UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION
SUPPLEMENTAL PRE-FILED DIRECT TESTIMONY OF ANGELA MORETTI VICE PRESIDENT, FINANCE & TREASURER RIDGELINE MIDSTREAM SERVICES LLC
(FERC Code: 960442)
Subject: Revised Cost of Service, Updated Rate Base, and Revised Rate Design
Draft — For Filing February 21, 2025
Counsel for Ridgeline Midstream Services LLC:
Calderwood & Harkness LLP 1601 K Street NW, Suite 900 Washington, DC 20006
George Trujillo, Responsible Partner Brett Callahan, Lead Associate David Stanton, Working Associate
C&H Matter No.: 1016-00005
TABLE OF CONTENTS
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I. INTRODUCTION AND QUALIFICATIONS
A. Identity and Position
1. Q. Please state your name, title, and business address.
A. My name is Angela Moretti. I am the Vice President, Finance & Treasurer of Ridgeline Midstream Services LLC ("Ridgeline" or the "Company"). My principal office is located at 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301. Ridgeline is a Delaware limited liability company whose sole member is Dunmore Energy Holdings Ltd. ("DEH"), a Cayman Islands exempted limited company registered with the Cayman Islands Registrar of Companies under Cayman Registry No. CR-381204. Ridgeline's federal Employer Identification Number is 87-4231956.
2. Q. What are your current responsibilities at Ridgeline?
A. As Vice President, Finance & Treasurer, I have oversight of all financial reporting, treasury operations, rate filings, and capital structure management for Ridgeline. I am responsible for managing the Company's relationships with its lenders and noteholders, overseeing the preparation of all regulatory filings with financial components, supervising the Company's internal finance team, and coordinating with external advisors, including auditors, accountants, appraisers, and economic consultants, in connection with all matters bearing on Ridgeline's financial performance and regulatory obligations. I report directly to Ridgeline's Chief Executive Officer and the Board of Managers of Dunmore Energy Holdings Ltd.
B. Professional Background and Qualifications
3. Q. Please describe your professional background and qualifications.
A. I have over twenty years of professional experience in energy finance, pipeline cost-of-service regulation, and FERC rate proceedings. I hold a Bachelor of Science in Finance from the University of Virginia (2001) and a Master of Business Administration from the Wharton School of the University of Pennsylvania (2006), with a concentration in Finance and Energy Management. I am a Chartered Financial Analyst (CFA) charterholder, having received the CFA designation in 2008.
Prior to joining Ridgeline in 2020, I served as Director of Regulatory Finance at Shenandoah Gas Transmission Company, an interstate natural gas pipeline subsidiary of Shenandoah Utilities Corporation, from 2014 to 2020. In that capacity, I was responsible for preparing and sponsoring cost-of-service testimony in two general Section 4 rate cases before the Commission (Docket Nos. RP15-423-000 and RP18-1102-000), as well as in a Section 5 complaint proceeding (Docket No. RP17-684-000). Before my tenure at Shenandoah, I served as a Senior Financial Analyst at Meridian Pipeline Partners LLC from 2008 to 2014, where I was responsible for rate case support, capital structure optimization, and financial modeling for a portfolio of natural gas gathering and transmission assets. Earlier in my career, I worked as an investment banking analyst at Bancroft, Leighton & Company from 2001 to 2004, where I was a member of the energy infrastructure group focused on midstream pipeline transactions.
In addition to my experience before this Commission, I have provided testimony before the Public Service Commission of West Virginia in Case No. 19-0274-G-42T regarding a natural gas gathering rate proceeding, and before the Pennsylvania Public Utility Commission in Docket No. R-2018-3001078 regarding gas distribution rate design.
I am a member of the American Gas Association's Rate Committee and a regular presenter at the annual Institute for Professionals in Taxation Midstream Energy Conference. I have published articles on pipeline cost-of-service methodology in the Energy Law Journal and the Natural Gas & Electricity trade publication.
