UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION
PRE-FILED DIRECT TESTIMONY OF ANGELA MORETTI ON BEHALF OF RIDGELINE MIDSTREAM SERVICES LLC
COST OF SERVICE AND RATE BASE
Filed: December 5, 2022
TABLE OF CONTENTS
I. INTRODUCTION AND QUALIFICATIONS
A. Witness Identification
Q. Please state your full name, title, and business address.
A. My name is Angela Moretti. I am Vice President, Finance & Treasurer of Ridgeline Midstream Services LLC ("Ridgeline" or "RMS"). My principal office is located at 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301. I am testifying in this proceeding on behalf of Ridgeline Midstream Services LLC, the applicant in the above-captioned dockets.
Q. On whose behalf are you testifying?
A. I am testifying on behalf of Ridgeline Midstream Services LLC, the applicant in Docket Nos. RP22-847-000 and RP22-847-001. Ridgeline is an interstate natural gas pipeline company subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC" or the "Commission") under the Natural Gas Act ("NGA"), 15 U.S.C. §§ 717 et seq.
B. Professional Background and Qualifications
Q. Please describe your educational background.
A. I hold a Bachelor of Science degree in Accounting from the University of Virginia, which I received in 2001. I also hold a Master of Business Administration degree with a concentration in Corporate Finance from the Wharton School of the University of Pennsylvania, which I received in 2005. I am a Certified Public Accountant licensed in the Commonwealth of Virginia and the State of West Virginia. I have maintained my CPA certifications through continuing professional education throughout my career.
Q. Please describe your professional experience.
A. I have over twenty years of experience in energy industry finance, regulatory accounting, and financial management. My career has been devoted almost exclusively to the midstream natural gas and oil pipeline sector, with extensive experience in FERC-jurisdictional cost-of-service filings, rate proceedings, and regulatory financial reporting.
From 2001 to 2005, prior to attending business school, I served as a Staff Accountant and subsequently Senior Accountant at Penrose Group in Clarksburg, West Virginia, where I was responsible for the preparation of FERC Form No. 2 annual reports, regulatory accounting entries, and supporting workpapers for rate case filings before this Commission.
Following the completion of my MBA in 2005, I joined Larkspur Holdings (now Hollowell Corporation) in Charleston, West Virginia, where I served in progressively responsible positions within the finance and regulatory accounting departments. From 2005 to 2008, I served as Manager, Regulatory Accounting. From 2008 to 2012, I served as Director, Financial Planning & Analysis. During my tenure at Harborline Group, I was directly involved in two general rate case filings before FERC, including the preparation of cost-of-service studies, rate base calculations, capital structure presentations, and supporting testimony workpapers.
From 2012 to 2017, I served as Vice President, Finance at Mountaineer Pipeline Company, LLC, a privately held interstate natural gas pipeline company operating in the Appalachian Basin. At Mountaineer Pipeline, I was responsible for all aspects of financial operations, including treasury management, capital budgeting, debt issuance and management, tax planning, and regulatory financial reporting. I was the lead financial witness in Mountaineer Pipeline's 2015 rate case filing before this Commission in Docket No. RP15-312-000, where I presented testimony on cost of service, rate base, capital structure, and cost of capital.
In 2017, I joined Ridgeline Midstream Services LLC in my current position as Vice President, Finance & Treasurer. In this role, I have overall responsibility for all of Ridgeline's financial operations, including treasury, accounting, tax, financial planning and analysis, and regulatory financial reporting. I report directly to James K. Winfield, Chief Executive Officer and President of Ridgeline Midstream Services LLC.
Q. What are your current responsibilities at Ridgeline?
A. As Vice President, Finance & Treasurer, I am responsible for the oversight and management of all financial operations of Ridgeline Midstream Services LLC. My responsibilities include, but are not limited to:
•  Oversight of the corporate treasury function, including cash management, banking relationships, and liquidity planning;
•  Management of all debt financing activities, including the Senior Secured Credit Facility and the Second Lien Senior Secured Notes;
•  Oversight of the accounting function, including the maintenance of books and records in accordance with the FERC Uniform System of Accounts prescribed in 18 C.F.R. Part 201;
•  Preparation and filing of FERC Form No. 2 annual reports;
•  Tax planning and compliance, including coordination with outside tax advisors;
•  Financial planning, budgeting, and forecasting;
•  Regulatory financial reporting and support for rate proceedings before FERC; and
•  Coordination with our parent company, Dunmore Energy Holdings Ltd. ("DEH"), on financial matters, capital allocation, and intercompany transactions.
I supervise a team of twelve professionals in the finance, accounting, and treasury departments at Ridgeline. I also serve as the primary liaison with Ridgeline's outside auditors at Ashford & McBride LLP, and with our banking syndicate led by Pinnacle National Bank, N.A.
Q. Have you previously testified before the Federal Energy Regulatory Commission or any other regulatory body?
A. Yes. As noted above, I served as the lead financial witness in the general rate case filing of Mountaineer Pipeline Company, LLC, before this Commission in Docket No. RP15-312-000. In that proceeding, I presented pre-filed direct testimony and rebuttal testimony on cost of service, rate base, capital structure, and cost of capital. I was cross-examined at the evidentiary hearing and my testimony was accepted into the record. The Commission's order in that proceeding approved a cost of service and rate base substantially consistent with the amounts I presented. I have also presented testimony before the Public Service Commission of West Virginia on two occasions in connection with intrastate pipeline rate matters.
C. Purpose of Testimony
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony is to present and support the cost-of-service and rate base components of Ridgeline's initial rate filing in this proceeding. Specifically, my testimony addresses the following:
1.  The test-year cost of service of $97.36 million that forms the basis for Ridgeline's proposed recourse rates;
2.  The rate base of $612.40 million as of the test year ended March 31, 2022;
3.  The proposed capital structure of 55% equity and 45% debt;
4.  The weighted average cost of debt of 5.25%;
5.  The proposed return on rate base, computed using a weighted average cost of capital of 10.0625%;
6.  The annual depreciation expense of $14.68 million;
7.  The operating expenses of $17.26 million, consisting of operations and maintenance ("O&M") expense and administrative and general ("A&G") expense;
8.  Taxes, including taxes other than income taxes and the income tax allowance;
9.  Revenue credits of $16.10 million; and
10.  The identification of supporting exhibits and workpapers (Exhibits A through P filed with the application) that document and support the figures presented in my testimony.
