PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It has been prepared by Calderwood & Harkness LLP at the request of the client for the purpose of providing legal advice in connection with pending regulatory proceedings before the Federal Energy Regulatory Commission. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Ridgeline Midstream Services LLC.
MEMORANDUM
TO:
Patricia Dunmore, Founder & Chairperson, Dunmore Energy Holdings Ltd. Billing Partner, Calderwood & Harkness LLP
James K. Winfield, CEO & President, Ridgeline Midstream Services LLC
Angela Moretti, VP, Finance & Treasurer, Ridgeline Midstream Services LLC
Dr. Natasha Orlov, Director of Rates & Regulatory, Ridgeline Midstream Services LLC
FROM:
George Trujillo, Responsible Partner, Energy & Infrastructure, Calderwood & Harkness LLP
Brett Callahan, Lead Associate, Energy & Infrastructure, Calderwood & Harkness LLP
David Stanton, Working Associate, Energy & Infrastructure, Calderwood & Harkness LLP
DATE: October 18, 2024
RE: Creditworthiness Provision Design — Addressing Deficiency Item 11, FERC Docket Nos. RP22-847-000 and RP22-847-001, Ridgeline Midstream Services LLC
C&H Matter No.: 1016-00005
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I. Executive Summary
This memorandum analyzes the Federal Energy Regulatory Commission's ("FERC" or "Commission") policies, precedent, and evolving standards regarding creditworthiness provisions in open-access transportation tariffs and recommends specific tariff language for inclusion in the redesigned FERC Gas Tariff, Original Volume No. 1, of Ridgeline Midstream Services LLC ("Ridgeline" or the "Company"). The purpose of the analysis and recommendations set forth herein is to cure Deficiency Item 11 identified in the January 19, 2023, Deficiency Letter issued by FERC's Office of Energy Market Regulation (lead analyst Dr. Miriam Okafor), which cited the inadequacy of the creditworthiness provisions contained in Ridgeline's originally proposed tariff.
Procedural Context. Ridgeline filed its initial application on May 12, 2022, in Docket Nos. RP22-847-000 (the rate case proceeding) and RP22-847-001 (the interconnection proceeding), seeking Commission approval of an initial tariff rate for interstate transportation service on the 187-mile Ridgeline Pipeline System and authorization for physical interconnection with Appalachian Trunk Pipeline Company, LLC ("ATPC") at the Wetzel County Interconnect in Wetzel County, West Virginia. The Commission's Office of Energy Market Regulation issued its Deficiency Letter on January 19, 2023, identifying fourteen (14) separate deficiency items that required remediation before the application could be further processed. Deficiency Item 11 specifically cited the inadequacy of the creditworthiness provisions set forth in the proposed tariff's General Terms and Conditions, noting the absence of defined criteria, evaluation procedures, collateral mechanisms, and dispute resolution processes.
The proceeding has been administratively dormant since September 8, 2023, when Administrative Law Judge Clara Whitfield granted a second extension of time for the filing of a supplemental response. A third extension was subsequently granted on March 4, 2024, establishing a final deadline of February 21, 2025, for the filing of the redesigned tariff and supplemental pre-filed testimony. This memorandum is being prepared as part of the comprehensive tariff redesign effort being coordinated with Braswell Energy Consulting Group LLC ("Braswell") (engagement number BEC-2023-0041, lead consultant Dr. Raymond Braswell) and will inform both the near-final fourth draft of the revised tariff (targeted for November 2024) and the draft supplemental pre-filed testimony of Dr. Natasha Orlov addressing rate design, creditworthiness, and related tariff provisions.
Summary of Key Recommendations. Based on our analysis of FERC policy, applicable precedent, the Commission's expectations as articulated in the Deficiency Letter, and the practical circumstances of Ridgeline's shipper base and financial structure, we recommend the following principal elements for the redesigned creditworthiness provisions:
1. Tiered Creditworthiness Framework Based on Investment-Grade Credit Ratings. Establishment of a three-tier classification system: Tier 1 for investment-grade rated shippers; Tier 2 for non-investment-grade but financially qualified shippers; and Tier 3 for shippers requiring full collateralization of their obligations.
2. Defined Collateral Requirements. Clear specification of acceptable forms of credit assurance for shippers that do not meet the minimum unsecured credit thresholds, including irrevocable standby letters of credit, cash deposits in segregated escrow accounts, surety bonds, parent or affiliate guarantees, and prepayment.
3. Unsecured Credit Limits Calibrated to Shipper Financial Capacity. A formulaic approach to calculating unsecured credit limits based on tangible net worth and estimated maximum monthly obligations, with differentiated limits for Tier 1 and Tier 2 shippers.
4. Flexible Creditworthiness Evaluation Procedures. Transparent, objective evaluation procedures with defined timelines, applicable to both rated and non-rated shippers, ensuring that creditworthiness determinations are made within 10 business days and that shippers receive written notice of the basis for any determination.
5. Dispute Resolution Mechanisms. A multi-step process providing shippers with the right to request reconsideration of adverse creditworthiness determinations, followed by access to FERC complaint procedures or the tariff's general dispute resolution provisions.
6. Provisions Reflecting FERC's Evolving Standards on Non-Discriminatory Creditworthiness Requirements. Incorporation of non-discrimination requirements, provisions for governmental and municipal shipper treatment, and ongoing monitoring mechanisms consistent with the Commission's most recent policy pronouncements.
Practical Significance. The design of workable and FERC-compliant creditworthiness provisions is of particular importance given the composition of Ridgeline's current and projected shipper base. The Mountainside Gas Producers Coalition ("MGPC"), representing fourteen (14) independent natural gas producers operating in the Marcellus and Utica shale formations, constitutes a significant portion of the anticipated demand for transportation service on the Ridgeline Pipeline System. Many of MGPC's members are smaller, independent producers that may not carry investment-grade credit ratings from nationally recognized statistical rating organizations. The creditworthiness framework must therefore strike a balance between Ridgeline's legitimate interest in assuring payment for transportation services — particularly in light of the Company's $612.40 million rate base and substantial debt obligations — and the need to provide fair, meaningful access to transportation capacity for all shippers, including those without the financial profile of major integrated producers.
