UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION
PRE-FILED DIRECT TESTIMONY OF DR. RAYMOND BRASWELL ON BEHALF OF RIDGELINE MIDSTREAM SERVICES LLC
December 5, 2022
Filed by:
Calderwood & Harkness LLP 1601 K Street NW, Suite 900 Washington, DC 20006 Telephone: (202) 555-7800 Facsimile: (202) 555-7801
George Trujillo, Responsible Partner Brett Callahan, Lead Associate David Stanton, Working Associate
On behalf of Ridgeline Midstream Services LLC 700 Kanawha Boulevard East, Suite 1400 Charleston, WV 25301
TABLE OF CONTENTS
LIST OF EXHIBITS
PRE-FILED DIRECT TESTIMONY OF DR. RAYMOND BRASWELL
I. INTRODUCTION AND QUALIFICATIONS
A. Identification and Purpose
Q. Please state your name, business address, and position.
A. My name is Dr. Raymond Braswell. My business address is Braswell Energy Consulting Group LLC, 8300 Greensboro Drive, Suite 450, McLean, Virginia 22102. I am the Lead Consultant and founder of Braswell Energy Consulting Group LLC, a consulting firm specializing in energy regulatory economics, rate-of-return analysis, and cost-of-service matters for natural gas pipelines, electric utilities, and other energy infrastructure companies.
Q. On whose behalf are you submitting this testimony?
A. I am submitting this pre-filed direct testimony on behalf of Ridgeline Midstream Services LLC ("Ridgeline" or "RMS"), a wholly owned subsidiary of Dunmore Energy Holdings Ltd. ("DEH"). I have been retained by Ridgeline as an independent expert witness to present testimony on the appropriate return on equity ("ROE") and capital structure for purposes of determining Ridgeline's initial tariff rate for interstate natural gas transportation service on the Ridgeline Pipeline System.
Q. In what docket is this testimony being filed?
A. This testimony is being filed in Federal Energy Regulatory Commission ("FERC" or "Commission") Docket Nos. RP22-847-000 and RP22-847-001. Docket No. RP22-847-000 is the rate case proceeding, and Docket No. RP22-847-001 is the interconnection proceeding. Ridgeline filed its application for an initial tariff rate and interconnection authorization on May 12, 2022, pursuant to Sections 4 and 7 of the Natural Gas Act ("NGA"), 15 U.S.C. §§ 717c and 717f, and the Commission's regulations at 18 C.F.R. Parts 154, 157, and 284.
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to present to the Presiding Administrative Law Judge and the Commission my expert analysis and recommendation regarding the appropriate ROE, capital structure, and overall weighted average cost of capital ("WACC") for Ridgeline for ratemaking purposes. Specifically, my testimony supports the following elements of Ridgeline's initial rate filing:
(1) A proposed return on equity of 14.00%, derived from a discounted cash flow ("DCF") proxy group analysis consistent with established FERC methodology;
(2) A proposed capital structure of 55% equity and 45% debt, reflecting the capital structures maintained by comparable publicly traded natural gas pipeline companies;
(3) A weighted average cost of debt of 5.25%, derived from the weighted average of Ridgeline's two debt instruments;
(4) A resulting weighted average cost of capital ("WACC") of 10.0625%, calculated as (0.55 × 14.00%) + (0.45 × 5.25%) = 7.70% + 2.3625% = 10.0625%; and
(5) A return on rate base of $61.62 million, based on a total rate base of $612.40 million as filed by Ridgeline.
Q. Have you prepared exhibits in support of your testimony?
A. Yes. I have prepared nine exhibits, designated Exhibit RB-1 through Exhibit RB-9, which are attached to and incorporated into this testimony. These exhibits contain the detailed calculations, data, and supporting documentation underlying my analysis and recommendations. A list of these exhibits appears in the List of Exhibits at the front of this testimony and in the Appendix.
Q. Were these exhibits prepared by you or under your direct supervision?
A. Yes. Each of the nine exhibits was prepared by me or under my direct supervision and control. I am responsible for the accuracy and completeness of each exhibit, and I have personally reviewed all data sources and calculations reflected therein.
B. Professional Qualifications
Q. Please describe your educational background.
A. I hold a Doctor of Philosophy (Ph.D.) degree in economics from the University of Virginia, where I completed my doctoral dissertation on the estimation of equity cost of capital for regulated natural gas pipeline companies under federal ratemaking methodologies. I also hold a Master of Arts (M.A.) degree in economics from the University of Virginia and a Bachelor of Arts (B.A.) degree in economics, summa cum laude, from Wake Forest University. My graduate coursework included advanced study in financial economics, industrial organization, public utility regulation, econometrics, and quantitative methods.
Q. Please describe your professional experience.
A. Following the completion of my doctoral degree, I joined the Federal Energy Regulatory Commission as a staff economist in the Office of Energy Market Regulation ("OEMR"), where I served for approximately nine years. During my tenure at the Commission, I specialized in rate-of-return analysis, cost-of-service regulation, and natural gas pipeline ratemaking. I was responsible for analyzing pipeline rate filings under Sections 4 and 5 of the Natural Gas Act, evaluating proposed returns on equity and capital structures, and preparing staff recommendations for the Commission and presiding administrative law judges. I participated in numerous rate case proceedings, both as a staff analyst and as a witness presenting the Commission Staff's recommended rate of return.
During my time at FERC, I also served as a member of the Commission's Task Force on Natural Gas Pipeline Rate Design, which was convened to evaluate potential refinements to the Commission's cost-of-service methodology and rate design principles for interstate natural gas pipelines. I served on the Task Force from its inception through the issuance of its final report and recommendations.