C. Purpose of Supplemental Testimony
4. Q. What is the purpose of your supplemental testimony?
A. This supplemental pre-filed direct testimony supplements and updates my original pre-filed direct testimony filed on December 5, 2022, in Docket Nos. RP22-847-000 and RP22-847-001. The purpose of this supplemental testimony is to present the following revised cost-of-service components and rate design parameters:
(a) A revised total cost of service of $103.15 million;
(b) An updated rate base of $612.40 million, which remains unchanged from the original filing;
(c) A revised weighted average cost of capital ("WACC") of 9.2375%;
(d) A revised return on equity ("ROE") of 12.50%, reduced from the originally proposed 14.00%;
(e) Revised billing determinants of 328,500,000 Dth/yr, based on a design capacity of 1,200,000 Dth/d and a revised load factor assumption of 75%; and
(f) A revised proposed recourse rate of $0.3140/Dth, composed of a reservation component of $0.3102/Dth and a usage component of $0.0038/Dth.
5. Q. What prompted this supplemental filing?
A. This supplemental filing responds to the Deficiency Letter dated January 19, 2023, issued by the FERC Office of Energy Market Regulation ("OEMR"), which identified fourteen (14) deficiency items in the Company's original application. My testimony specifically addresses the revisions relevant to cost of service, rate base, capital structure, and rate design, and directly responds to three of the fourteen deficiency items: Item 1, regarding the adequacy of ROE support; Item 4, regarding the load factor assumption underlying the billing determinant calculation; and Item 10, regarding penalty revenue crediting. The remaining deficiency items are addressed in the supplemental testimony of Dr. Natasha Orlov, which is filed concurrently with this testimony.
6. Q. Did you engage outside advisors in the preparation of this supplemental testimony?
A. Yes. This testimony was prepared in coordination with Braswell Energy Consulting Group LLC ("BEC"), engagement number BEC-2023-0041, led by Dr. Raymond Braswell. Dr. Braswell is a former FERC economist who was engaged by Dunmore Energy Holdings Ltd. on April 15, 2023, to provide expert economic consulting services in support of Ridgeline's revised cost-of-service filing and, in particular, the updated discounted cash flow ("DCF") proxy group analysis underlying the revised ROE recommendation. In addition, the supporting workpapers accompanying this testimony have been audited and verified with the assistance of Ashford & McBride LLP, DEH's independent auditors and accountants, based in New York, New York. Pipeline and facility valuations included in the rate base determination were provided by Ridgepoint Appraisal & Valuation Inc., based in Houston, Texas.
D. Summary of Changes from Original Filing
7. Q. Please summarize the principal changes between the original filing and this revised filing.
A. The following table summarizes the key changes between the original filing dated May 12, 2022, and this revised supplemental filing:
As shown above, while the revised ROE and WACC are lower than originally proposed—reflecting a 150-basis-point reduction in ROE—the total cost of service has increased by $5.79 million, and the per-unit recourse rate has increased by $0.0875/Dth (approximately 38.6%). These increases are principally attributable to (i) the reduction in the load factor assumption from 100% to 75%, which reduces billing determinants by 109,500,000 Dth/yr, and (ii) a $10.10 million reduction in projected revenue credits, partially offset by the reduced return on rate base and lower income tax allowance.