Cross-Reference. The creditworthiness provisions addressed in this memorandum must be coordinated with the creditworthiness analysis in the revised Interconnection Agreement (Version 3.0, dated April 2023) between Ridgeline and ATPC governing the physical interconnection facilities at the Wetzel County Interconnect. While the interconnection agreement's creditworthiness provisions address the obligations between the two pipelines rather than between Ridgeline and its shippers, consistency of approach and terminology will be important for regulatory acceptance and practical administration.
II. Background and Procedural Posture
A. Overview of the Ridgeline Pipeline System and Filing
Ridgeline Midstream Services LLC is a Delaware limited liability company, the sole member of which is Dunmore Energy Holdings Ltd., a Cayman Islands exempted limited company (Company Registration No. CR-381204). Ridgeline maintains its principal office at 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301, and its registered agent for service of process in Delaware is Capitol Filings Inc., 1209 Orange Street, Wilmington, Delaware 19801. The Company's federal Employer Identification Number is 87-4231956, and its FERC pipeline code is 960442.
The Ridgeline Pipeline System. The Ridgeline Pipeline System (the "System") consists of approximately 187 miles of 24-inch-diameter high-pressure natural gas pipeline extending from the Wetzel County Interconnect in Wetzel County, West Virginia, to the Waynesburg Compressor Station in Greene County, Pennsylvania. The System has a design capacity of 1.2 billion cubic feet per day ("Bcf/d"), equivalent to 1,200,000 dekatherms per day ("Dth/d"). Current throughput is approximately 680 million cubic feet per day ("MMcf/d"), representing a utilization rate of approximately 56.67% of design capacity. The System includes three compressor stations with aggregate compression of 45,000 horsepower. The System was placed in service on October 1, 2021, and its original construction cost was approximately $587.2 million.
Initial Rate Filing. On May 12, 2022, Ridgeline filed its initial application with the Commission in the above-captioned dockets, seeking approval of an initial tariff rate for interstate transportation service under Part 284, Subpart G of the Commission's regulations (open-access transportation) and authorization for physical interconnection with ATPC at the Wetzel County Interconnect. The filing included proposed FERC Gas Tariff, Original Volume No. 1, and supporting cost-of-service testimony. The key parameters of the initial filing were as follows:
Tariff Redesign Parameters. The comprehensive tariff redesign currently underway, coordinated with Braswell, has resulted in revised parameters that will be reflected in the fourth draft revised tariff and supplemental testimony. The principal revisions to the rate design include:
The shift from a 100% load factor assumption to a 75% load factor assumption, while reducing the assumed return on equity by 150 basis points, has resulted in an increase in the proposed per-unit recourse rate from $0.2265/Dth to $0.3140/Dth. This revision was driven in part by the need to align the rate design with the System's actual utilization experience and reasonable throughput projections, as discussed in the separate rate design memorandum.
B. The Deficiency Letter and Item 11
On January 19, 2023, the Commission's Office of Energy Market Regulation issued a Deficiency Letter in Docket Nos. RP22-847-000 and RP22-847-001 identifying fourteen (14) deficiency items requiring remediation. The Deficiency Letter was authored under the supervision of Dr. Miriam Okafor, Lead Economic Analyst, and reflected the staff's review of Ridgeline's initial tariff filing, supporting workpapers, and testimony.
Deficiency Item 11 specifically addressed the creditworthiness provisions in the proposed tariff. The Deficiency Letter stated, in pertinent part:
"Inadequate creditworthiness provisions. The proposed General Terms and Conditions (Section 20) contain only a general statement requiring shippers to demonstrate 'adequate credit' without defining specific criteria, evaluation procedures, collateral mechanisms, or dispute resolution processes. The Commission's policies require that creditworthiness provisions in open-access tariffs be clearly defined, objectively administered, non-discriminatory, and include meaningful alternatives for shippers that do not carry investment-grade credit ratings. The proposed tariff fails to meet these requirements."
The Deficiency Letter further indicated that the creditworthiness provisions should address, at a minimum: (i) defined credit rating thresholds; (ii) alternative evaluation criteria for non-rated shippers; (iii) acceptable forms of credit assurance; (iv) unsecured credit limit calculation methodology; (v) evaluation procedures and timelines; (vi) provisions for ongoing creditworthiness monitoring; and (vii) dispute resolution procedures.
Partial Response. On March 15, 2023, Ridgeline filed a partial response to the Deficiency Letter addressing eight (8) of the fourteen (14) deficiency items (specifically Items 1 through 4 and Items 7 through 10). Item 11, along with the remaining unaddressed items (Items 5, 6, 12, 13, and 14), was deferred to the comprehensive tariff redesign effort. The six unaddressed items were the subject of Ridgeline's first motion for extension of time, filed April 28, 2023, in which Ridgeline requested a 120-day extension to prepare a comprehensive response through a redesigned tariff. That motion was granted, and subsequent extensions have carried the proceeding to the current February 21, 2025, filing deadline.
C. Intervenor Positions Relevant to Creditworthiness
Several intervenors in the proceeding have staked out positions, whether directly or indirectly, on creditworthiness-related issues. An understanding of these positions is essential to designing creditworthiness provisions that are both defensible before the Commission and practical in light of the settlement dynamics in this proceeding.
Appalachian Trunk Pipeline Company, LLC (ATPC). ATPC is represented by Kellner, Royce & Dillard LLP (lead counsel William Pratt, Senior Partner; One PPG Place, Suite 2800, Pittsburgh, Pennsylvania 15222). ATPC's protest, filed August 15, 2022, and the answering testimony of its witnesses filed January 9, 2023, raised several concerns about Ridgeline's proposed tariff, including concerns about the creditworthiness of Ridgeline's shippers insofar as those shippers' financial condition may impact the reliability of interconnection operations and the scheduling of gas deliveries and receipts at the Wetzel County Interconnect. ATPC's Vice President of Regulatory Affairs, Sandra K. Fenton, has indicated through counsel that ATPC would want reciprocal creditworthiness provisions for any shippers receiving service through the Wetzel County Interconnect, such that shippers nominating deliveries to or from the interconnect would be subject to creditworthiness standards acceptable to both Ridgeline and ATPC. This position has implications for the coordination between the tariff creditworthiness provisions and the provisions of the Interconnection Agreement.