After departing the Commission, I founded Braswell Energy Consulting Group LLC in 2014, through which I have since provided expert consulting and testimony services on ROE, capital structure, cost of service, and ratemaking matters for natural gas pipelines, electric utilities, natural gas distribution companies, and other energy infrastructure enterprises. My consulting practice has involved engagements before the Commission, state public utility commissions in over a dozen states, and in commercial arbitration proceedings.
Q. Have you previously provided expert testimony before FERC or other regulatory bodies?
A. Yes. I have presented expert testimony on ROE and capital structure issues before the Commission on approximately seventeen prior occasions. I have also provided expert testimony before state public utility commissions in Virginia, West Virginia, Pennsylvania, Ohio, Maryland, Kentucky, North Carolina, and Texas. In addition, I have provided expert testimony in commercial arbitration proceedings involving disputes over regulated pipeline tariff rates and the cost of capital for natural gas infrastructure assets. A complete listing of my prior expert testimony engagements is set forth in my curriculum vitae, attached as Exhibit RB-1.
Q. Have you published any scholarly or professional work related to the subject matter of your testimony?
A. Yes. I have published articles in the Energy Law Journal, the Public Utilities Fortnightly, the Natural Gas & Electricity journal, and the Journal of Regulatory Economics. My published works address topics including the discounted cash flow methodology as applied to natural gas pipelines, the treatment of capital structure in FERC ratemaking, the impact of tax reform on natural gas pipeline cost of service, and the economic analysis of equity risk premiums for regulated energy utilities. A complete list of my publications is included in Exhibit RB-1.
Q. What is your current position, and under what engagement have you been retained in this proceeding?
A. I currently serve as the Lead Consultant of Braswell Energy Consulting Group LLC, a Virginia limited liability company. I was retained by Ridgeline as an independent expert witness for purposes of this rate case proceeding. My retention as an expert witness in this proceeding is separate from, and predates, a subsequent consulting engagement with Ridgeline (engagement number BEC-2023-0041), which pertains to a later tariff redesign consulting project that commenced on April 15, 2023, and is unrelated to the current testimony. My expert testimony in this proceeding reflects my independent professional judgment and is not influenced by any other engagement with Ridgeline or its affiliates.
Q. Is your curriculum vitae attached to this testimony?
A. Yes. My full curriculum vitae, including a complete listing of my educational background, professional experience, expert testimony engagements, publications, and professional affiliations, is attached as Exhibit RB-1.
C. Summary of Conclusions
Q. Please summarize the principal conclusions of your testimony.
A. Based on the analysis set forth in detail in my testimony and supporting exhibits, I have reached the following principal conclusions:
1. Return on Equity. The appropriate ROE for Ridgeline is 14.00%. This ROE is based on a discounted cash flow proxy group analysis utilizing a group of ten comparable publicly traded natural gas pipeline companies. The 14.00% ROE falls within the zone of reasonableness established by the proxy group DCF results and is positioned in the upper portion of that zone to account for the specific risk characteristics of Ridgeline, including its status as a new pipeline, single-asset concentration, utilization ramp-up risk, and private ownership.
2. Capital Structure. The appropriate capital structure for ratemaking purposes is 55% equity and 45% debt. This hypothetical capital structure reflects the capital structures maintained by comparable publicly traded natural gas pipeline companies in the proxy group and is consistent with FERC precedent for new natural gas pipelines. Ridgeline's actual capital structure, which consists of approximately 6.34% equity and 93.66% debt, is atypically leveraged and is not appropriate for ratemaking purposes.
3. Cost of Debt. The weighted average cost of debt is 5.25%, derived from the weighted average of Ridgeline's two debt tranches: a $400 million senior secured term loan and $150 million in second lien senior secured notes.
4. Weighted Average Cost of Capital. The resulting WACC is 10.0625%, calculated as follows: (0.55 × 14.00%) + (0.45 × 5.25%) = 7.70% + 2.3625% = 10.0625%.
5. Return on Rate Base. The return on Ridgeline's filed rate base of $612.40 million is $61.62 million ($612.40 million × 10.0625% = $61.62 million, rounded).
6. Consistency with Precedent and Capital Attraction. The proposed ROE and capital structure are consistent with FERC precedent, are within the zone of reasonableness, and are necessary to attract and retain capital investment for this new pipeline system, which entered service on October 1, 2021, at an original construction cost of $587.2 million.
The specific analyses supporting each of these conclusions are presented in the sections that follow and in the accompanying exhibits.
II. OVERVIEW OF RIDGELINE MIDSTREAM SERVICES LLC AND THE RIDGELINE PIPELINE SYSTEM
A. Corporate Structure
Q. Please describe the corporate structure of Ridgeline Midstream Services LLC.
A. Ridgeline Midstream Services LLC is a Delaware limited liability company organized for the purpose of owning and operating the Ridgeline Pipeline System for interstate natural gas transportation service. The sole member of Ridgeline is Dunmore Energy Holdings Ltd. ("DEH"), which holds a 100% membership interest in Ridgeline.
DEH is a Cayman Islands exempted limited company, with its registered office at 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1002. DEH is a strategic private energy company with a diversified portfolio of midstream energy infrastructure assets, including approximately 1,200 miles of midstream gathering and transportation pipelines, two cryogenic natural gas processing plants, and a 250 megawatt wind energy portfolio currently under development. DEH's enterprise value, based on the most recently available internal valuation at the time of this filing, is estimated at approximately $2.4 billion. DEH reported consolidated annual revenue of approximately $485 million for the most recently completed fiscal year available at the time of this filing.