I note that the return on equity ("ROE") of 14.00% that is incorporated into my cost-of-service calculation is addressed separately and in detail in the pre-filed direct testimony of Dr. Raymond Braswell, Ridgeline's expert witness on cost of equity. Dr. Braswell presents a discounted cash flow ("DCF") proxy group analysis supporting the proposed 14.00% ROE. My testimony takes the 14.00% ROE as given and incorporates it into the overall cost-of-service calculation.
Additionally, the detailed rate design methodology, including the reservation/usage rate split, is addressed in the pre-filed direct testimony of Dr. Natasha Orlov. My testimony presents the total cost of service and provides summary rate calculations for informational purposes, but the rate design details are properly within the scope of Dr. Orlov's testimony.
D. Summary of Conclusions
Q. Please summarize the principal conclusions of your testimony.
A. My testimony supports the following principal conclusions:
1.  Ridgeline's total rate base, as filed, is $612.40 million. This figure is derived from Ridgeline's books and records, is computed in accordance with the FERC Uniform System of Accounts, and reflects the historical cost of the Ridgeline Pipeline System less accumulated depreciation, adjusted for accumulated deferred income taxes ("ADIT") and other rate base items including working capital allowance.
2.  The proposed weighted average cost of capital ("WACC") is 10.0625%, computed using a capital structure of 55% equity and 45% debt, a return on equity of 14.00%, and a weighted average cost of debt of 5.25%.
3.  The total cost of service is $97.36 million. This amount includes the return on rate base, depreciation expense, operating expenses, taxes, income tax allowance, and is net of revenue credits.
4.  These figures are just and reasonable within the meaning of Sections 4 and 5 of the Natural Gas Act and are supported by Ridgeline's audited books and records, FERC Form No. 2 data, and the detailed workpapers filed as Exhibits A through P to the application.
E. List of Exhibits Sponsored by This Witness
Q. Please identify the exhibits that you are sponsoring in this proceeding.
A. I am sponsoring the following exhibits, which have been filed with Ridgeline's application in this proceeding and which support the cost-of-service and rate base calculations presented in my testimony:
•  Exhibit A — Cost-of-Service Summary Statement
•  Exhibit B — Rate Base Statement and Supporting Schedules
•  Exhibit C — Capital Structure and Cost of Capital
•  Exhibit D — Depreciation Rate Analysis and Supporting Workpapers
•  Exhibit E — Operations and Maintenance Expense Detail
•  Exhibit F — Administrative and General Expense Detail
•  Exhibit G — Taxes Other Than Income Taxes
•  Exhibit H — Income Tax Allowance Computation
•  Exhibit I — Revenue Credits Detail
•  Exhibit J — Working Capital Allowance Computation
•  Exhibit K — Accumulated Deferred Income Taxes (ADIT) Calculation
•  Exhibit L — Gross Plant in Service — Detail by Functional Account
•  Exhibit M — Debt Instruments and Cost of Debt Calculation
•  Exhibit N — Test Year Adjustments Workpapers
•  Exhibit P — FERC Form No. 2 Data Extracts (Selected Pages)
I also reference certain portions of Exhibit O, which contains engineering cost data related to the interconnection facilities discussed in Section XII of my testimony, although the engineering aspects of that exhibit are sponsored by Mr. Thomas Greaves.
II. CORPORATE AND ORGANIZATIONAL OVERVIEW
A. Ridgeline Midstream Services LLC
Q. Please describe Ridgeline Midstream Services LLC.
A. Ridgeline Midstream Services LLC is a limited liability company organized under the laws of the State of Delaware. Ridgeline's registered agent is Capitol Filings Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. Ridgeline's Employer Identification Number (EIN) is 87-4231956, and its FERC Code is 960442.
Ridgeline was formed for the purpose of constructing, owning, and operating the Ridgeline Pipeline System, a 187-mile high-pressure natural gas transmission pipeline in the Appalachian Basin. Ridgeline provides open-access transportation service under its FERC Gas Tariff, Original Volume No. 1, pursuant to Part 284, Subpart G of the Commission's regulations.
Q. Please describe Ridgeline's ownership structure.
A. Ridgeline Midstream Services LLC is wholly owned by its sole member, Dunmore Energy Holdings Ltd. ("DEH"). DEH is a Cayman Islands exempted limited company registered under Cayman Registry No. CR-381204. DEH's registered office is located at 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1002, Cayman Islands.
DEH is a strategic private energy company that is active in oil and gas midstream infrastructure and, more recently, in renewable energy development. DEH's portfolio of assets includes approximately 1,200 miles of midstream gathering and transportation pipelines across the Appalachian Basin and the Gulf Coast region, two cryogenic gas processing plants with an aggregate processing capacity of approximately 600 MMcf/d, and a 250 MW wind energy portfolio currently under development in West Texas.
DEH's estimated enterprise value is approximately $2.8 billion, based on the most recent internal valuation completed in the second quarter of 2022. DEH's 2023 consolidated annual revenue was approximately $485 million. DEH is not publicly traded; its equity is privately held.
The founder, Chairperson, and controlling shareholder of DEH is Patricia Dunmore, who holds a 72% equity interest in DEH. The remaining 28% equity interest is held by a group of institutional investors and family trusts. Ms. Dunmore serves as Chairperson of the Board of Directors of DEH and has served in that capacity since the company's founding in 2009.
B. The Ridgeline Pipeline System
Q. Please describe the Ridgeline Pipeline System.
A. The Ridgeline Pipeline System is a 187-mile, 24-inch-diameter, high-pressure natural gas transmission pipeline extending from Wetzel County, West Virginia to Greene County, Pennsylvania. The pipeline was designed and constructed to provide reliable, high-volume natural gas transportation service from production areas in the prolific Marcellus and Utica shale formations in northern West Virginia to market delivery points in southwestern Pennsylvania.
The pipeline's receipt point is the Wetzel County Interconnect, located in Wetzel County, West Virginia, at approximate coordinates 39.6120° N, 80.7540° W. The delivery point is the Waynesburg Compressor Station, located in Greene County, Pennsylvania, at approximate coordinates 39.8965° N, 80.1810° W.