Mountainside Gas Producers Coalition (MGPC). MGPC is represented by Whitmore & Sable LLP (lead counsel Rebekah Montague, Partner; 1200 New Hampshire Avenue NW, Suite 600, Washington, DC 20036). MGPC, through its Executive Director Calvin Dreyer and its fourteen (14) independent natural gas producer members operating in the Marcellus and Utica shale formations, has advocated throughout this proceeding for creditworthiness provisions that do not unduly burden smaller, non-investment-grade producers. MGPC's economic witness, Dr. Eleanor Vasquez, provided testimony in January 2023 addressing, among other things, the need for reasonable unsecured credit alternatives for shippers that lack investment-grade ratings but have demonstrated histories of reliable payment and responsible financial management. Dr. Vasquez noted that many independent producers in the Appalachian Basin maintain strong cash flow positions and low leverage ratios relative to their peers, notwithstanding the absence of a formal credit rating from a nationally recognized statistical rating organization. MGPC's position is particularly relevant to the design of the Tier 2 (non-investment-grade) creditworthiness framework recommended in this memorandum.
Clearwater Municipal Gas Authority (CMGA). CMGA is represented by Fordham Municipal Law Group PC (lead counsel Stephen Greer, Principal; 312 Adams Avenue, Suite 100, Scranton, Pennsylvania 18503). CMGA is a municipal authority organized under the Pennsylvania Municipality Authorities Act, with its principal office at 455 Market Street, Clearwater, Pennsylvania 15330, and its General Manager is Dennis Ott. As a municipal authority backed by the taxing power of the municipality that created it, CMGA would likely qualify for special creditworthiness treatment as a governmental entity under both FERC precedent and the framework recommended herein. The tariff provisions should expressly address the credit treatment of municipal and governmental shippers, both to accommodate CMGA and to establish a clear, generally applicable standard for any future governmental entity seeking service on the System.
FERC Trial Staff. Jonathan Briggs, Lead Trial Attorney, and Dr. Miriam Okafor have indicated in informal communications — referenced in the May 2023 informal conference request letter submitted by Ridgeline — that creditworthiness provisions should follow the evolving FERC standard requiring transparent, non-discriminatory, and objective criteria. Trial Staff has emphasized that the Commission views creditworthiness provisions as a core component of the tariff's General Terms and Conditions and expects such provisions to reflect the full panoply of requirements identified in the Commission's Policy Statement on Creditworthiness and subsequent orders. While Trial Staff has not taken a formal position on the specific parameters that Ridgeline's creditworthiness provisions should contain, the informal guidance is consistent with the framework recommended in this memorandum.
III. FERC Policy Framework on Creditworthiness Provisions
A. Statutory and Regulatory Authority
The Commission's authority to regulate creditworthiness provisions in open-access transportation tariffs derives from the Natural Gas Act ("NGA"), 15 U.S.C. §§ 717 et seq., and the Commission's implementing regulations.
Natural Gas Act Section 4 (15 U.S.C. § 717c) requires that all rates, charges, and terms and conditions of service of natural gas companies subject to the Commission's jurisdiction be "just and reasonable." Creditworthiness provisions, as a component of the General Terms and Conditions of a FERC Gas Tariff, are subject to this standard. A pipeline's creditworthiness provisions must be designed to protect the pipeline's legitimate financial interests without imposing unjust or unreasonable burdens on shippers seeking access to transportation service.
Natural Gas Act Section 5 (15 U.S.C. § 717d) prohibits any natural gas company from making or granting any "undue preference or advantage to any person or subject[ing] any person to any undue prejudice or disadvantage." This anti-discrimination principle is central to the design of creditworthiness provisions and requires that the same objective standards be applied to all shippers, regardless of size, corporate affiliation, or other characteristics unrelated to creditworthiness.
18 C.F.R. Part 284, Subpart G establishes the regulatory framework for open-access transportation by interstate pipelines, including the requirement that pipelines maintain tariffs containing all terms and conditions of service. Creditworthiness provisions are among the terms and conditions required to be filed with and approved by the Commission.
18 C.F.R. § 154.1 *et seq.* governs the filing requirements for tariff provisions, including the format, content, and procedural requirements applicable to tariff filings. The creditworthiness provisions recommended herein must comply with these requirements when incorporated into the redesigned tariff.
The overarching principle derived from these statutory and regulatory authorities is that creditworthiness provisions must be just, reasonable, and not unduly discriminatory or preferential. They must strike a balance between the pipeline's legitimate interest in assuring payment for services rendered and shippers' interest in fair and meaningful access to transportation services on the pipeline system.
B. FERC Order History and Key Precedent
The Commission's policy on creditworthiness provisions has evolved significantly over the past three decades, from the restructuring-era orders through the Commission's comprehensive Policy Statement and subsequent adjudicatory decisions.
Order No. 636 and the Restructuring Orders. The Commission's landmark restructuring orders, beginning with Order No. 636, Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission's Regulations, 59 FERC ¶ 61,030 (1992), established the foundational requirements for creditworthiness provisions in open-access tariffs. In the restructuring context, the Commission recognized that the unbundling of pipeline services and the transition to open-access transportation necessitated the development of clear and workable creditworthiness standards. Pipelines were required, as part of their restructured tariffs, to include creditworthiness provisions that would protect the pipeline's financial interests while facilitating open and non-discriminatory access to transportation capacity. Order No. 636 did not prescribe specific creditworthiness criteria, but it established the expectation that pipelines would develop and include such provisions in their tariffs as a component of the General Terms and Conditions.