E. List of Exhibits
8. Q. What exhibits are you sponsoring in connection with this supplemental testimony?
A. I am sponsoring twelve supplemental exhibits, designated Exhibit AM-S1 through Exhibit AM-S12, as follows:
• Exhibit AM-S1: Revised Statement A — Cost of Service Summary ($103.15 million)
• Exhibit AM-S2: Revised Statement B — Rate Base Summary ($612.40 million)
• Exhibit AM-S3: Revised Statement C — Depreciation Schedule ($14.68 million annual; $23.49 million accumulated)
• Exhibit AM-S4: Revised Statement D — Capital Structure (55% equity / 45% debt)
• Exhibit AM-S5: Revised Statement E — Weighted Average Cost of Capital (9.2375%)
• Exhibit AM-S6: Revised Statement F — Return on Rate Base ($56.57 million)
• Exhibit AM-S7: Revised Statement G — Operating Expenses (O&M: $13.92 million; A&G: $5.14 million)
• Exhibit AM-S8: Revised Statement H — Taxes Other Than Income ($3.80 million)
• Exhibit AM-S9: Revised Statement I — Income Tax Allowance ($15.04 million)
• Exhibit AM-S10: Revised Statement J — Revenue Credits (($6.00 million))
• Exhibit AM-S11: Revised Statement K — Billing Determinants (328,500,000 Dth/yr at 75% load factor)
• Exhibit AM-S12: Revised Statement L — Rate Derivation ($0.3140/Dth total: $0.3102/Dth reservation + $0.0038/Dth usage)
Each of these exhibits has been prepared under my direction and supervision, and each is true and correct to the best of my knowledge, information, and belief. These exhibits update and supersede the corresponding Statements A through L that were filed with the original application on May 12, 2022, and supplement the original Exhibit Nos. A through P, which remain part of the record as originally filed, except as updated by the exhibits sponsored herein.
II. OVERVIEW OF THE RIDGELINE PIPELINE SYSTEM
A. System Description
9. Q. Please describe the Ridgeline Pipeline System.
A. The Ridgeline Pipeline System (the "System" or the "Pipeline") is a 187-mile, 24-inch-diameter high-pressure natural gas transmission pipeline extending from the Wetzel County Interconnect in Wetzel County, West Virginia, to the Waynesburg Compressor Station in Greene County, Pennsylvania. The receipt point at the Wetzel County Interconnect is located at approximate coordinates of 39.6120° N latitude, 80.7540° W longitude, and the delivery point at the Waynesburg Compressor Station is located at approximate coordinates of 39.8965° N latitude, 80.1810° W longitude.
The Pipeline has a design capacity of 1.2 Bcf/d, equivalent to 1,200,000 Dth/d at an assumed heating value of 1,000 BTU per cubic foot. Current throughput is approximately 680 MMcf/d, representing a utilization rate of approximately 56.67% (680,000 Dth/d ÷ 1,200,000 Dth/d).
The System includes three compressor stations: the Wetzel Station (located near the receipt point in Wetzel County, West Virginia), the Mannington Station (located at approximately Pipeline milepost 88, near Mannington, Marion County, West Virginia), and the Waynesburg Station (located at the delivery point in Greene County, Pennsylvania). These three stations provide aggregate installed compression of 45,000 horsepower ("HP"), distributed approximately equally across the three locations, with each station housing multiple natural gas-fired compressor units in a turbine-driven configuration.
The Pipeline was placed in service on October 1, 2021, following completion of construction and successful hydrostatic testing. The System provides open-access natural gas transportation service pursuant to Part 284, Subpart G of the Commission's regulations, under FERC Gas Tariff, Original Volume No. 1.
B. Corporate Structure
10. Q. Please describe Ridgeline's corporate structure.
A. Ridgeline Midstream Services LLC is a limited liability company organized and existing under the laws of the State of Delaware. Ridgeline's sole member is Dunmore Energy Holdings Ltd. ("DEH"), a Cayman Islands exempted limited company. DEH's registered address is 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1002, Cayman Islands. DEH's founder and controlling shareholder is Patricia Dunmore, who holds approximately 72% of the outstanding equity interests in DEH.
DEH is a diversified midstream and energy infrastructure holding company with an estimated enterprise value of approximately $2.8 billion, based on an internal valuation as of December 31, 2023. DEH reported consolidated annual revenue of approximately $485 million for the fiscal year ended December 31, 2023. DEH's portfolio includes approximately 1,200 miles of midstream natural gas gathering and transportation pipelines across the Appalachian Basin and the Mid-Continent region, two cryogenic natural gas processing plants with combined inlet capacity of approximately 400 MMcf/d, and a 250 MW wind energy generation portfolio currently under development in the Upper Midwest.