Patricia Dunmore is the Founder, Chairperson, and controlling shareholder of DEH, holding approximately 72% of the equity interest in DEH. Ms. Dunmore has served as Chairperson since DEH's founding and has been instrumental in the strategic development of DEH's energy infrastructure portfolio, including the decision to construct the Ridgeline Pipeline System.
The day-to-day management of Ridgeline is overseen by its executive officers. James K. Winfield serves as the Chief Executive Officer and President of Ridgeline, responsible for the overall management, strategic direction, and operations of the company. Angela Moretti serves as the Vice President, Finance & Treasurer of Ridgeline, responsible for the company's financial management, accounting, regulatory reporting, and treasury functions. Ms. Moretti has separately filed testimony in this proceeding addressing Ridgeline's cost of service and rate design.
Ridgeline's Employer Identification Number ("EIN") is 87-4231956, and its FERC pipeline identification code is 960442.
Q. Is Ridgeline a publicly traded company?
A. No. Ridgeline is a wholly owned subsidiary of DEH, which is itself a privately held company. Neither Ridgeline nor DEH has any publicly traded equity or debt securities. This is a significant factor in my analysis, as it necessitates the use of a proxy group of comparable publicly traded natural gas pipeline companies to estimate the cost of equity capital for Ridgeline, as I discuss in detail in Section IV of this testimony.
B. The Ridgeline Pipeline System
Q. Please describe the physical characteristics of the Ridgeline Pipeline System.
A. The Ridgeline Pipeline System is a 187-mile, 24-inch-diameter, high-pressure natural gas pipeline extending from its receipt point at the Wetzel County Interconnect in Wetzel County, West Virginia (approximate coordinates: 39.6120° N, 80.7540° W), to its delivery point at the Waynesburg Compressor Station in Greene County, Pennsylvania (approximate coordinates: 39.8965° N, 80.1810° W). The pipeline traverses the Appalachian Basin, one of the most prolific natural gas producing regions in the United States, and is designed to transport natural gas produced from Marcellus and Utica Shale formations to downstream markets.
The Ridgeline Pipeline System has a design capacity of 1.2 billion cubic feet per day ("Bcf/d"), which corresponds to 1,200,000 dekatherms per day ("Dth/d") at an assumed BTU content of 1,000 BTU per cubic foot. As of the date of this testimony, the system is transporting approximately 680 million cubic feet per day ("MMcf/d"), representing a utilization rate of approximately 56.67% of design capacity.
The pipeline is supported by three compressor stations: the Wetzel Station, located near the receipt point in Wetzel County, West Virginia; the Mannington Station, located along the pipeline route in Marion County, West Virginia; and the Waynesburg Station, located at the delivery point in Greene County, Pennsylvania. The three compressor stations have an aggregate installed compression capacity of 45,000 horsepower.
Q. When did the Ridgeline Pipeline System enter service?
A. The Ridgeline Pipeline System entered commercial service on October 1, 2021. As of the date of this testimony, the system has been in operation for approximately fourteen months. The original construction cost of the Ridgeline Pipeline System was $587.2 million.
Q. Is Ridgeline seeking interconnection with any other pipeline system?
A. Yes. In connection with this proceeding, Ridgeline is also seeking authorization under Section 7 of the Natural Gas Act and 18 C.F.R. Part 157 for an interconnection with the existing pipeline network of Appalachian Trunk Pipeline Company, LLC ("ATPC"), a 640-mile interstate natural gas pipeline system with a capacity of 3.8 Bcf/d. The proposed interconnection would be located at ATPC Milepost 412.6. This interconnection is necessary to enable Ridgeline to deliver natural gas into the ATPC system for further transportation to downstream markets in the Mid-Atlantic and Northeast regions.
Q. What type of tariff is Ridgeline proposing?
A. Ridgeline is proposing a tariff under Part 284, Subpart G of the Commission's regulations, providing open-access transportation service. The tariff is designated as FERC Gas Tariff, Original Volume No. 1. The tariff offers both firm and interruptible transportation service on a non-discriminatory, open-access basis, consistent with the Commission's policies for interstate natural gas pipeline service.
C. Significance of ROE for a New Pipeline
Q. Why is the determination of an appropriate ROE particularly important for Ridgeline?
A. The determination of an appropriate ROE is critically important for Ridgeline for several reasons, each of which is amplified by Ridgeline's status as a newly constructed pipeline system.
First, Ridgeline is a newly constructed pipeline that entered service only approximately fourteen months before the filing of this rate case. Unlike established pipeline systems that may have decades of operating history and well-known cost and revenue profiles, Ridgeline is in the earliest stages of its operational life. It has limited operating history, and there is inherent uncertainty regarding future throughput volumes, operating costs, and revenue generation. The Ridgeline Pipeline System is currently in its ramp-up phase, operating at approximately 56.67% of its design capacity of 1.2 Bcf/d. This ramp-up phase creates significant uncertainty regarding the timing and extent to which the system will achieve full utilization.
Second, the financing structure of the Ridgeline Pipeline System underscores the importance of an adequate ROE. The construction of the pipeline was financed through a combination of $400 million in senior secured term loan borrowings, $150 million in second lien senior secured notes, and $37.2 million in equity contributions from DEH, for a total of $587.2 million. The pipeline's debt obligations — which total $550 million — impose substantial fixed charges that must be serviced irrespective of throughput volumes. An adequate ROE is essential to ensure that the total return on the system is sufficient to service these debt obligations, provide a reasonable return on equity to Ridgeline's member, and maintain the financial soundness of the enterprise.