Policy Statement on Creditworthiness (Docket No. PL06-1). In its Policy Statement on Creditworthiness for Interstate Natural Gas Pipelines and Order Withdrawing Rulemaking Proceeding, 111 FERC ¶ 61,412 (2005) ("Policy Statement"), the Commission articulated comprehensive guiding principles for creditworthiness provisions in open-access tariffs. The Policy Statement was issued after an extensive rulemaking proceeding in which the Commission solicited and received comments from a wide range of stakeholders, including pipelines, shippers, industry associations, and state regulatory agencies. The Commission declined to adopt a uniform, one-size-fits-all creditworthiness standard, instead opting for a flexible approach under which individual pipelines would develop creditworthiness provisions tailored to their particular circumstances, subject to the following core principles:
(1) Clearly defined criteria. Creditworthiness provisions should contain objective, clearly defined standards by which a shipper's creditworthiness is evaluated. The Commission rejected standards that leave the determination entirely to the pipeline's "sole discretion" or that rely on vague or undefined terms such as "adequate credit" without further specification.
(2) Non-discrimination. Creditworthiness provisions must be applied in a non-discriminatory manner to all shippers. The same standards and procedures must apply to affiliates and non-affiliates alike, and the pipeline may not give undue preference to any shipper based on characteristics unrelated to creditworthiness.
(3) Alternative forms of credit assurance. The tariff must provide for alternative forms of credit assurance for shippers that do not meet the pipeline's minimum creditworthiness standards. These alternatives should include, at a minimum, letters of credit, cash deposits, guarantees from creditworthy affiliates or parents, prepayment, and surety bonds. The Commission has expressly rejected tariff provisions that permit only a single form of credit assurance (such as cash deposit only) as unduly restrictive.
(4) Transparent evaluation processes. The tariff should describe the process by which creditworthiness evaluations are conducted, including the information that shippers must submit, the timeline within which the pipeline will make its determination, and the form in which the determination will be communicated to the shipper.
(5) Dispute resolution procedures. The tariff should include a mechanism by which a shipper may challenge an adverse creditworthiness determination. At a minimum, shippers must have the right to file a complaint with the Commission under Section 5 of the NGA. Many approved tariffs also include interim dispute resolution mechanisms, such as reconsideration requests, negotiation, or mediation.
Subsequent Orders Refining the Standards. Since the issuance of the Policy Statement, the Commission has issued numerous orders in individual pipeline rate proceedings that have refined and applied the creditworthiness principles articulated therein. Several consistent themes emerge from this body of precedent:
First, the Commission has rejected creditworthiness provisions that are overly vague or that vest excessive discretion in the pipeline. In Vireo Industries, LLC, 153 FERC ¶ 61,171 (2015), the Commission rejected a proposal that would have permitted the pipeline to determine creditworthiness based on "such factors as [the pipeline] deems relevant" and required instead that the tariff specify the particular factors to be considered and the weight to be given to each. Similarly, in Larkspur Holdings, 149 FERC ¶ 61,255 (2014), the Commission directed the pipeline to revise its tariff to replace a subjective "reasonable satisfaction" standard with objective criteria.
Second, the Commission has required that pipelines offer a meaningful menu of credit support options. In Southern Natural Gas Company, L.L.C., 162 FERC ¶ 61,099 (2018), the Commission approved a creditworthiness framework that included five alternative forms of credit assurance and noted with approval that the pipeline had expanded its original proposal to include surety bonds and prepayment options in addition to letters of credit, cash deposits, and guarantees.
Third, the Commission has paid particular attention to the treatment of smaller, non-investment-grade shippers. In Millennium Pipeline Company, L.L.C., 157 FERC ¶ 61,148 (2016), the Commission approved an alternative creditworthiness evaluation framework for non-rated shippers that relied on audited financial statements and specified financial metrics, finding that the framework provided a meaningful pathway for non-investment-grade entities to establish creditworthiness without the expense of obtaining a formal credit rating.
Recent FERC Decisions. A survey of recent Commission orders within the past five years reveals a consistent pattern of expectations regarding creditworthiness provisions. The following decisions are particularly instructive for purposes of the Ridgeline tariff redesign:
(a) Equitrans, L.P., 172 FERC ¶ 61,046 (2020): The Commission approved creditworthiness provisions that included specified minimum credit rating thresholds (BBB- or equivalent), with alternatives for non-rated shippers based on financial statement analysis. The Commission noted with approval that the tariff defined unsecured credit limits as a function of tangible net worth and that the evaluation timeline was limited to ten (10) business days.
(b) ETC Tiger Pipeline, LLC, 166 FERC ¶ 61,233 (2019): The Commission required the pipeline to revise its proposed creditworthiness provisions to include a right-to-cure period of not less than five (5) business days for shippers receiving notice of a material adverse change determination. The Commission found that the original proposal, which permitted immediate suspension of service, was unreasonably harsh.
(c) Gulf South Pipeline Company, LP, 174 FERC ¶ 61,183 (2021): The Commission approved a tiered creditworthiness framework with differentiated unsecured credit limits for investment-grade and non-investment-grade shippers, and approved the pipeline's aggregate exposure cap as a reasonable mechanism for managing total unsecured credit risk across the shipper portfolio.
(d) Iroquois Gas Transmission System, L.P., 168 FERC ¶ 61,014 (2019): The Commission approved provisions for governmental and municipal shipper creditworthiness treatment, noting that entities with taxing authority present substantially different credit risk profiles than private-sector shippers and that tariff provisions should reflect this distinction.
(e) Tennessee Gas Pipeline Company, L.L.C., 176 FERC ¶ 61,121 (2021): The Commission approved creditworthiness provisions that defined acceptable forms of collateral to include irrevocable standby letters of credit, cash deposits, surety bonds, parent guarantees, and prepayment, and required that collateral be calibrated to the shipper's actual or estimated maximum monthly obligation rather than to the pipeline's full annual revenue requirement.
These recent decisions confirm that the Commission expects creditworthiness provisions to be comprehensive, objective, transparent, non-discriminatory, and calibrated to the specific circumstances of the pipeline and its shippers.
C. Key Principles Distilled from FERC Precedent
Based on our review of the Commission's statutory authority, the Policy Statement, and the body of adjudicatory precedent described above, we have distilled the following seven key principles that must guide the design of Ridgeline's creditworthiness provisions:
1. Objectivity and Transparency. Creditworthiness criteria must be objective and stated in the tariff itself. The pipeline cannot rely on subjective standards such as "sole discretion," "reasonable satisfaction," or other formulations that vest unlimited evaluative authority in the pipeline without specifying the criteria to be applied. The tariff must define the specific financial metrics, credit ratings, or other criteria by which creditworthiness is determined, and the methodology for applying those criteria must be set forth with sufficient specificity that a shipper can anticipate the outcome of the evaluation based on its known financial characteristics.