Ridgeline is DEH's sole FERC-jurisdictional interstate natural gas pipeline asset. As such, the cost-of-service, rate base, and capital structure presented in this testimony are specific to Ridgeline and do not reflect the consolidated financial position of DEH or any of DEH's other subsidiaries or portfolio companies.
C. Proposed Interconnection
11. Q. Please describe the proposed interconnection that is the subject of Docket No. RP22-847-001.
A. Ridgeline has proposed a physical interconnection with Appalachian Trunk Pipeline Company, LLC ("ATPC"), a Pennsylvania limited liability company with FERC Code 840117, at the Wetzel County Interconnect. The proposed interconnection would be located at ATPC Milepost 412.6 on ATPC's mainline system.
ATPC operates a 640-mile interstate natural gas pipeline system with a total system capacity of approximately 3.8 Bcf/d. ATPC is a wholly owned subsidiary of Tidewater Infrastructure Partners LP, a diversified infrastructure investment partnership based in Philadelphia, Pennsylvania.
The total estimated cost of the interconnection facilities is $22.3 million. Under the proposed cost-sharing arrangement, Ridgeline would bear $7.6 million of the interconnection costs (representing 34.08% of the total), and ATPC would bear $14.7 million (representing 65.92% of the total). The proposed allocation reflects the relative benefits to each pipeline system, measured by the proportionate design capacity gains attributable to each party.
The interconnection is designed for an initial capacity of 800 MMcf/d on a bidirectional basis, with the capability to expand to 1.2 Bcf/d through the installation of additional metering and regulation equipment. Completion of the interconnection is expected to materially increase throughput on the Ridgeline system by providing direct access to ATPC's extensive downstream market delivery infrastructure, which connects to major demand centers in the Mid-Atlantic and Northeast regions.
The cost-sharing arrangement and the terms of the proposed interconnection agreement remain subject to negotiation and, as discussed in the companion testimony of Dr. Natasha Orlov, are also the subject of Deficiency Item 9, which addresses the Commission's requirement that interconnection agreements be filed as rate schedules.
III. RATE BASE
A. Overview of Rate Base Components
12. Q. Please describe the total rate base for the Ridgeline Pipeline System.
A. The total rate base for the Ridgeline Pipeline System is $612.40 million, calculated as of the end of the twelve-month test year ended March 31, 2022. This amount remains unchanged from the rate base presented in the Company's original application filed on May 12, 2022. The rate base is composed of the following elements:
Each component of the rate base is discussed in detail below and is supported by Exhibit AM-S2 (Revised Statement B — Rate Base Summary).
B. Gross Plant in Service
13. Q. What is the gross plant in service included in Ridgeline's rate base?
A. Ridgeline's gross plant in service is $587.2 million, representing the original construction cost of the Pipeline and all associated facilities as recorded on Ridgeline's books of account at historical cost. This amount includes all costs associated with the construction and commissioning of the 187-mile pipeline, the three compressor stations (Wetzel, Mannington, and Waynesburg), all ancillary facilities including metering stations, regulation equipment, cathodic protection systems, SCADA and telecommunications infrastructure, and all capitalized overhead costs incurred during the construction period. All facilities comprising the $587.2 million gross plant figure were placed in service on October 1, 2021.
The historical cost of $587.2 million was independently confirmed by Ridgepoint Appraisal & Valuation Inc. of Houston, Texas, which conducted a comprehensive appraisal of the Ridgeline Pipeline System facilities as of the in-service date. Ridgepoint's appraisal employed the cost approach and concluded that the original cost of $587.2 million represents the actual and prudent cost of construction, consistent with the Commission's standards for inclusion in rate base.
No additions to or retirements of plant in service occurred during the test year ended March 31, 2022, that would require adjustment to the gross plant figure. Accordingly, gross plant in service of $587.2 million is the same as reported in the original filing and requires no modification.
C. Accumulated Depreciation
14. Q. What is the accumulated depreciation reflected in the rate base?
A. Accumulated depreciation as of the end of the test year (March 31, 2022) is $23.49 million. Ridgeline depreciates its pipeline and compressor station assets using the straight-line method at an annual depreciation rate of 2.5%, which corresponds to an estimated useful life of 40 years.