The Ridgeline Pipeline System has a design capacity of 1.2 billion cubic feet per day ("Bcf/d"), which is equivalent to 1,200,000 dekatherms per day ("Dth/d") at an assumed BTU content of 1,000 BTU per cubic foot. Current throughput is approximately 680 million cubic feet per day ("MMcf/d"), representing approximately 56.67% utilization of design capacity. I note that throughput has been steadily increasing since the pipeline's in-service date as additional shippers have contracted for capacity and as upstream production volumes in the receipt area have grown.
The pipeline system includes three compressor stations:
1.  Wetzel Station, located near the receipt point in Wetzel County, West Virginia, with installed compression of 15,000 horsepower ("HP");
2.  Mannington Station, located at approximately milepost 78 near Mannington, Marion County, West Virginia, with installed compression of 15,000 HP; and
3.  Waynesburg Station, located at the delivery point in Greene County, Pennsylvania, with installed compression of 15,000 HP.
The aggregate installed compression across the three stations is 45,000 HP.
The Ridgeline Pipeline System was placed in service on October 1, 2021. The original construction cost of the pipeline system was $587.2 million, as recorded on Ridgeline's books and records. The system was constructed over a period of approximately twenty-four months, commencing in November 2019, following the receipt of a certificate of public convenience and necessity from this Commission in Docket No. CP19-258-000, issued on September 12, 2019.
Ridgeline provides open-access transportation service under its FERC Gas Tariff, Original Volume No. 1, filed pursuant to Section 284.221 of the Commission's regulations (18 C.F.R. § 284.221) and Part 284, Subpart G. The pipeline is subject to the Commission's regulatory authority under Sections 4, 5, and 7 of the Natural Gas Act, 15 U.S.C. §§ 717c, 717d, and 717f, and the Commission's implementing regulations at 18 C.F.R. Parts 154, 157, and 284.
III. TEST YEAR AND ACCOUNTING BASIS
A. Selection of Test Year
Q. What test year has Ridgeline selected for purposes of this rate filing?
A. Ridgeline has selected the twelve-month period ended March 31, 2022 as the test year for this rate filing. I will refer to this period as the "test year" or "test period" throughout my testimony.
Q. Why did Ridgeline select this particular test year?
A. The selection of the test year ended March 31, 2022 is appropriate for several reasons. First, this test year captures the first full six months of pipeline operations following the Ridgeline Pipeline System's in-service date of October 1, 2021. The period from October 1, 2021 through March 31, 2022 represents the initial operational period of the pipeline, during which time the system's cost structure stabilized and recurring operational costs became identifiable and measurable.
Second, because the Ridgeline Pipeline System was not in service for the entirety of the twelve-month test year, Ridgeline has annualized certain test-year costs where appropriate to reflect a full year of operations. This annualization methodology is consistent with the Commission's longstanding policy of permitting pipelines to annualize costs that are subject to partial-year distortions, particularly in the context of newly constructed facilities. The specific annualization adjustments are documented in the workpapers filed as Exhibit N.
Third, the test year ended March 31, 2022 was the most recent twelve-month period for which complete, audited financial data was available at the time Ridgeline prepared and filed its application in this proceeding. Ridgeline's financial statements for the period ended March 31, 2022 have been audited by Ashford & McBride LLP, and the workpapers supporting this filing are derived from those audited financial records.
Q. Are the test-year data consistent with FERC accounting requirements?
A. Yes. The test-year data presented in my testimony and supporting exhibits are maintained in accordance with the Uniform System of Accounts prescribed by this Commission under 18 C.F.R. Part 201. Ridgeline maintains its books and records on an accrual basis in conformity with generally accepted accounting principles ("GAAP") as modified by the FERC Uniform System of Accounts. The data are also consistent with the information reported in Ridgeline's FERC Form No. 2 annual report for the relevant period, extracts of which are included in Exhibit P.
B. Adjustments to Test-Year Data
Q. Has Ridgeline made any adjustments to the actual test-year data?
A. Yes. Ridgeline has made certain adjustments to the actual test-year data to derive the adjusted test-year cost of service. These adjustments are of two principal types:
First, Ridgeline has applied known and measurable adjustments consistent with the Commission's longstanding policy. Known and measurable adjustments reflect changes in costs or revenues that are certain to occur and that are capable of reasonable quantification. These adjustments ensure that the test-year cost of service reflects the costs that the pipeline will actually incur on a going-forward basis. Examples of known and measurable adjustments in this filing include adjustments to reflect contractual escalations in lease and service agreements that took effect after the test-year end, and adjustments to reflect changes in staffing levels that were implemented and are now ongoing.
Second, Ridgeline has applied normalization adjustments to account for the partial-year nature of pipeline operations during the test year. As noted above, the Ridgeline Pipeline System was placed in service on October 1, 2021, which means that only six months of operational data fall within the twelve-month test year. To avoid understating costs that will recur on an annual basis, Ridgeline has annualized the six months of operational data to derive twelve-month equivalents for certain cost categories, including O&M expense and compressor station fuel and power costs. These annualization adjustments are documented in Exhibit N.
Q. Has Ridgeline excluded any non-recurring or extraordinary items from the test-year data?
A. Yes. Consistent with Commission policy, Ridgeline has identified and excluded certain non-recurring and extraordinary items from the test-year cost of service. Non-recurring items are costs that are not expected to recur in the normal course of business, and their inclusion would distort the ongoing cost of service. Specifically, Ridgeline has excluded $1.24 million in one-time startup and commissioning costs associated with the initial in-service of the pipeline system that were incurred during October and November 2021. Ridgeline has also excluded $0.38 million in costs associated with a non-recurring environmental remediation at the Mannington Station site that was completed in January 2022. These exclusions are detailed in Exhibit N.
Q. Are all test-year adjustments documented in the supporting workpapers?
A. Yes. All adjustments to the test-year data, including known and measurable adjustments, normalization adjustments, and exclusions of non-recurring items, are fully documented in the supporting workpapers filed as Exhibit N. Each adjustment is identified, explained, quantified, and supported with source documentation.
IV. RATE BASE
A. Overview
Q. What is Ridgeline's total rate base as filed in this proceeding?
A. Ridgeline's total rate base as filed is $612.40 million. The rate base represents the total investment on which Ridgeline is entitled to earn a reasonable return, computed in accordance with the Commission's regulations and established precedent.