2. Non-Discrimination. The same creditworthiness standards must be applied to all shippers, whether affiliated or unaffiliated with the pipeline, whether large or small, and regardless of the type of service requested (firm or interruptible). The Commission has been particularly vigilant about ensuring that creditworthiness provisions are not used as a mechanism for favoring pipeline affiliates or for discouraging competition in the natural gas transportation market.
3. Alternatives for Non-Investment-Grade Entities. The tariff must provide meaningful alternatives for shippers that do not carry investment-grade credit ratings from nationally recognized statistical rating organizations. This principle is of particular relevance to Ridgeline's tariff design given the composition of the MGPC membership — fourteen independent producers, many of which may lack formal credit ratings despite maintaining sound financial positions. The Commission has consistently held that the absence of a credit rating does not, in itself, render a shipper uncreditworthy, and that tariffs must provide alternative evaluation pathways based on audited financial statements and specified financial metrics.
4. Right to Adequate Assurance. The pipeline has a legitimate right to assure itself of the shipper's ability to pay for transportation services rendered. This right is grounded in the NGA and in common-law principles of adequate assurance. The pipeline may require collateral or other credit support from shippers that do not demonstrate sufficient creditworthiness, and may take protective action (including suspension of service, subject to appropriate procedures and notice) in the event of a material adverse change in a shipper's financial condition.
5. Proportionality. Collateral requirements should be reasonably related to the shipper's actual or estimated obligations under its service agreement(s) with the pipeline. The Commission has rejected collateral requirements that are excessive relative to the shipper's exposure, as such requirements may effectively function as a barrier to access. Collateral amounts should be calibrated to a reasonable multiple of the shipper's estimated maximum monthly obligation — typically three months — rather than to the pipeline's total revenue requirement or other inflated measure.
6. Dispute Resolution. The tariff should provide a clear process by which a shipper can challenge an adverse creditworthiness determination. At a minimum, this process must include the right to file a complaint with the Commission under Section 5 of the NGA. Best practices also include an internal reconsideration process and, where applicable, referral to the tariff's general dispute resolution provisions (negotiation, mediation, or arbitration).
7. Governmental and Municipal Entities. Governmental bodies, including municipal authorities, state agencies, and other political subdivisions, present a fundamentally different credit risk profile than private-sector shippers. The Commission has recognized that entities backed by the taxing authority of a governmental body should generally be presumed creditworthy and should not be required to post collateral absent circumstances suggesting unusual financial distress. The creditworthiness provisions in Ridgeline's tariff should include an express carve-out for governmental and municipal shippers, which is directly relevant to the participation of CMGA.
IV. Analysis of Deficiencies in Ridgeline's Original Tariff
A. Summary of Original Creditworthiness Provisions
Ridgeline's proposed FERC Gas Tariff, Original Volume No. 1, as filed on May 12, 2022, contained a single paragraph in the General Terms and Conditions addressing creditworthiness. Section 20 of the originally proposed tariff stated, in its entirety:
"Any Shipper requesting Firm Transportation Service or Interruptible Transportation Service on the Ridgeline Pipeline System must demonstrate adequate credit to Transporter's reasonable satisfaction prior to the commencement of service and on an ongoing basis during the term of any Service Agreement."
This provision was deficient in virtually every respect identified by the Commission's Policy Statement and subsequent orders. It contained no defined credit rating thresholds, no specification of the criteria or methodology by which "adequate credit" would be evaluated, no identification of acceptable forms of collateral or credit assurance, no formula or methodology for calculating unsecured credit limits, no procedures governing the timeline or process for creditworthiness evaluation, no notification requirements, no right-to-cure provisions, no dispute resolution mechanism, and no separate treatment for governmental or municipal shippers. In short, the original provision vested effectively unlimited discretion in Ridgeline to determine creditworthiness on the basis of unspecified criteria, precisely the type of approach that the Commission has consistently rejected.
B. Specific Deficiencies Identified
Based on our analysis of the original Section 20 against the requirements of FERC policy and precedent, we have identified the following ten (10) specific deficiencies, each of which must be remedied in the redesigned tariff:
1. No objective standard for "adequate credit." The original provision relied on the undefined term "adequate credit" without specifying the financial metrics, credit ratings, or other criteria that would constitute adequate credit. This formulation fails the Commission's objectivity requirement.
2. Excessive discretion retained by Ridgeline. The "reasonable satisfaction" standard vested the creditworthiness determination in Ridgeline's subjective judgment, without constraining that judgment by reference to specified criteria. The Commission has rejected analogous formulations in prior proceedings.
3. No specification of minimum credit rating or alternative evaluation criteria. The original provision did not identify a minimum credit rating threshold (such as BBB- or equivalent from an NRSRO) and did not describe any alternative evaluation criteria for shippers without formal credit ratings.
4. No unsecured credit limit calculation methodology. The original provision did not address the concept of unsecured credit limits and did not provide any formula or methodology for determining the amount of credit that a shipper could obtain without posting collateral.
5. No list of acceptable forms of credit assurance or collateral. The original provision did not identify the forms of collateral or credit support that Ridgeline would accept from shippers that do not meet the creditworthiness standard, in violation of the Commission's requirement that tariffs offer a menu of credit support options.
6. No timeframes for creditworthiness evaluation or notification. The original provision did not establish any timeline within which Ridgeline would complete its creditworthiness evaluation or notify the shipper of the results of that evaluation.
7. No right-to-cure provisions. The original provision did not address the shipper's right to cure a creditworthiness deficiency — for example, by posting collateral or providing a guarantee — before the pipeline takes adverse action such as suspending or terminating service.
8. No dispute resolution mechanism. The original provision did not include any process by which a shipper could challenge an adverse creditworthiness determination, whether through internal reconsideration, FERC complaint, or other dispute resolution procedures.
9. No separate provisions for governmental or municipal shippers. The original provision applied a single, undifferentiated standard to all shippers without recognizing the distinct credit profiles of governmental and municipal entities.