The annual depreciation expense on gross plant of $587.2 million at a rate of 2.5% is $14.68 million ($587.2 million × 2.5% = $14.68 million). Given that the Pipeline was placed in service on October 1, 2021, the partial-year depreciation from October 1, 2021, through March 31, 2022 (approximately six months) would be approximately $7.34 million. The filed accumulated depreciation of $23.49 million as of the test year end reflects the partial-year depreciation of $7.34 million plus prior period adjustments arising from the capitalization and subsequent reclassification of certain pre-commercial operating costs that were appropriately included in the depreciable plant base, as detailed in the supporting workpapers to Exhibit AM-S3.
Net plant in service, which constitutes the largest component of rate base, is accordingly calculated as gross plant of $587.2 million less accumulated depreciation of $23.49 million, yielding $563.71 million.
D. Working Capital Allowance
15. Q. Please explain the working capital allowance included in rate base.
A. The working capital allowance included in rate base is $18.64 million. The Commission's standard methodology for computing the working capital component of rate base for natural gas pipeline companies begins with the so-called "one-eighth formula," which provides a simplified proxy for cash working capital by computing one-eighth of the sum of operations and maintenance ("O&M") expense and administrative and general ("A&G") expense. Applying the one-eighth formula to the test-year O&M expense of $12.44 million and A&G expense of $4.82 million yields a preliminary figure of approximately $2.16 million (1/8 × ($12.44 million + $4.82 million) = 1/8 × $17.26 million ≈ $2.16 million).
However, the filed working capital allowance of $18.64 million is substantially greater than the one-eighth formula result because it includes additional components that are properly recognized as working capital for rate base purposes under Commission precedent. Specifically, the $18.64 million figure includes the following:
(a) Cash Working Capital Study: $2.16 million, derived from the one-eighth formula calculation described above;
(b) Gas Imbalance Receivables: $8.72 million, representing the average outstanding balance of gas imbalance receivables due from shippers during the test year, which represents gas in kind that Ridgeline has delivered in excess of shippers' nominations and for which it has not yet been compensated;
(c) Operating Cash Requirements: $5.41 million, representing the cash balances that Ridgeline must maintain to fund ongoing pipeline operations, including accounts payable, accrued payroll, and other current operating liabilities, as determined through a lead-lag study; and
(d) Other Cash Working Capital Items: $2.35 million, comprising prepaid insurance premiums and security deposits associated with pipeline right-of-way agreements.
Each component of the working capital allowance is documented in the supporting workpapers to Exhibit AM-S2 and has been verified by Ashford & McBride LLP.
E. Accumulated Deferred Income Taxes (ADIT)
16. Q. Please explain the ADIT adjustment to rate base.
A. Accumulated Deferred Income Taxes of ($12.45 million) are deducted from rate base, consistent with the Commission's normalization requirements. ADIT arises from the timing differences between the accelerated depreciation method used for federal and state income tax purposes—specifically, the Modified Accelerated Cost Recovery System ("MACRS")—and the straight-line depreciation method used for book and ratemaking purposes at an annual rate of 2.5%.
Under MACRS, Ridgeline depreciates its pipeline and compressor station assets over a 15-year recovery period using the 150% declining-balance method, which front-loads depreciation deductions for tax purposes relative to the straight-line book depreciation. This creates a timing difference that generates a deferred tax liability. Under the Commission's normalization accounting requirements, this deferred tax liability is reflected as a reduction to rate base, thereby reducing the amount on which ratepayers are required to provide a return. The ADIT deduction of $12.45 million represents the cumulative timing difference as of the test year end, March 31, 2022, and is consistent with Ridgeline's tax returns and the deferred tax liability recorded on its balance sheet.