Q. What are the principal components of the rate base?
A. The rate base consists of the following principal components: (1) Net Plant in Service, which is Gross Plant in Service less Accumulated Depreciation; (2) Working Capital Allowance; (3) Accumulated Deferred Income Taxes ("ADIT"), which reduces the rate base; and (4) Other Rate Base Items, including gas stored underground, prepayments, and materials and supplies. Each of these components is discussed in detail below.
B. Gross Plant in Service
Q. What is the Gross Plant in Service included in Ridgeline's rate base?
A. Gross Plant in Service is $587.20 million. This amount represents the original construction cost of the Ridgeline Pipeline System as recorded on Ridgeline's books and records. The $587.20 million includes all costs that are properly capitalizable under the FERC Uniform System of Accounts and that were incurred in connection with the design, engineering, procurement, construction, and commissioning of the pipeline system.
Q. What are the major components of the Gross Plant in Service?
A. The Gross Plant in Service of $587.20 million consists of the following major functional categories of plant:
•  Pipeline Facilities — This category includes the 187 miles of 24-inch-diameter, high-pressure natural gas transmission pipeline, including all pipe, fittings, valves, cathodic protection systems, pipeline coating, and associated construction costs. Pipeline facilities represent the largest single component of Gross Plant in Service.
•  Compressor Station Facilities — This category includes the three compressor stations (Wetzel Station, Mannington Station, and Waynesburg Station), comprising 45,000 HP of aggregate installed compression. The compressor station costs include the compressor units, gas turbine drivers, station piping, buildings, electrical systems, and all associated construction costs.
•  Metering and Regulation Equipment — This category includes the metering and regulation facilities at the receipt and delivery points, including ultrasonic flow meters, gas chromatographs, pressure regulation equipment, and associated control systems.
•  SCADA and Communications Systems — This category includes the Supervisory Control and Data Acquisition system, fiber optic communication lines, remote terminal units, and the central control facility.
•  Rights-of-Way — This category includes the costs of acquiring permanent and temporary easements along the 187-mile pipeline route traversing Wetzel, Marion, and Monongalia Counties in West Virginia and Greene County in Pennsylvania.
•  Land — This category includes the cost of land acquired in fee simple for the three compressor station sites and for the metering and regulation facilities.
A detailed breakdown of Gross Plant in Service by functional account is provided in Exhibit L.
Q. What is the basis for the plant values?
A. The plant values are recorded at historical cost, which is the actual cost incurred by Ridgeline to construct the pipeline system. Historical cost is the standard basis for plant valuation under the FERC Uniform System of Accounts and under the Commission's rate-setting methodology. The construction costs have been audited by Ashford & McBride LLP and are reconciled to Ridgeline's books and records and to the amounts reported in Ridgeline's FERC Form No. 2 annual report.
C. Accumulated Depreciation
Q. What is the Accumulated Depreciation included in the rate base calculation?
A. Accumulated Depreciation as of the test year ended March 31, 2022 is $23.49 million.
Q. How was the Accumulated Depreciation computed?
A. Accumulated Depreciation is computed using the straight-line method at an annual depreciation rate of 2.5%, applied to the Gross Plant in Service of $587.20 million. The Ridgeline Pipeline System was placed in service on October 1, 2021. For the period from the in-service date through the end of the test year on March 31, 2022, which represents six months of operation, the depreciation provision would be calculated as $587.20 million × 2.5% × (6/12) = $7.34 million for the partial year.
The total Accumulated Depreciation of $23.49 million as filed includes this partial-year provision along with prior period adjustments that are detailed in the supporting workpapers. These prior period adjustments reflect certain reclassifications and corrections to the depreciation accounts that were identified during the audit process and that are documented in Exhibit D. The depreciation rate of 2.5% is discussed further in Section VI of my testimony.
D. Net Plant in Service
Q. What is the Net Plant in Service?
A. Net Plant in Service is $563.71 million, computed as Gross Plant in Service of $587.20 million less Accumulated Depreciation of $23.49 million. Net Plant in Service represents the undepreciated original cost of the pipeline system and is the largest component of Ridgeline's rate base.
E. Working Capital Allowance
Q. What is the Working Capital Allowance included in Ridgeline's rate base?
A. The Working Capital Allowance included in Ridgeline's rate base is $18.64 million.
Q. How was the Working Capital Allowance derived?
A. The Working Capital Allowance is derived from multiple components. As a starting point, the Commission's traditional formula provides for a working capital allowance equal to one-eighth (1/8) of annual O&M expense plus A&G expense. Under this formula, the basic working capital allowance would be computed as follows:
1/8 × ($12.44 million O&M + $4.82 million A&G) = 1/8 × $17.26 million = $2.16 million (rounded)
However, the total Working Capital Allowance of $18.64 million includes additional working capital components beyond the basic 1/8 formula. These additional components include:
•  Cash working capital — computed on the basis of a lead-lag study that examines the timing differences between when Ridgeline receives revenues from its shippers and when it must pay its operating expenses, including fuel, power, labor, materials, and other costs. The cash working capital study results are detailed in Exhibit J.
•  Prepaid expenses — including prepaid insurance premiums, prepaid property taxes, and other prepaid items that represent amounts paid by Ridgeline in advance of the period to which they relate.
•  Other working capital items — including deposits and other current asset balances that support pipeline operations.
The detailed computation of the Working Capital Allowance, including the cash working capital study methodology and results, is set forth in Exhibit J.
F. Accumulated Deferred Income Taxes (ADIT)
Q. What is the Accumulated Deferred Income Taxes amount included in the rate base?
A. The Accumulated Deferred Income Taxes, or ADIT, balance is negative $12.45 million, which serves to reduce the rate base. This deduction from rate base is appropriate and required under the Commission's regulatory framework.
Q. What does the ADIT balance represent?
A. The ADIT balance represents the cumulative timing differences between book depreciation (straight-line at 2.5%) and tax depreciation (accelerated under the Modified Accelerated Cost Recovery System, or "MACRS," as applicable under the Internal Revenue Code). Because Ridgeline claims accelerated depreciation for income tax purposes, the pipeline system generates larger tax deductions in the early years of its life than are reflected in the book depreciation expense. This creates a timing difference that results in deferred income taxes.