10. No provisions addressing creditworthiness on an ongoing basis. While the original provision referenced creditworthiness "on an ongoing basis during the term of any Service Agreement," it did not define the events or circumstances that would trigger a reassessment, the notice requirements applicable to such a reassessment, or the consequences of a material adverse change in a shipper's financial condition.
Each of these deficiencies is addressed by the recommended creditworthiness framework set forth in Section V of this memorandum.
V. Recommended Creditworthiness Framework
A. Overview of Proposed Structure
We recommend that the redesigned tariff include a comprehensive new Section 20 of the General Terms and Conditions, titled "Creditworthiness," consisting of fifteen (15) subsections addressing each element required by FERC policy and responsive to each specific deficiency identified in the Deficiency Letter and in our analysis above.
The recommended framework is organized around a tiered classification approach that provides differentiated treatment based on the shipper's credit profile:
• Tier 1 — Investment-Grade Rated Entities. Shippers (or their guarantors) that carry an investment-grade long-term senior unsecured debt rating from at least one nationally recognized statistical rating organization. Tier 1 shippers qualify for full unsecured credit up to the calculated Unsecured Credit Limit.
• Tier 2 — Non-Investment-Grade but Financially Qualified Entities. Shippers that do not carry investment-grade ratings but that meet alternative creditworthiness criteria based on audited financial statement analysis. Tier 2 shippers qualify for partial unsecured credit (up to 50% of the Tier 1 Unsecured Credit Limit), with collateral required for the balance of their obligations.
• Tier 3 — Full Collateral Required. Shippers that do not meet either the Tier 1 or Tier 2 creditworthiness standards. Tier 3 shippers must post collateral for the full amount of their estimated obligations.
In addition to the tiered framework, the recommended provisions include a governmental and municipal shipper carve-out providing presumptive creditworthiness for qualifying governmental entities, directly responsive to the participation of CMGA in this proceeding and consistent with FERC precedent on governmental shipper treatment.
The provisions recommended in this section are intended to be incorporated into the fourth draft (near-final) revised tariff (November 2024 version) and addressed in the supplemental testimony of Dr. Natasha Orlov, who will provide supporting testimony explaining the rationale for the framework and its consistency with FERC policy. Full tariff language will be drafted separately for inclusion in the revised tariff; this memorandum provides the substantive framework, policy support, and detailed specifications from which the tariff language will be derived.
B. Credit Rating Thresholds (Tier 1 — Investment Grade)
Minimum Credit Rating. The recommended minimum credit rating threshold for Tier 1 classification is an investment-grade long-term senior unsecured debt rating of BBB- (Standard & Poor's or Fitch Ratings) or Baa3 (Moody's Investors Service), or equivalent, from at least one nationally recognized statistical rating organization ("NRSRO") as that term is defined by the Securities and Exchange Commission. This threshold is consistent with the prevailing standard in FERC-approved creditworthiness provisions across the interstate natural gas pipeline industry and reflects the Commission's recognition that investment-grade ratings provide a reasonable, objective basis for creditworthiness determinations.
Effect of Tier 1 Classification. A shipper that meets the Tier 1 minimum credit rating threshold qualifies for full unsecured credit up to the Unsecured Credit Limit calculated in accordance with the formula described in Section V.D below. No collateral is required from a Tier 1 shipper unless the shipper's obligations exceed its calculated Unsecured Credit Limit, in which case collateral is required only for the excess amount.
Guarantor Provisions. If the shipper itself does not carry a credit rating from an NRSRO, a parent company or affiliate may provide a guaranty on behalf of the shipper, provided that the guarantor entity meets the minimum Tier 1 credit rating threshold. The guaranty must be in a form substantially similar to the Form of Parent/Affiliate Guaranty to be attached to the tariff as an appendix (Appendix C, referenced herein). The guaranty must be irrevocable, unconditional, and must cover the full amount of the shipper's obligations under all service agreements with Ridgeline. The guarantor's credit rating and financial condition will be treated as the basis for the shipper's creditworthiness determination in lieu of the shipper's own financial metrics.
Rating Downgrade Provisions. In the event that a Tier 1 shipper's (or its guarantor's) credit rating is downgraded below the minimum investment-grade threshold by all NRSROs that rate the entity, the shipper will be reclassified from Tier 1 to Tier 2 or Tier 3, as applicable, based on the shipper's financial condition. Upon reclassification, the shipper will have ten (10) business days from the date of written notice by Ridgeline to post adequate collateral for the amount exceeding the revised Unsecured Credit Limit applicable to the shipper's new tier classification, or for the full amount of the shipper's obligations if no unsecured credit is available under the revised classification. This ten-business-day period constitutes a reasonable cure period consistent with FERC precedent. Failure to post the required collateral within the specified period will constitute an event of default subject to the remedies set forth in Section V.G (Material Adverse Change) below.
C. Alternative Creditworthiness Evaluation (Tier 2 — Non-Investment-Grade)
Applicability. The alternative creditworthiness evaluation framework applies to shippers that do not carry investment-grade credit ratings from any NRSRO and that do not have access to a parent or affiliate guaranty from an investment-grade entity. This framework is designed to provide a meaningful pathway to creditworthiness for the many independent natural gas producers and other smaller entities that may not carry formal credit ratings, including the members of MGPC. The fourteen independent producers that constitute MGPC's membership operate in the Marcellus and Utica shale formations and represent a significant component of Ridgeline's current and projected shipper base. Many of these entities are financially sound but have not sought credit ratings from NRSROs, which can be costly and, for smaller entities, may not be warranted by the nature and scale of their operations.
Financial Information Required. To be evaluated under the Tier 2 framework, the shipper must submit to Ridgeline the following financial information:
(a) Audited financial statements for the two most recent completed fiscal years, prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") and audited by an independent certified public accounting firm;
(b) Unaudited interim quarterly financial statements for the most recent completed fiscal quarter, certified by the shipper's chief financial officer or controller;
(c) A list of all outstanding obligations under FERC-jurisdictional transportation or storage service agreements, including the identity of the pipeline(s), contract quantities, and payment history; and
(d) Such other financial information as Ridgeline may reasonably request, provided that any additional information requests are applied consistently and on a non-discriminatory basis to all Tier 2 applicants.