F. Other Rate Base Items
17. Q. What other items are included in rate base?
A. The remaining $42.50 million of rate base consists of three components:
(a) Gas Stored Underground and In Transit: $27.80 million, representing the value of natural gas held in pipeline inventory (linepack) and in transit at the average balance during the test year. This gas is necessary for the operation of the Pipeline and represents an investment by Ridgeline that is used and useful in providing jurisdictional service;
(b) Prepayments: $8.20 million, consisting of prepaid amounts for pipeline right-of-way agreements, environmental monitoring contracts, and insurance premiums that extend beyond the test year; and
(c) Materials and Supplies: $6.50 million, representing the average inventory of spare parts, pipe, valves, fittings, and compressor station components maintained at the three compressor stations and at the Company's Charleston, West Virginia, warehouse for use in pipeline operations and maintenance.
Each of these items is separately itemized and supported in Exhibit AM-S2.
G. No Change in Rate Base from Original Filing
18. Q. Has the rate base changed from the original filing?
A. No. The total rate base of $612.40 million is unchanged from the rate base presented in Ridgeline's original application filed on May 12, 2022. The revisions presented in this supplemental testimony relate to the return on rate base (due to the reduced ROE), the operating expense components of the cost of service, revenue credits, and the billing determinant and rate design methodology. None of these revisions affect the underlying rate base.
The rate base has been verified against Ridgeline's FERC Form 2, Annual Report of Major Natural Gas Companies, for the test year ended March 31, 2022, as well as against the audited financial statements of Ridgeline Midstream Services LLC prepared with the assistance of Ashford & McBride LLP. These reconciliations confirm that the rate base of $612.40 million is consistent with Ridgeline's books of account and regulatory filings.
IV. CAPITAL STRUCTURE
A. Proposed Capital Structure
19. Q. What is Ridgeline's proposed capital structure for ratemaking purposes?
A. Ridgeline proposes a capital structure consisting of 55% equity and 45% debt for purposes of computing its weighted average cost of capital. This capital structure is unchanged from the original filing and reflects the actual capitalization of Ridgeline Midstream Services LLC as a single-asset pipeline entity.
The Commission's longstanding policy permits the use of a pipeline's actual capital structure for ratemaking purposes where the pipeline is a stand-alone entity and the capital structure is not unduly leveraged or otherwise unreasonable. As discussed further below, Ridgeline's 55/45 equity-to-debt ratio falls within the range the Commission has accepted for comparable pipeline entities and is reflective of the actual financing arrangements put in place at the time of construction.
B. Equity Component
20. Q. Please describe the equity component of Ridgeline's capital structure.
A. The equity component represents 55% of Ridgeline's total capitalization. Ridgeline's sole equity holder is Dunmore Energy Holdings Ltd. DEH contributed equity capital of $37.2 million to fund the construction of the Ridgeline Pipeline System. This equity contribution was calculated as the residual of the total construction cost of $587.2 million after accounting for the $400 million term loan under the Senior Secured Credit Facility and the $150 million in Second Lien Senior Secured Notes, both described below ($587.2 million − $400.0 million − $150.0 million = $37.2 million).
For ratemaking purposes, the imputed equity component of the rate base is calculated by applying the 55% equity ratio to the total rate base of $612.40 million, yielding an imputed equity value of $336.82 million ($612.40 million × 55% = $336.82 million). The return on this equity component is computed by applying the proposed 12.50% ROE, as discussed in Section V of this testimony.
C. Debt Component — Senior Secured Credit Facility
21. Q. Please describe the senior secured credit facility.
A. Ridgeline entered into a Credit Facility Agreement dated September 15, 2021 (the "Credit Facility" or the "Credit Agreement"), providing for a $400 million term loan and a $75 million revolving credit facility. The administrative agent under the Credit Agreement is Pinnacle National Bank, N.A., with principal offices at 600 Travis Street, Suite 4200, Houston, Texas 77002. The relationship manager for the Ridgeline account is Richard Calvert, Managing Director, Energy Lending Group, Pinnacle National Bank, N.A.