Under the Commission's normalization requirements and well-established precedent, ADIT is deducted from rate base because it represents cost-free capital provided by ratepayers through the tax timing differences. The deduction of ADIT from rate base ensures that ratepayers receive the benefit of the tax deferral and that the pipeline does not earn a return on capital that is effectively provided at no cost.
The ADIT balance has been computed in accordance with the Commission's normalization requirements, consistent with IRS normalization rules, and is detailed in Exhibit K. I also discuss the relationship between ADIT and the income tax allowance in Section VIII of my testimony.
G. Other Rate Base Items
Q. What Other Rate Base Items are included in the rate base?
A. Other Rate Base Items total $42.50 million. These items are properly includable in rate base because they represent investments that are necessary for the provision of jurisdictional transportation service. The Other Rate Base Items consist of the following components:
•  Gas Stored Underground — $28.75 million. This amount represents the cost of gas held in underground storage facilities that is necessary for operational purposes, including line pack and system balancing. The gas stored underground is valued at the weighted average cost of acquisition, consistent with Commission policy.
•  Prepayments — $6.30 million. This amount represents prepaid expenses that are not already captured in the Working Capital Allowance, including long-term prepayments for rights-of-way maintenance, multi-year service contracts, and other advance payments.
•  Materials and Supplies — $7.45 million. This amount represents the cost of spare parts, pipe, fittings, valves, and other materials held in inventory for use in the operations and maintenance of the Ridgeline Pipeline System. These materials are necessary to ensure the reliable and safe operation of the system and to support timely repairs and planned maintenance activities.
Each of these components is supported by documentation in Exhibit B.
H. Rate Base Summary Table
Q. Please summarize the components of Ridgeline's rate base.
A. The following table summarizes the components of Ridgeline's rate base as filed:
The total rate base of $612.40 million represents the investment on which Ridgeline seeks to earn a just and reasonable return. Each component is supported by Ridgeline's books and records, has been prepared in accordance with the FERC Uniform System of Accounts, and is documented in the exhibits and workpapers filed with the application.
V. CAPITAL STRUCTURE AND COST OF CAPITAL
A. Proposed Capital Structure
Q. What capital structure is Ridgeline proposing for purposes of this rate filing?
A. Ridgeline proposes a capital structure of 55% equity and 45% debt for purposes of computing the weighted average cost of capital and the return on rate base.
Q. What is the basis for the proposed 55% equity / 45% debt capital structure?
A. The proposed capital structure is based on the actual capitalization of Ridgeline and its parent, DEH, adjusted to reflect a reasonable hypothetical capital structure that is consistent with Commission precedent for new pipeline facilities.
The actual financing of the Ridgeline Pipeline System, which I describe in detail below, involved a combination of debt and equity. The total construction cost of $587.20 million was funded through a Senior Secured Credit Facility providing $400 million in term loan borrowings, $150 million in Second Lien Senior Secured Notes, and an equity contribution of $37.20 million from DEH. On a gross basis, this financing mix represents approximately 93.7% debt and 6.3% equity, which is substantially more leveraged than would be appropriate for rate-setting purposes.
However, the Commission has long recognized that the actual financing of a particular pipeline project does not necessarily dictate the capital structure used for rate-setting purposes. The Commission has permitted pipelines to use a hypothetical capital structure when the pipeline's actual capital structure does not reflect the overall financial posture of the pipeline and its parent, or when the actual structure is not representative of the capital structure that a pipeline of similar risk would maintain on a standalone basis. See, e.g., Vireo Industries., 84 FERC ¶ 61,084 (1998); Northwest Pipeline Corp., 87 FERC ¶ 61,266 (1999).
In this case, the 55%/45% equity-to-debt ratio reflects the consolidated capital structure of DEH, which maintains an enterprise-level capital structure of approximately 55% equity and 45% debt. Ridgeline relies on the financial strength and creditworthiness of DEH for its ability to access capital markets and maintain favorable borrowing terms. The Commission has recognized that it is appropriate to look to the parent company's capital structure when the subsidiary's actual structure is heavily leveraged due to project financing arrangements. The proposed 55%/45% structure is also within the range of capital structures maintained by the proxy group of comparable pipeline companies analyzed by Dr. Braswell in his testimony on return on equity.
B. Financing of the Ridgeline Pipeline System
Q. Please describe the financing of the Ridgeline Pipeline System in detail.
A. The total construction cost of the Ridgeline Pipeline System was $587.20 million. This cost was financed through the following sources:
Senior Secured Credit Facility. On September 15, 2021, Ridgeline entered into a Senior Secured Credit Facility Agreement (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., located at 600 Travis Street, Suite 4200, Houston, Texas 77002.
The lending syndicate under the Credit Agreement consists of three participants:
•  Pinnacle National Bank, N.A. — 40% participation ($160 million term loan commitment)
•  Granite Trust Company — 30% participation ($120 million term loan commitment)
•  Lakeshore Capital Bank — 30% participation ($120 million term loan commitment)
The term loan matures on October 1, 2028 and bears interest at a floating rate equal to the Secured Overnight Financing Rate ("SOFR") plus 325 basis points. The revolving credit facility has the same maturity date and bears interest at SOFR plus 300 basis points. As of the test-year end, the $400 million term loan was fully drawn and the revolving credit facility had not been drawn upon.
The term loan is subject to mandatory amortization payments on a quarterly basis, with amortization commencing on January 1, 2022. I note that the outstanding balance of the term loan is being reduced over time in accordance with the amortization schedule set forth in the Credit Agreement, and the outstanding balance as of the end of the test year reflects these scheduled payments.
The Credit Agreement is secured by a first priority lien on substantially all of the assets of Ridgeline, including the Ridgeline Pipeline System, all associated real property, personal property, and contract rights.
Second Lien Senior Secured Notes. On September 22, 2021, Ridgeline issued $150 million in aggregate principal amount of Second Lien Senior Secured Notes (the "Notes") due 2030. The Notes bear a fixed interest rate (coupon) of 7.875% per annum, payable semi-annually. The Notes mature on September 22, 2030.