Third, and perhaps most fundamentally, the Supreme Court has long recognized that the rate of return allowed a regulated entity must be "sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties." Bluefield Water Works & Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 679, 693 (1923). This principle applies with particular force to a new pipeline system that has committed nearly $600 million in capital to serve the public interest through interstate natural gas transportation. If the ROE established in this initial rate proceeding is inadequate, it will undermine the ability of Ridgeline — and the broader investment community — to justify future capital commitments to natural gas infrastructure development.
For all of these reasons, it is essential that the ROE and capital structure approved in this proceeding be sufficient to reflect the risk inherent in a new pipeline operation and to attract and retain the capital necessary for Ridgeline to fulfill its obligation to provide safe, reliable, and efficient natural gas transportation service.
III. LEGAL STANDARD FOR DETERMINATION OF ROE
A. FERC's DCF Methodology
Q. What methodology does FERC employ to determine the appropriate ROE for a natural gas pipeline?
A. Under long-established FERC precedent and policy, the appropriate methodology for determining the ROE for a natural gas pipeline is the discounted cash flow ("DCF") model. The Commission has consistently applied the DCF model as the primary analytical tool for estimating the cost of equity capital for natural gas pipelines subject to its jurisdiction under the Natural Gas Act.
The DCF model is based on the fundamental financial principle that the price of a share of common stock reflects the present value of all expected future dividends, discounted at the investor's required rate of return. From this relationship, the cost of equity can be expressed as:
k = (D₁ / P₀) + g
where:
k = the investor's required rate of return (cost of equity); D₁ = the expected dividend per share over the coming year; P₀ = the current market price per share; and g = the expected long-term growth rate of dividends.
In other words, the cost of equity is equal to the expected dividend yield plus the expected growth rate of dividends. This is the foundational equation of the DCF model as applied in regulatory proceedings.
Q. How does FERC apply the DCF model in practice?
A. The Commission applies a two-step DCF methodology, which was adopted to address the concern that short-term analyst growth rate projections may not fully capture the long-term growth expectations that investors incorporate into stock prices. Under the two-step approach, the expected growth rate component of the DCF model is calculated as a weighted average of two growth rate inputs:
(1) A short-term growth rate, based on the consensus of analysts' projected earnings per share ("EPS") growth rates over a three-to-five-year forecast horizon; and
(2) A long-term growth rate, based on the expected long-term growth rate of the United States economy, typically approximated by the expected long-term growth rate of nominal gross domestic product ("GDP").
The Commission weights these two growth rate inputs in the ratio of two-thirds short-term growth and one-third long-term GDP growth. This weighting reflects the Commission's judgment that investors in regulated pipeline companies place primary reliance on near-term earnings growth prospects but also incorporate expectations regarding the long-term growth of the economy into their valuation of pipeline equities.
Q. What is the "zone of reasonableness"?
A. The DCF proxy group analysis produces a range of indicated costs of equity, one for each company in the proxy group. This range of individual DCF results defines the "zone of reasonableness" — the band within which the authorized ROE must fall in order to be deemed just and reasonable under the Natural Gas Act. The Commission has consistently held that the appropriate ROE for a particular pipeline must be set within this zone of reasonableness, taking into account the specific risk characteristics of the pipeline relative to the proxy group companies.
The zone of reasonableness concept has deep roots in regulatory ratemaking law. The Supreme Court established in Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944), that the rate of return must be "commensurate with returns on investments in other enterprises having corresponding risks" and must be "sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital." The zone of reasonableness framework operationalizes this standard by establishing an empirically derived range of equity returns that investors in comparable enterprises require.
In Bluefield Water Works & Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 679 (1923), the Supreme Court further elaborated that the return allowed must be "equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties." Together, Hope and Bluefield establish the constitutional framework within which the Commission determines the just and reasonable rate of return for natural gas pipelines.
The D.C. Circuit has affirmed the Commission's use of the DCF methodology and the zone of reasonableness framework in numerous decisions, and has recognized the Commission's broad discretion in selecting the specific ROE within the zone, provided the Commission adequately explains its reasoning. The placement of the ROE within the zone must reflect the particular risk profile of the pipeline at issue, with higher-risk pipelines warranting placement in the upper portion of the zone and lower-risk pipelines warranting placement in the lower portion.
B. Burden of Proof
Q. Who bears the burden of proof in this proceeding with respect to the proposed ROE?
A. As the applicant pipeline seeking to establish an initial tariff rate under Section 4 of the Natural Gas Act, Ridgeline bears the burden of demonstrating that its proposed ROE is just and reasonable. Under the NGA, the filing pipeline must affirmatively support the reasonableness of each element of its proposed rate, including the rate of return, cost of service, and rate design.
This is in contrast to proceedings under Section 5 of the NGA, in which the Commission or an intervenor challenges an existing rate as unjust and unreasonable. In a Section 5 proceeding, the existing rate is presumed to be just and reasonable, and the burden of proof falls on the party seeking to change the rate. Here, because Ridgeline is filing an initial tariff rate — and has not previously had a Commission-approved rate in effect — Ridgeline must carry the burden of demonstrating the justness and reasonableness of each rate component, including the proposed 14.00% ROE.
My testimony and accompanying exhibits are designed to meet that burden by presenting a comprehensive DCF proxy group analysis consistent with established Commission methodology, supported by publicly available financial data and recognized analytical techniques.