The lending syndicate under the Credit Facility consists of Pinnacle National Bank, N.A. (40% participation), Granite Trust Company (30% participation), and Lakeshore Capital Bank (30% participation). The term loan has a final maturity date of October 1, 2028, and bears interest at a floating rate equal to the Secured Overnight Financing Rate ("SOFR") plus 325 basis points per annum. The revolving credit facility has the same maturity date and interest rate terms as the term loan.
As of December 31, 2024, the outstanding balance on the term loan was $362.8 million, reflecting scheduled quarterly amortization payments that have reduced the original $400 million principal since the initial drawdown. The revolving credit facility had no outstanding borrowings as of December 31, 2024, although approximately $12.3 million in letters of credit were outstanding against the facility.
D. Debt Component — Second Lien Notes
22. Q. Please describe the second lien notes.
A. On September 22, 2021, Ridgeline issued $150 million in aggregate principal amount of 7.875% Second Lien Senior Secured Notes due 2030 (the "Second Lien Notes"). The Second Lien Notes were issued in a private placement to two institutional investors: Harborview Capital Management LLC, a New York-based credit fund managed by Samantha Hu, Portfolio Manager, which purchased $90 million in principal amount; and Sentinel Ridge Fund LP, a Philadelphia-based private credit fund managed by Peter Nowicki, Managing Partner, which purchased $60 million in principal amount.
The Second Lien Notes bear interest at a fixed rate of 7.875% per annum, payable semi-annually, and mature on September 22, 2030. 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. As of December 31, 2024, the full $150 million principal amount of the Second Lien Notes remained outstanding.
E. Weighted Average Cost of Debt
23. Q. What is the weighted average cost of debt used in the WACC calculation?
A. The weighted average cost of debt is 5.25%. This figure is calculated by weighting the cost of each debt instrument by its outstanding principal balance as of the test year date. Specifically, the calculation combines the effective interest rate on the term loan (SOFR + 325 basis points, which at the test year date produced an all-in rate of approximately 3.85%) and the fixed rate on the Second Lien Notes (7.875%), weighted by their respective proportions of total outstanding debt. The resulting blended cost of debt is 5.25%, as presented in detail in the supporting workpapers to Exhibit AM-S5.
I note that the weighted average cost of debt is sensitive to the level of SOFR at the time of calculation. The 5.25% figure reflects the SOFR rate prevailing during the test year and represents a reasonable cost of debt for ratemaking purposes. The component-level calculation is set forth in Exhibit AM-S5.
F. Reasonableness of Capital Structure
24. Q. Is Ridgeline's proposed 55/45 equity-to-debt capital structure reasonable?
A. Yes. The proposed 55% equity and 45% debt capital structure is within the range of capital structures that the Commission has accepted for comparable interstate natural gas pipeline companies. In my experience with pipeline rate proceedings, the Commission has generally found capital structures with equity ratios in the range of 40% to 65% to be reasonable, depending on the specific facts and circumstances of the pipeline entity. Ridgeline's 55% equity ratio is near the midpoint of this range.
Moreover, as a single-asset pipeline entity with a relatively short operating history (having been placed in service on October 1, 2021), Ridgeline faces construction-era and ramp-up risks that justify a somewhat higher equity component than might be appropriate for a more seasoned, diversified pipeline system. The 55/45 ratio was established at the time of the original financing and reflects the risk profile that Ridgeline's lenders and equity investors assessed at the time of the construction commitment.
Finally, the capital structure was not affected by the tariff redesign or any of the revisions presented in this supplemental testimony.
V. RETURN ON EQUITY
A. Revised ROE Proposal
25. Q. What is Ridgeline's revised proposed return on equity?
A. Ridgeline's revised proposed return on equity is 12.50%, reduced from the 14.00% ROE proposed in the original filing of May 12, 2022. This revision directly addresses Deficiency Item 1 in the OEMR Deficiency Letter dated January 19, 2023, which identified inadequate cost-of-service support for the originally proposed ROE, specifically noting the absence of an updated proxy group analysis reflecting market conditions subsequent to 2021.