The Notes were issued in a private placement to two institutional investors:
•  Harborview Capital Management LLC, located at 450 Park Avenue, 18th Floor, New York, New York 10022 (portfolio manager: Samantha Hu); and
•  Sentinel Ridge Fund LP, located at 301 Commerce Street, Suite 2200, Fort Worth, Texas 76102 (managing partner: Peter Nowicki).
The Notes are secured by a second priority lien on substantially all of the assets of Ridgeline, subordinate to the first priority lien securing the Senior Secured Credit Facility.
Equity Contribution by DEH. The remaining construction cost was funded through a direct equity contribution by DEH of $37.20 million, computed as $587.20 million total construction cost less $400 million term loan less $150 million Notes. DEH's equity contribution was made in the form of a cash capital contribution to Ridgeline.
C. Cost of Debt
Q. What is the weighted average cost of debt that Ridgeline proposes for purposes of this filing?
A. Ridgeline proposes a weighted average cost of debt of 5.25%.
Q. How was the weighted average cost of debt computed?
A. The weighted average cost of debt was computed based on the weighted average of the interest rates applicable to the two debt tranches, weighted by their respective outstanding principal amounts.
As described above, the Senior Secured Credit Facility term loan bears interest at SOFR plus 325 basis points. At the time of filing, the one-month SOFR rate was approximately 1.55%, resulting in an all-in interest rate on the term loan of approximately 4.80% (1.55% + 3.25% = 4.80%). While SOFR is a floating rate that fluctuates over time, the 1.55% rate represents the prevailing rate during the test period and is a reasonable basis for computing the cost of debt in this filing.
The Second Lien Senior Secured Notes bear a fixed interest rate of 7.875%.
The weighted average cost of debt is computed as follows, using the outstanding principal amounts of the two tranches at the time of filing:
•  Term Loan: $400 million at 4.80% → weighted contribution: ($400M / $550M) × 4.80% = 72.73% × 4.80% = 3.49%
•  Second Lien Notes: $150 million at 7.875% → weighted contribution: ($150M / $550M) × 7.875% = 27.27% × 7.875% = 2.15%
•  Total weighted average: 3.49% + 2.15% = 5.64%
The filed weighted average cost of debt of 5.25% reflects certain adjustments to account for the amortized balance of the term loan over the rate design period and the inclusion of commitment fees and other financing costs associated with the revolving credit facility, which are amortized over the life of the facility. The detailed computation is set forth in Exhibit M. The resulting 5.25% weighted average cost of debt is a conservative and reasonable figure that accurately reflects Ridgeline's cost of borrowing.
Q. Is the weighted average cost of debt of 5.25% reasonable?
A. Yes. The 5.25% weighted average cost of debt is reasonable for several reasons. First, it is based on the actual interest rates borne by Ridgeline's debt instruments, which were negotiated at arm's length with sophisticated institutional lenders and investors. Second, the interest rates are consistent with prevailing market rates for similarly rated midstream pipeline credits at the time of issuance. Third, the weighted average methodology appropriately accounts for the relative proportions and costs of the two debt tranches. The Commission has consistently accepted weighted average cost of debt calculations based on a pipeline's actual debt instruments, and the 5.25% figure presented here is supported by the documentation filed as Exhibit M.
D. Return on Equity
Q. What return on equity is Ridgeline proposing?
A. Ridgeline proposes a return on equity of 14.00%.
Q. Are you sponsoring the return on equity?
A. No. The 14.00% return on equity is sponsored and supported in detail by Dr. Raymond Braswell in his pre-filed direct testimony filed concurrently with this testimony. Dr. Braswell presents a discounted cash flow ("DCF") proxy group analysis that supports the proposed 14.00% ROE. Dr. Braswell's analysis identifies a proxy group of comparable natural gas pipeline companies, computes the DCF-derived cost of equity for each member of the proxy group, and demonstrates that 14.00% falls within the zone of reasonableness for the return on equity applicable to Ridgeline.
For purposes of my testimony, I take the 14.00% ROE as given and incorporate it into the overall cost-of-service calculation. I note that the 14.00% ROE is at the upper end of the range typically approved by the Commission for natural gas pipeline companies, which Dr. Braswell explains is appropriate given the risk profile of the Ridgeline Pipeline System as a newly constructed pipeline with limited operating history and a throughput level that has not yet reached design capacity.
E. Weighted Average Cost of Capital (WACC)
Q. What is the weighted average cost of capital that results from the proposed capital structure and cost rates?
A. The weighted average cost of capital ("WACC") is 10.0625%, computed as follows:
•  Equity component: 55% × 14.00% = 7.7000%
•  Debt component: 45% × 5.25% = 2.3625%
•  Total WACC: 7.7000% + 2.3625% = 10.0625%
The WACC of 10.0625% represents the blended rate of return that Ridgeline must earn on its rate base in order to provide a just and reasonable return to its equity owners and to service its debt obligations. This WACC is consistent with the range of overall rates of return approved by the Commission for natural gas pipeline companies in recent proceedings.
F. Return on Rate Base
Q. What is the return on rate base?
A. The return on rate base is $61.62 million (rounded), computed by multiplying the total rate base of $612.40 million by the WACC of 10.0625%:
$612.40 million × 10.0625% = $61.62 million (rounded)
This is the dollar amount of the return component included in Ridgeline's total cost of service.
G. Capital Structure Summary Table
Q. Please summarize the proposed capital structure and cost of capital.
A. The following table summarizes the proposed capital structure, cost rates, and weighted average cost of capital:
The capital structure, cost rates, and resulting WACC are supported by the documentation and analysis set forth in Exhibits C and M.
VI. DEPRECIATION EXPENSE
A. Depreciation Rate
Q. What depreciation rate is Ridgeline proposing for the Ridgeline Pipeline System?
A. Ridgeline proposes an annual straight-line depreciation rate of 2.5%, applied to the Gross Plant in Service of $587.20 million.
Q. What is the basis for the proposed 2.5% depreciation rate?
A. The proposed 2.5% annual straight-line depreciation rate is based on an estimated useful life of approximately 40 years for the Ridgeline Pipeline System. This useful life estimate is consistent with the Commission's depreciation policy for natural gas transmission pipelines, which generally recognizes useful lives in the range of 30 to 50 years for major pipeline facilities, depending on the specific characteristics of the system, the operating environment, and other relevant factors.