C. Considerations for New, Non-Publicly-Traded Pipelines
Q. Are there any special considerations that apply to the ROE determination for a new, privately held pipeline such as Ridgeline?
A. Yes. There are several important considerations that are unique to, or amplified in, the context of a new, privately held pipeline such as Ridgeline.
First, because Ridgeline is a privately held company — its sole member, DEH, is also a private company — there are no publicly traded equity securities for Ridgeline that could be used to directly observe the market's required rate of return on Ridgeline's equity. In the absence of directly observable market data, FERC precedent requires the use of a proxy group of comparable publicly traded natural gas pipeline companies to estimate the cost of equity. The DCF model is applied to the publicly traded equity securities of the proxy group companies, and the resulting indicated costs of equity are used to infer the cost of equity for the pipeline at issue. I have followed this well-established approach in my analysis, as described in Section IV.
Second, the Commission has recognized that new pipelines face risks that are distinct from, and often greater than, those faced by established pipeline systems with long operating histories. These risks include, but are not limited to:
(a) Construction risk: Although the Ridgeline Pipeline System is now in service and construction risk has been substantially resolved, the recent completion of a major construction project means that the system has not yet established a track record of reliable operations, and there may be residual risks associated with post-construction commissioning and operational optimization.
(b) Ramp-up risk: New pipelines typically require a period of time to achieve full utilization as shippers execute contracts and production from connected supply sources matures. Ridgeline's current throughput of approximately 680 MMcf/d represents only 56.67% of its 1.2 Bcf/d design capacity, confirming that the system is in its ramp-up phase.
(c) Utilization uncertainty: Related to ramp-up risk, there is inherent uncertainty regarding the ultimate level of throughput that a new pipeline will achieve and the pace at which utilization will increase. Unlike established pipelines that may have decades of throughput data, Ridgeline has only approximately fourteen months of operating data on which to base utilization expectations.
(d) Regulatory risk: This is Ridgeline's initial rate filing before the Commission. There is no established tariff rate, no prior rate case history, and no track record of Commission review or approval of Ridgeline's cost of service or rate of return. The uncertainty inherent in an initial rate filing is greater than in a subsequent rate case for an established pipeline.
(e) Financing risk: As a privately held company with a heavily leveraged actual capital structure, Ridgeline faces greater challenges in accessing capital markets compared to publicly traded pipeline companies with diversified investor bases and established capital market relationships.
These considerations are relevant to the placement of the recommended ROE within the zone of reasonableness, as I discuss in Section VII.C of my testimony.
IV. DCF PROXY GROUP SELECTION
A. Screening Criteria
Q. How did you select the proxy group of comparable companies for your DCF analysis?
A. I selected the proxy group using a systematic set of screening criteria designed to identify publicly traded companies with risk profiles, business characteristics, and regulatory environments that are reasonably comparable to those of Ridgeline. The use of a proxy group composed of comparable companies is the standard approach for estimating the cost of equity for a non-publicly-traded pipeline under FERC precedent.
The specific screening criteria I applied are as follows:
(1) Business Activity: Companies must be engaged predominantly in interstate natural gas pipeline transportation and/or midstream natural gas gathering, processing, and transportation. Companies whose revenues are primarily derived from unrelated business activities — such as crude oil refining, electric power generation, or retail energy marketing — were excluded from consideration.
(2) Public Trading: Companies must have publicly traded common equity securities listed on a major United States stock exchange, specifically the New York Stock Exchange ("NYSE") or the Nasdaq Stock Market. This requirement ensures that reliable market price data is available for purposes of calculating the dividend yield component of the DCF model.
(3) Dividend Payment: Companies must have paid regular quarterly cash dividends (or distributions, in the case of master limited partnerships) throughout the analysis period. The payment of regular dividends is a prerequisite for the application of the DCF model, which is based on the relationship between the current dividend, the current stock price, and the expected growth rate.
(4) FERC Jurisdiction: Companies must either be FERC-jurisdictional natural gas pipelines themselves or be master limited partnerships, C-corporations, or other publicly traded entities with significant FERC-jurisdictional interstate natural gas pipeline assets. This criterion ensures that the proxy group companies operate in a regulatory environment comparable to that of Ridgeline.
(5) Investment-Grade Credit Rating: Companies must hold investment-grade credit ratings from Moody's Investors Service and/or Standard & Poor's. This criterion excludes companies with significantly different financial risk profiles and ensures that the proxy group is representative of the credit quality that investors would expect of a well-capitalized natural gas pipeline company.
(6) No Pending Merger or Acquisition Activity: Companies must not have any pending merger, acquisition, or other extraordinary corporate transaction that could materially distort the company's market price and thereby compromise the reliability of the DCF analysis.
(7) Sufficient Analyst Coverage: Companies must have consensus earnings growth rate estimates available from recognized financial data services, with a minimum of three individual analyst estimates contributing to the consensus forecast. This criterion ensures that the growth rate inputs to the DCF model are based on a sufficient breadth of informed opinion.
Q. Are these criteria consistent with FERC precedent?
A. Yes. The screening criteria I have applied are consistent with the criteria that the Commission and its staff have used in prior proceedings to select proxy groups for natural gas pipeline DCF analyses. The Commission has emphasized the importance of selecting proxy group companies that are reasonably comparable to the pipeline at issue in terms of business risk, financial risk, and regulatory environment, and has approved proxy groups selected using criteria substantially similar to those I have employed.