Evaluation Criteria. Ridgeline shall evaluate the shipper's creditworthiness based on the following objective criteria, applied consistently to all Tier 2 applicants:
(1) Tangible Net Worth. The shipper must have a positive tangible net worth (total assets minus intangible assets minus total liabilities) as reflected in the most recent audited financial statements. Tangible net worth serves as the primary indicator of the shipper's capacity to meet its obligations in the event of financial stress.
(2) Current Ratio. The ratio of the shipper's current assets to current liabilities must be at least 1.0:1, indicating that the shipper has sufficient liquid assets to meet its near-term obligations as they come due.
(3) Net Income. The shipper must have reported positive net income in at least one of the two most recent completed fiscal years. This criterion is designed to accommodate the cyclical nature of the natural gas production industry, in which producers may experience periods of negative net income due to commodity price fluctuations, while providing assurance that the shipper's operations are fundamentally viable.
(4) Debt-to-Equity Ratio. The shipper's total debt-to-total equity ratio must not exceed 4.0:1. This leverage limit ensures that the shipper has not assumed debt obligations so large relative to its equity base as to present an unacceptable credit risk.
(5) Payment History. The shipper's history of payment performance on outstanding FERC-jurisdictional transportation and storage service agreements is a relevant factor. A shipper with no history of delinquencies, defaults, or payment disputes on such agreements will be viewed favorably. A shipper with a history of chronic late payment or default will weigh against a favorable creditworthiness determination.
(6) Other Relevant Factors. Ridgeline may consider other factors relevant to the shipper's ability to meet its financial obligations, including but not limited to the shipper's reserve base (for producer shippers), hedge position, capital expenditure commitments, and litigation exposure. Any such additional factors must be applied consistently and without undue discrimination to all Tier 2 applicants, and the basis for considering such factors in any individual case must be documented in the written determination provided to the shipper.
Effect of Tier 2 Classification. Shippers meeting the Tier 2 criteria qualify for partial unsecured credit, calculated as 50% of the Unsecured Credit Limit that would apply if the shipper were classified as Tier 1 (i.e., 50% of the lesser of 10% of tangible net worth or three months of estimated maximum monthly obligations). Collateral must be posted for the balance of the shipper's obligations not covered by the partial unsecured credit allowance.
Timeline for Evaluation. Ridgeline shall complete its Tier 2 creditworthiness evaluation within ten (10) business days of receipt of the shipper's complete application and all required financial information. If the application is incomplete, Ridgeline shall notify the shipper of the deficiencies within three (3) business days of receipt, and the ten-business-day evaluation period shall not commence until all deficiencies have been cured.
D. Unsecured Credit Limits
The recommended Unsecured Credit Limit framework is designed to calibrate the amount of credit extended to each shipper on an unsecured basis to the shipper's demonstrated financial capacity, while providing a reasonable cap on Ridgeline's aggregate unsecured credit exposure.
Tier 1 Formula. For shippers classified as Tier 1, the Unsecured Credit Limit equals the lesser of:
(a) Ten percent (10%) of the shipper's (or, if applicable, its guarantor's) tangible net worth as reflected in the most recent audited financial statements; and
(b) Three (3) months of the shipper's estimated maximum monthly obligation under all service agreements with Ridgeline, calculated as the product of (i) the shipper's aggregate Maximum Daily Quantity ("MDQ") under all service agreements, (ii) the applicable maximum tariff rate (reservation plus usage), and (iii) the number of days in the highest-demand month (31 days).
This formula ensures that the unsecured credit limit is the lower of a measure of the shipper's absolute financial capacity (tangible net worth) and a measure of the shipper's actual exposure to Ridgeline. The 10% tangible net worth cap is consistent with prevailing industry practice and with the unsecured credit limit methodologies approved by the Commission in comparable proceedings.
Tier 2 Formula. For shippers classified as Tier 2, the Unsecured Credit Limit equals 50% of the Tier 1 limit calculated using the formula above. The 50% discount reflects the higher credit risk associated with non-investment-grade shippers while still providing meaningful unsecured credit access.
Aggregate Exposure Cap. Ridgeline's total unsecured credit exposure across all shippers shall not exceed twenty percent (20%) of Ridgeline's net plant in service as reflected in its most recent annual FERC Form No. 2 filing or equivalent financial report. Based on current figures, Ridgeline's net plant in service is approximately $563.71 million, resulting in an aggregate unsecured credit exposure cap of approximately $112.74 million. If the aggregate unsecured credit exposure approaches or reaches this cap, Ridgeline may require additional collateral from shippers on a non-discriminatory, pro rata basis. The aggregate exposure cap serves as a prudent risk management tool that protects Ridgeline's financial condition and, by extension, the interests of its creditors and other stakeholders. This type of aggregate cap has been approved by the Commission in prior proceedings, including Gulf South Pipeline Company, LP, 174 FERC ¶ 61,183 (2021).
Recalculation. Unsecured Credit Limits shall be recalculated annually, within thirty (30) days of Ridgeline's receipt of the shipper's audited financial statements for the most recently completed fiscal year. In addition, Unsecured Credit Limits may be recalculated at any time upon the occurrence of a Material Adverse Change (as defined in Section V.G below) affecting the shipper's or its guarantor's financial condition.
E. Collateral Requirements (Tier 3 and Supplemental)
Acceptable Forms of Collateral. The following forms of collateral shall be acceptable to satisfy a shipper's credit assurance obligations under the tariff:
1. Irrevocable Standby Letter of Credit. An irrevocable standby letter of credit issued by a U.S. commercial bank that (i) has minimum total assets of $10 billion as reported in its most recent publicly available annual financial statements, and (ii) carries a minimum long-term credit rating of A- (Standard & Poor's or Fitch Ratings) or A3 (Moody's Investors Service), or equivalent, from at least one NRSRO. It bears noting that Ridgeline's own banking relationships — Pinnacle National Bank, N.A. (agent bank under the Senior Secured Credit Facility), Granite Trust Company, and Lakeshore Capital Bank — meet these requirements, although the shipper's letter of credit need not be issued by any of these institutions. The letter of credit must be in a form substantially similar to the Form of Irrevocable Standby Letter of Credit to be attached to the tariff as an appendix (Appendix B, referenced herein).