The 40-year estimated useful life is supported by the following considerations:
1.  Physical life — The Ridgeline Pipeline System was constructed using modern materials (API 5L X-70 grade steel pipe) and construction techniques. The pipeline is equipped with a comprehensive cathodic protection system and high-performance coating to protect against external corrosion. Based on the physical characteristics of the pipe and the operating environment, a physical life of well in excess of 40 years is anticipated.
2.  Functional life — The pipeline serves prolific natural gas production areas in the Marcellus and Utica shale formations, which are expected to sustain significant production volumes for decades to come. The functional demand for natural gas transportation capacity in the Appalachian Basin is expected to continue throughout and beyond the 40-year useful life estimate.
3.  Regulatory and industry precedent — The Commission has approved depreciation rates in the range of 2.0% to 3.0% (corresponding to useful lives of approximately 33 to 50 years) for natural gas transmission pipelines in numerous rate proceedings. The proposed 2.5% rate (40-year life) is squarely within this range.
Detailed depreciation rate support, including a life analysis and consideration of negative net salvage, is provided in the supporting workpapers filed as Exhibit D. I note that negative net salvage — the estimated cost of retirement, net of any salvage value — has been considered in the depreciation analysis. The workpapers document Ridgeline's analysis of negative net salvage and its conclusion that the 2.5% composite depreciation rate appropriately accounts for negative net salvage over the life of the system.
B. Annual Depreciation Expense
Q. What is the annual depreciation expense included in the cost of service?
A. The annual depreciation expense included in the cost of service is $14.68 million, computed as follows:
$587.20 million × 2.5% = $14.68 million
This amount represents a full year of depreciation expense applied for rate-setting purposes. Although the pipeline was in service for only six months during the twelve-month test year, the cost of service properly includes a full year of depreciation because the recourse rates are designed to recover costs on a going-forward basis. The Commission's rate-setting methodology for new pipelines contemplates the use of annualized depreciation in the cost of service, and Ridgeline's approach is consistent with that methodology.
The $14.68 million annual depreciation expense is a significant component of the total cost of service and reflects the systematic allocation of the pipeline's original cost over its estimated useful life.
VII. OPERATING EXPENSES
A. Operations and Maintenance (O&M) Expense
Q. What is the test-year O&M expense included in the cost of service?
A. The test-year O&M expense is $12.44 million, as reported in Ridgeline's FERC Form No. 2 data and adjusted for known and measurable changes and normalization as described in Section III.B of my testimony.
Q. What are the principal components of O&M expense?
A. O&M expense consists of the costs directly associated with the operation and maintenance of the Ridgeline Pipeline System's physical facilities. The principal components of O&M expense are as follows:
•  Compressor station operations and maintenance — This is the largest component of O&M expense and includes the costs of operating and maintaining the three compressor stations (Wetzel Station, Mannington Station, and Waynesburg Station), with aggregate installed compression of 45,000 HP. These costs include compressor unit maintenance and overhaul costs, gas turbine driver maintenance, fuel gas costs, electric power costs for auxiliary equipment, station operator labor, and materials and supplies consumed in station operations.
•  Pipeline right-of-way maintenance — This component includes the costs of maintaining the 187-mile pipeline right-of-way, including vegetation management, erosion control, patrol and inspection, and repairs to the right-of-way surface.
•  Metering and regulation — This component includes the costs of operating and maintaining the metering and regulation facilities at the receipt and delivery points, including calibration and testing of flow measurement devices, maintenance of pressure regulation equipment, and replacement of consumable components.
•  System control and load dispatching — This component includes the costs of the central control room operations, including operator labor, communication costs, and system monitoring activities.
•  SCADA and communications — This component includes the costs of maintaining and operating the Supervisory Control and Data Acquisition system, including software licensing, hardware maintenance, fiber optic line maintenance, and cybersecurity measures.
•  Environmental compliance — This component includes the costs of compliance with environmental regulations applicable to the pipeline system, including air quality monitoring and reporting at compressor stations, water quality monitoring, and hazardous materials management.
•  Safety and integrity management — This component includes the costs of Ridgeline's pipeline safety and integrity management program, including inline inspections, external corrosion surveys, cathodic protection monitoring, and compliance with Department of Transportation Pipeline and Hazardous Materials Safety Administration ("PHMSA") regulations.
•  Other operations — This component includes miscellaneous operational costs not separately categorized above.
A detailed breakdown of O&M expense by account and sub-account is provided in Exhibit E.
B. Administrative and General (A&G) Expense
Q. What is the test-year A&G expense included in the cost of service?
A. The test-year A&G expense is $4.82 million, as reported in Ridgeline's FERC Form No. 2 data and adjusted for known and measurable changes as described in Section III.B.
Q. What are the principal components of A&G expense?
A. A&G expense consists of costs that are incurred in the general administration of Ridgeline's business and that are not directly assignable to specific operational functions. The principal components of A&G expense are as follows:
•  Salaries and benefits — administrative personnel — This component includes the salaries, wages, and employee benefits (including health insurance, retirement plan contributions, and payroll taxes) for Ridgeline's administrative and managerial personnel, including executive officers, finance and accounting staff, human resources personnel, and other administrative employees.
•  Office and administrative facility costs — This component includes the lease costs, utilities, and maintenance costs for Ridgeline's principal office at 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301, as well as office supplies, equipment, and information technology costs.
•  Insurance — This component includes premiums for property insurance covering the Ridgeline Pipeline System and associated facilities, casualty insurance, general liability insurance, directors and officers liability insurance, and other insurance coverage maintained by Ridgeline in the ordinary course of business.
•  Regulatory commission expenses — This component includes FERC annual charges, state regulatory fees, and other regulatory assessments applicable to Ridgeline's operations.
•  General corporate allocations from DEH — This component includes Ridgeline's allocated share of certain general corporate services provided by DEH, including corporate governance, strategic planning, investor relations, and certain shared services. These allocations are made on the basis of a documented cost allocation methodology that assigns costs to Ridgeline based on its proportionate use of the shared services. The allocation methodology is consistent with Commission policy regarding the inclusion of parent company allocations in a pipeline's cost of service, and the allocated amounts are supported by documentation in Exhibit F.
•  Professional services — This component includes fees for outside professional services, including legal fees, external audit fees paid to Ashford & McBride LLP, consulting fees, and other professional service costs incurred in the ordinary course of business.