B. Proxy Group Companies
Q. Which companies did you include in your proxy group?
A. The application of the screening criteria described above resulted in the selection of the following ten companies as the proxy group for purposes of my DCF analysis:
1. Crestline Pipeline Partners LP ("CPP"). Crestline Pipeline Partners is a master limited partnership that owns and operates approximately 2,400 miles of interstate natural gas transmission pipelines in the Gulf Coast and Southeast regions of the United States. CPP's FERC-jurisdictional pipeline systems include the Louisiana Mainline System (1,100 miles, 2.1 Bcf/d capacity) and the Southeastern Lateral System (1,300 miles, 1.8 Bcf/d capacity). CPP is publicly traded on the NYSE under the ticker symbol "CPP" and has an approximate market capitalization of $4.2 billion. CPP has an investment-grade credit rating of Baa2 from Moody's and BBB from S&P.
2. Blackridge Midstream Corporation ("BMC"). Blackridge Midstream is a C-corporation that owns and operates a diversified portfolio of midstream natural gas infrastructure, including approximately 3,100 miles of gathering and transportation pipelines, three natural gas processing plants, and associated compression facilities in the Permian Basin and Eagle Ford Shale regions of Texas. BMC's FERC-jurisdictional assets include the West Texas Connector Pipeline (420 miles, 1.4 Bcf/d capacity). BMC is publicly traded on the NYSE under the ticker symbol "BKRM" with an approximate market capitalization of $5.8 billion. BMC holds a credit rating of Baa1 from Moody's and BBB+ from S&P.
3. Allegheny Gas Transmission Holdings Inc. ("AGTH"). Allegheny Gas Transmission is a C-corporation that owns and operates approximately 1,800 miles of interstate natural gas pipelines in the Appalachian Basin and Mid-Atlantic region. AGTH's principal asset is the Allegheny Main Line, a 1,200-mile, 2.8 Bcf/d pipeline system that provides transportation service from production areas in West Virginia and Pennsylvania to consumption centers in the Mid-Atlantic and Northeast. AGTH is publicly traded on the NYSE under the ticker symbol "AGTH" with an approximate market capitalization of $3.6 billion. AGTH holds a credit rating of Baa2 from Moody's and BBB from S&P. AGTH is particularly relevant to the proxy group because it operates in the same geographic region as Ridgeline and serves similar supply and demand markets.
4. Greystone Energy Transfer LP ("GET"). Greystone Energy Transfer is a master limited partnership that owns and operates approximately 4,500 miles of natural gas and natural gas liquids pipelines across the central United States, including the Northern Plains System (1,600 miles, 2.2 Bcf/d) and the Missouri Valley System (1,200 miles, 1.5 Bcf/d). GET is publicly traded on the NYSE under the ticker symbol "GETP" with an approximate market capitalization of $7.1 billion. GET holds a credit rating of Baa2 from Moody's and BBB from S&P.
5. Summit Corridor Pipeline Company ("SCPC"). Summit Corridor Pipeline is a C-corporation that owns and operates the Summit Corridor Pipeline, a 380-mile, 1.6 Bcf/d interstate natural gas pipeline in the Rocky Mountain region, along with associated gathering and processing assets. SCPC is publicly traded on the Nasdaq under the ticker symbol "SCPC" with an approximate market capitalization of $2.1 billion. SCPC holds a credit rating of Baa3 from Moody's and BBB- from S&P. SCPC is a useful comparator for Ridgeline because, like Ridgeline, its asset base is concentrated in a single major pipeline system, providing a benchmark for single-asset risk.
6. Rivermark Natural Gas Partners LLC ("RNG"). Rivermark Natural Gas Partners is a publicly traded limited liability company that owns and operates approximately 2,800 miles of natural gas gathering, processing, and transportation pipelines in the Marcellus and Utica Shale regions of Pennsylvania, West Virginia, and Ohio. RNG's FERC-jurisdictional assets include the Keystone Transmission Pipeline (600 miles, 1.8 Bcf/d capacity). RNG is publicly traded on the NYSE under the ticker symbol "RNGS" with an approximate market capitalization of $4.5 billion. RNG holds a credit rating of Baa2 from Moody's and BBB from S&P. Rivermark is directly comparable to Ridgeline in terms of geographic focus and exposure to Appalachian Basin production.
7. Ironclad Infrastructure Inc. ("ICI"). Ironclad Infrastructure is a C-corporation that owns and operates a portfolio of natural gas and crude oil pipeline systems across the Southeast and Gulf Coast regions, totaling approximately 3,200 miles of pipeline. ICI's FERC-jurisdictional natural gas pipeline assets include the Gulf Central Pipeline (900 miles, 2.4 Bcf/d capacity). ICI is publicly traded on the NYSE under the ticker symbol "IRCI" with an approximate market capitalization of $6.3 billion. ICI holds a credit rating of Baa1 from Moody's and BBB+ from S&P.
8. Heartland Midstream Holdings LP ("HMH"). Heartland Midstream Holdings is a master limited partnership that owns and operates approximately 1,900 miles of natural gas gathering, processing, and transportation pipelines in the Mid-Continent region, including Oklahoma, Kansas, and the Texas Panhandle. HMH is publicly traded on the NYSE under the ticker symbol "HMHP" with an approximate market capitalization of $2.8 billion. HMH holds a credit rating of Baa3 from Moody's and BBB- from S&P.
9. Northwind Gas Transportation Corp. ("NGT"). Northwind Gas Transportation is a C-corporation that owns and operates the Northwind Pipeline, a 520-mile, 2.0 Bcf/d interstate natural gas pipeline in the Northeast, along with two shorter lateral pipelines and associated compression facilities. NGT is publicly traded on the Nasdaq under the ticker symbol "NGTC" with an approximate market capitalization of $3.0 billion. NGT holds a credit rating of Baa2 from Moody's and BBB from S&P. Northwind is a useful comparator because it serves markets in the Northeast that are also downstream of Ridgeline's delivery point.