2. Cash Deposit. A cash deposit held in a segregated, interest-bearing escrow account maintained at a qualifying financial institution designated by Ridgeline. Interest accruing on the cash deposit shall accrue to the benefit of the shipper. Ridgeline shall designate an escrow agent for this purpose; Pinnacle National Bank, N.A. or another qualifying institution may serve in this capacity. The terms of the escrow arrangement shall be set forth in an escrow agreement in a form to be approved by Ridgeline and the shipper.
3. Surety Bond. A surety bond issued by an insurer that carries a minimum financial strength rating of A- (or equivalent) from a nationally recognized insurance rating agency (e.g., A.M. Best Company). The surety bond must be in a form acceptable to Ridgeline and must name Ridgeline as the obligee.
4. Parent or Affiliate Guaranty. A guaranty from a parent company or affiliate of the shipper, provided that the guarantor entity meets the minimum Tier 1 credit rating threshold (investment-grade). The guaranty must be in the form attached to the tariff as an appendix. This form of credit assurance is essentially the same mechanism that qualifies a shipper for Tier 1 classification; it is listed here to clarify that it also constitutes an acceptable form of collateral for Tier 2 and Tier 3 shippers.
5. Prepayment. Prepayment of up to three (3) months of estimated transportation charges under the shipper's service agreement(s) with Ridgeline. Prepaid amounts shall be applied against the shipper's invoices as they become due and shall be replenished by the shipper as applied.
Amount of Collateral. For Tier 3 shippers (no unsecured credit available), the required collateral amount equals three (3) months of the shipper's estimated maximum monthly obligation under all service agreements with Ridgeline, calculated using the methodology described in Section V.D above. For Tier 2 shippers supplementing partial unsecured credit, the required collateral amount equals the difference between three months of estimated maximum monthly obligations and the shipper's Tier 2 Unsecured Credit Limit. The three-month standard is consistent with prevailing industry practice and with the Commission's proportionality principle, as it provides Ridgeline with sufficient credit protection to cover the shipper's obligations during the billing cycle and collection period without imposing excessive collateral requirements.
Letter of Credit Mechanics. Any letter of credit posted as collateral must be either an "evergreen" letter of credit (i.e., automatically renewing for successive one-year periods unless the issuing bank provides notice of non-renewal) or a term letter of credit with a term of at least twelve (12) months with automatic renewal for successive one-year periods. The issuing bank must provide Ridgeline with at least thirty (30) days' advance written notice of its intention not to renew the letter of credit. If the letter of credit is not renewed or replaced with substitute collateral acceptable to Ridgeline at least ten (10) business days before the expiration date, Ridgeline shall have the right to draw on the letter of credit in full and hold the proceeds as a cash deposit (subject to the cash deposit provisions of the tariff) until substitute collateral is provided.
Cash Deposit Return. Cash deposits shall be returned to the shipper within fifteen (15) business days following the later of (i) the termination or expiration of all service agreements between the shipper and Ridgeline, and (ii) the shipper's satisfaction of all outstanding payment obligations to Ridgeline, including any disputed amounts resolved in Ridgeline's favor.
F. Governmental and Municipal Shipper Provisions
Consistent with FERC precedent and the distinct credit profile of governmental entities, we recommend the following provisions for governmental and municipal shippers:
Presumptive Creditworthiness. Governmental entities, including municipal authorities organized under state law, state agencies, and other political subdivisions of U.S. state or local governments, shall be presumed creditworthy without further evaluation under the tiered framework described above, provided that the entity satisfies all of the following conditions:
(1) The entity is a political subdivision, agency, or instrumentality of a U.S. state or local government, or an authority created by or pursuant to state law;
(2) The entity has the legal authority to levy taxes, assessments, or user charges, or is backed by the full faith and credit or the taxing authority of a governmental entity that has such authority; and
(3) The entity is not currently in default on any outstanding publicly traded or privately placed debt obligations.
No Collateral Required. A governmental shipper meeting the foregoing conditions shall not be required to post any form of collateral or credit assurance as a condition of receiving service on the Ridgeline Pipeline System. This provision is directly responsive to the participation of CMGA — a municipal authority organized under the Pennsylvania Municipality Authorities Act, with the power to establish and collect user charges and assessments — in this proceeding. CMGA, under this framework, would be presumed creditworthy and would not be required to post collateral.
Loss of Governmental Status or Financial Distress. In the event that a governmental shipper loses its taxing authority, has its enabling legislation repealed or materially amended, enters into any form of insolvency or receivership, or is placed under the supervision of a state-appointed financial control board, Ridgeline may require the governmental shipper to undergo creditworthiness evaluation under the standard tiered framework (Tier 1, Tier 2, or Tier 3, as applicable) and to post collateral if necessary. Any such requirement shall be imposed only after written notice to the governmental shipper and an opportunity for the shipper to demonstrate its continued ability to meet its financial obligations.
G. Material Adverse Change Provisions
Triggering Events. The following events shall constitute a "Material Adverse Change" for purposes of the creditworthiness provisions:
(1) A downgrade of the shipper's (or its guarantor's) credit rating by any NRSRO to below the minimum investment-grade threshold, where the shipper was previously classified as Tier 1 based on that rating;
(2) The filing by or against the shipper (or its guarantor) of a petition under any chapter of the U.S. Bankruptcy Code, or the commencement of any other insolvency, receivership, assignment for the benefit of creditors, or similar proceeding;
(3) The shipper's (or its guarantor's) default on any material debt obligation, where the outstanding principal amount of such debt exceeds $5,000,000;
(4) A material adverse change in the shipper's (or its guarantor's) financial condition as reflected in publicly filed financial statements (including 10-K, 10-Q, or 8-K filings with the SEC) or as otherwise disclosed to Ridgeline in writing; and
(5) The shipper's failure to provide audited financial statements to Ridgeline within one hundred twenty (120) days after the end of the shipper's fiscal year, as required by the ongoing monitoring provisions.
Demand for Adequate Assurance. Upon the occurrence of a Material Adverse Change triggering event, Ridgeline may deman