•  Other A&G expenses — This component includes miscellaneous administrative and general expenses not separately categorized above, including travel and entertainment, industry association dues, and charitable contributions.
A detailed breakdown of A&G expense by account and sub-account is provided in Exhibit F.
C. Operating Expense Summary Table
Q. Please summarize the operating expenses included in the cost of service.
A. The following table summarizes the operating expenses included in Ridgeline's cost of service:
The total operating expenses of $17.26 million are reasonable, are supported by Ridgeline's books and records and FERC Form No. 2 data, and reflect the costs necessary to operate and administer the Ridgeline Pipeline System in a safe, reliable, and efficient manner.
VIII. TAXES
A. Taxes Other Than Income Taxes
Q. What is the amount of taxes other than income taxes included in the cost of service?
A. Taxes other than income taxes total $3.80 million.
Q. What are the components of taxes other than income taxes?
A. Taxes other than income taxes consist primarily of state and local property taxes and franchise taxes assessed on the Ridgeline Pipeline System and Ridgeline's business operations. The pipeline system traverses portions of West Virginia (Wetzel, Marion, and Monongalia Counties) and Pennsylvania (Greene County), and Ridgeline is subject to property tax assessments in each jurisdiction through which the pipeline passes.
The principal components of taxes other than income taxes are as follows:
•  West Virginia property taxes — Assessed by the West Virginia State Tax Department based on the appraised value of the pipeline facilities, compressor stations, and other real and personal property located in West Virginia. The assessed values and applicable tax rates are based on the most recent assessment and millage rates.
•  Pennsylvania property taxes — Assessed by Greene County and applicable municipal taxing authorities on the pipeline facilities and compressor station property located in Pennsylvania.
•  West Virginia business and occupation taxes — Applicable to Ridgeline's gross receipts from operations in West Virginia.
•  Franchise taxes and other state and local taxes — Including Delaware franchise taxes (as Ridgeline is a Delaware limited liability company) and other miscellaneous state and local tax obligations.
The computation of taxes other than income taxes is supported by the documentation filed as Exhibit G, which includes copies of the applicable tax assessments, tax rate schedules, and calculations.
B. Income Tax Allowance
Q. What is the income tax allowance included in the cost of service?
A. The income tax allowance included in the cost of service is $16.10 million.
Q. How was the income tax allowance computed?
A. The income tax allowance was computed using the Commission's grossed-up income tax methodology. Under this methodology, the income tax allowance is calculated on the equity return portion of the cost of service — that is, the income tax allowance reflects the income taxes that must be paid on the equity component of the return, grossed up to account for the fact that the income taxes themselves are also subject to taxation.
The effective combined federal and state income tax rate used in the computation is approximately 26.13%. This combined rate is derived as follows:
•  Federal income tax rate: 21.00%
•  West Virginia state corporate net income tax rate: 6.50%
•  Combined effective rate, accounting for the deductibility of state income taxes from federal taxable income: 21.00% + 6.50% × (1 - 21.00%) = 21.00% + 5.135% = 26.135%, rounded to 26.13%
The income tax allowance is applied to the equity return component of the cost of service. The equity return is computed as the rate base of $612.40 million multiplied by the equity portion of the WACC (55% × 14.00% = 7.70%), which yields an equity return of $47.15 million. The grossed-up income tax on this equity return, computed at the effective combined rate of 26.13%, produces an income tax allowance of approximately $16.10 million. The detailed gross-up calculation, including intermediate steps, is set forth in Exhibit H.
Q. Please address whether Ridgeline is eligible for an income tax allowance.
A. Ridgeline Midstream Services LLC is organized as a limited liability company and is wholly owned by DEH, a Cayman Islands exempted limited company. The eligibility of pass-through entities for an income tax allowance in FERC-regulated rates has been the subject of significant Commission and judicial attention in recent years.
In Sterling Reach Holdings, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016), the D.C. Circuit held that the Commission must adequately justify allowing an income tax allowance for partnership-owned pipelines. The Commission subsequently issued a series of policy statements and orders addressing the income tax treatment of pass-through entities, including the Revised Policy Statement on Treatment of Income Taxes issued on March 15, 2018 (Docket No. PL17-1-000), 162 FERC ¶ 61,227 (2018).
Under the Commission's current policy, a pipeline organized as a pass-through entity is eligible for an income tax allowance to the extent that its partners or members are subject to an actual or potential income tax liability on the income generated by the pipeline. The Commission requires that the entity demonstrate that its owners bear an income tax burden attributable to the pipeline's income.
Ridgeline's sole member, DEH, is a Cayman Islands exempted limited company. While DEH itself may not be subject to income tax in the Cayman Islands, the income generated by Ridgeline flows through to DEH's beneficial owners, including Patricia Dunmore (who holds a 72% equity interest in DEH) and other equity holders who are subject to income tax on their share of the income in their respective jurisdictions of tax residence. Ridgeline has analyzed the income tax positions of DEH's equity holders and has concluded that the income tax allowance included in the cost of service is appropriate because the equity holders bear actual income tax liability on the income generated by the Ridgeline Pipeline System.
The detailed analysis of Ridgeline's eligibility for the income tax allowance, including documentation of the tax status of DEH's equity holders, is set forth in Exhibit H. Ridgeline reserves the right to supplement this analysis in response to any requests from Commission Staff or other parties.
C. Tax Summary Table
Q. Please summarize the tax components included in the cost of service.
A. The following table summarizes the tax components included in Ridgeline's cost of service:
IX. REVENUE CREDITS
A. Revenue Credits
Q. What revenue credits are included in the cost of service?
A. Revenue credits of $16.10 million are included in the cost of service as an offset (reduction) to the total cost of service to be recovered through firm recourse rates.
Q. What are the sources of the revenue credits?
A. The revenue credits represent revenues received by Ridgeline from sources other than firm transportation service that are properly credited against the cost of service. The Commission's long-established policy requires that certain non-firm revenues be credited against the cost of service so that firm shippers receive the benefit of these additional revenues and are not required to bear the full cost of service when the pipeline is also generating revenue from other sources.
The principal components of the revenue credits are as follows:
•  Interruptible transportation revenues — Ridgeline provides interruptible transportation service on the Ridgeline