10. Cascade Valley Pipeline Partners LP ("CVPP"). Cascade Valley Pipeline Partners is a master limited partnership that owns and operates approximately 1,100 miles of natural gas transportation pipelines in the Pacific Northwest and Northern California. CVPP's principal asset is the Cascade Valley Pipeline (700 miles, 1.3 Bcf/d capacity). CVPP is publicly traded on the NYSE under the ticker symbol "CVPP" with an approximate market capitalization of $2.4 billion. CVPP holds a credit rating of Baa3 from Moody's and BBB- from S&P.
Q. Why are these companies comparable to Ridgeline?
A. Each of the ten proxy group companies is comparable to Ridgeline in the following respects:
(a) Business Risk: All ten companies are primarily engaged in the business of interstate natural gas pipeline transportation, the same business in which Ridgeline is engaged. Each company derives the majority of its revenues from FERC-jurisdictional pipeline transportation services, ensuring that the proxy group reflects the business risk profile of a FERC-regulated natural gas pipeline.
(b) Regulatory Environment: All ten companies own and operate FERC-jurisdictional interstate natural gas pipeline assets, and their rates and returns are subject to Commission regulation under the Natural Gas Act. The proxy group companies thus face the same regulatory risks and opportunities as Ridgeline.
(c) Size and Scale: While the proxy group companies range in size from approximately $2.1 billion to $7.1 billion in market capitalization, and from approximately 380 miles to 4,500 miles of pipeline, the group spans a range that brackets Ridgeline's scale (187 miles, $587.2 million construction cost). This range ensures that the proxy group captures the market's pricing of risk for companies of varying sizes, while all remain within the same industry sector.
(d) Credit Quality: All ten companies hold investment-grade credit ratings, ranging from Baa3/BBB- to Baa1/BBB+. This range is consistent with the credit quality that investors would expect of a natural gas pipeline company, and provides a benchmark for the cost of equity associated with investment-grade natural gas pipeline operations.
Detailed financial data, credit ratings, and descriptive information for each proxy group company are presented in Exhibit RB-2.
C. Companies Excluded and Rationale
Q. Were there companies that you considered for inclusion in the proxy group but ultimately excluded?
A. Yes. During the screening process, I considered a number of additional companies that appeared to be potential candidates for inclusion in the proxy group but were ultimately excluded based on one or more of the screening criteria described above. The principal exclusions and the reasons for each are as follows:
(1) Pinnacle Gas Holdings Inc.: Pinnacle Gas Holdings was excluded because, at the time of my analysis, the company had announced a definitive merger agreement with a privately held infrastructure fund. The pendency of this acquisition would likely distort Pinnacle Gas Holdings' stock price, as the market price would reflect the anticipated acquisition premium rather than the company's standalone cost of equity, rendering the DCF analysis unreliable for this company.
(2) Crossroads Midstream LP: Crossroads Midstream was excluded because it did not meet the investment-grade credit rating criterion. At the time of my analysis, Crossroads held a credit rating of Ba1 from Moody's and BB+ from S&P, which are below investment grade. Including a non-investment-grade company in the proxy group would have introduced a company with a significantly different financial risk profile than is appropriate for a comparison with Ridgeline.
(3) Continental Gas Transmission Inc.: Continental Gas Transmission was excluded because its natural gas pipeline transportation operations represented less than 30% of its total consolidated revenues, with the majority of its revenues derived from crude oil pipeline transportation, natural gas liquids fractionation, and petrochemical feedstock services. Including Continental would have introduced a company whose business risk profile is materially different from that of a predominantly natural gas pipeline company.
(4) High Plains Energy Infrastructure Corp.: High Plains Energy Infrastructure was excluded because the company suspended its quarterly dividend payment during the second quarter of 2022, citing cash flow pressures associated with a major capital expansion project. The suspension of dividend payments renders the DCF model inapplicable to this company, as the model requires a current dividend payment as an input.
(5) Ridgeway Pipeline Associates LP: Ridgeway Pipeline Associates was excluded because it had only two analysts providing earnings growth rate estimates, which was below the minimum threshold of three analysts that I established as a screening criterion. Insufficient analyst coverage raises concerns about the reliability and representativeness of the consensus growth rate forecast.
In each case, the exclusion of the company was based on the objective application of the screening criteria, and not on any assessment of whether the company's inclusion would have raised or lowered the DCF results.
V. DCF ANALYSIS — DIVIDEND YIELD
A. Methodology. Q. How did you calculate the dividend yield component of the DCF model for each proxy group company?
A. The dividend yield component of the DCF model represents the expected current return that an investor receives through cash dividends (or distributions) relative to the price paid for the stock. I calculated the dividend yield for each proxy group company using the following formula:
D₁ / P₀ = (D₀ × (1 + ½g)) / P₀
where:
D₁ = the expected dividend per share over the coming year; D₀ = the current annualized dividend per share (based on the most recently declared quarterly dividend, annualized); g = the expected growth rate of dividends (using the composite growth rate from the two-step DCF methodology); and P₀ = the average closing stock price over the measurement period.
The adjustment factor of (1 + ½g) converts the current annualized dividend (D₀) into the expected forward dividend (D₁) by incorporating one-half of the expected annual growth in dividends. This adjustment is consistent with FERC's DCF methodology and reflects the fact that, on average, dividends are paid throughout the year and thus, on a time-weighted basis, incorporate approximately one-half year of expected growth.
Q. What measurement period did you use for the stock price averaging?
A. I calculated the average stock price for each proxy group company over a six-month period ending approximately September 30, 2022. Specifically, the averaging period spanned from April 1, 2022, through September 30, 2022. I used the daily closing price for each trading day during this period and calculated the simple arithmetic average of all daily closing prices.
The use of a six-month averaging period is consistent with FERC precedent and is designed to smooth out short-term fluctuations in stock prices that may not reflect long-term investor expectations. By using an averaging period that ends proximate to the test year period, the dividend yield captures market conditions that are reasonably representative of investor expectations during the period in which Ridgeline's rates would take effect.
Q. What source did you use for dividend data?
A. I obtained dividend data for each proxy group company from publicly available sources, including company investor relations websites, SEC filings (Forms 10-K and 10-Q), and recognized financial data services. For each company, I used the most recently declared regular quarterly dividend as of September 30, 2022, annualized by multiplying by four (or, in the case of MLPs paying regular quarterly distributions, annualizing the most recently declared distribution).
B. Results. Q. What are the dividend yield results for the proxy group companies?
A. The dividend yield results for each of the ten proxy group companies are as follows:
The dividend yields across the proxy group range from a low of 4.25% (Ironclad Infrastructure) to a high of 10.19% (Heartland Midstream Holdings). The median dividend yield is 6.93%, and the mean dividend yield is 7.16%.
These results reflect the market's current pricing of the income return component of equity investment in natural gas pipeline companies. The range of dividend yields is consistent with the range observed in prior Commission proceedings involving natural gas pipeline proxy groups.
Detailed calculations of the dividend yield for each proxy group company, including the specific stock prices and dividend data used, are presented in Exhibit RB-3.
VI. DCF ANALYSIS — GROWTH RATE
A. Short-Term Growth Rate
Q. How did you determine the short-term growth rate for each proxy group company?
A. The short-term growth rate for each proxy group company is based on the consensus of analysts' projected earnings per share ("EPS") growth rate forecasts. I obtained these consensus growth rate forecasts from Meridian Analytics, a recognized financial data service that compiles and reports consensus analyst estimates. The consensus growth rate for each company represents the median of individual analyst forecasts of the company's expected EPS growth rate over a three-to-five-year projection period.
The use of analysts' consensus EPS growth rate forecasts is consistent with FERC's DCF methodology. The Commission has recognized that analysts' growth rate forecasts are the best publicly available indicator of the growth expectations that equity investors incorporate into stock prices, and has relied on such forecasts as the primary input for the short-term growth rate component of the two-step DCF model.
Q. What are the short-term growth rate results for the proxy group?
A. The consensus short-term EPS growth rate forecasts for each proxy group company are as follows:
The short-term growth rates range from 3.50% (Heartland Midstream Holdings) to 8.20% (Blackridge Midstream Corporation). The median short-term growth rate is 5.58%, and the mean short-term growth rate is 5.74%. All proxy group companies meet the minimum threshold of three contributing analyst estimates, providing reasonable confidence in the reliability of the consensus forecasts.
B. Long-Term Growth Rate
Q. How did you determine the long-term growth rate?
A. Consistent with FERC's two-step DCF methodology, I used the expected long-term growth rate of the United States economy — specifically, the expected long-term growth rate of nominal gross domestic product ("GDP") — as the long-term growth rate input. The Commission has consistently held that, over the long term, the earnings of regulated pipeline companies cannot be expected to grow faster than the overall economy, and that the long-term GDP growth rate is an appropriate proxy for the sustainable long-term growth in dividends and earnings of pipeline companies.
I derived the long-term GDP growth rate from published consensus economic forecasts, including those published by the Congressional Budget Office ("CBO"), the Federal Reserve's Survey of Professional Forecasters, and the Blue Chip Economic Indicators consensus forecast. Based on these sources, I estimated the expected long-term nominal GDP growth rate at 4.20% per year. This estimate incorporates both real GDP growth expectations of approximately 2.0% per year and an expected long-run inflation rate of approximately 2.2% per year, consistent with the Federal Reserve's inflation target and current consensus forecasts.
Q. How did you blend the short-term and long-term growth rates?
A. Consistent with FERC precedent, I calculated the composite (blended) growth rate for each proxy group company as a weighted average of two-thirds of the short-term analyst consensus growth rate and one-third of the long-term GDP growth rate of 4.20%. The formula is:
Composite Growth Rate = (2/3 × Short-Term Growth Rate) + (1/3 × Long-Term GDP Growth Rate)
This two-thirds / one-third weighting has been applied by the Commission in its DCF analyses for natural gas pipelines and reflects the Commission's judgment that investor expectations incorporate both near-term, company-specific growth prospects and long-term, economy-wide growth considerations.
C. Results. Q. What are the composite growth rate results for each proxy group company?
A. The composite (blended) growth rate results for each proxy group company are as follows:
The composite growth rates range from 3.73% (Heartland Midstream Holdings) to 6.87% (Blackridge Midstream Corporation). The median composite growth rate is 5.12%, and the mean composite growth rate is 5.22%.
Detailed growth rate calculations for each proxy group company, including source documentation for the analyst consensus forecasts and GDP growth estimates, are presented in Exhibit RB-4.
VII. DCF RESULTS AND ZONE OF REASONABLENESS
A. Individual Company DCF Results
Q. What are the individual DCF results for each proxy group company?