The revised 12.50% ROE is based on an updated discounted cash flow ("DCF") proxy group analysis prepared by Dr. Raymond Braswell of Braswell Energy Consulting Group LLC. Dr. Braswell's DCF analysis utilizes market data through the third quarter of 2024 and identifies a proxy group of publicly traded natural gas pipeline master limited partnerships and midstream corporations with comparable risk profiles. The detailed DCF analysis and proxy group selection methodology are presented in the separately filed supplemental pre-filed direct testimony of Dr. Braswell, which I cross-reference and incorporate by reference herein for purposes of establishing the analytical foundation for the revised ROE.
B. Basis for Reduction
26. Q. Why has Ridgeline reduced its proposed ROE from 14.00% to 12.50%?
A. The original proposed ROE of 14.00% was based on a DCF proxy group analysis utilizing market data through year-end 2021. The OEMR Deficiency Letter correctly noted that this analysis did not reflect the substantial changes in capital market conditions, interest rate environments, and risk premium assessments that occurred between 2021 and the date of the deficiency review. The Commission's policy requires that ROE determinations be based on reasonably current market data.
In response to the deficiency, Ridgeline engaged Dr. Braswell to perform an updated DCF analysis using market data through Q3 2024. Dr. Braswell's updated analysis yields a zone of reasonableness with a lower bound and an upper bound within which the proposed 12.50% ROE falls. The reduction from 14.00% to 12.50% reflects the combined effects of (i) the significant increase in risk-free interest rates between 2021 and 2024, which affected equity risk premiums; (ii) changes in the dividend yields and growth rates observed in the proxy group companies; and (iii) the maturation of the Ridgeline system itself, which has now accumulated over three years of operating history since its October 1, 2021 in-service date, thereby reducing certain construction-era and start-up risk factors that supported the higher original ROE proposal.
I believe the revised 12.50% ROE represents a reasonable and appropriate return that balances the interests of Ridgeline's equity investor in earning a competitive, risk-adjusted return on invested capital with the Commission's objective of establishing just and reasonable rates for pipeline shippers.
C. Comparison to Intervenor Positions
27. Q. How does Ridgeline's revised ROE compare to the positions taken by intervenors in this proceeding?
A. In their answering testimony filed on January 9, 2023, the intervenors proposed the following ROE levels:
(a) Appalachian Trunk Pipeline Company, LLC (ATPC): 10.75%, as presented in the testimony of ATPC's witness, sponsored through counsel William Pratt of the firm Kellner, Royce & Dillard LLP;
(b) Marcellus Gas Producers Coalition (MGPC): 11.25%, as presented in the testimony of Dr. Eleanor Vasquez, an economic consultant retained by MGPC through counsel Rebekah Montague of the firm Whitmore & Sable LLP.
Ridgeline's revised proposed ROE of 12.50% remains above both intervenor proposals but represents a significant 150-basis-point reduction from Ridgeline's original 14.00% proposal. The difference between Ridgeline's revised proposal and the highest intervenor proposal (MGPC's 11.25%) is now 125 basis points, compared to 275 basis points under the original filing.
D. ROE Risk Adder Considerations
28. Q. What risk factors support an ROE at the proposed level of 12.50%?
A. Several risk factors specific to Ridgeline support an ROE at or above the median of the proxy group range:
(a) Construction-Era Risk Premium: Although the Pipeline has been in service since October 1, 2021, it is still in its early operating years, and the original construction commitment carried significant project development and execution risks. Ridgeline's equity investors bore the full risk of construction cost overruns, permitting delays, and the commissioning schedule. These risks are appropriately compensated through a return that reflects the overall risk profile of the investment at the time the equity commitment was made.
(b) Single-Asset Entity Risk: Ridgeline is a single-asset pipeline entity with no operational diversification. Unlike the multi-asset pipeline companies in the DCF proxy group, Ridgeline's financial performance is entirely dependent on the operations and throughput of a single 187-mile pipeline. This concentration risk warrants an ROE premium relative to more diversified entities.
(c) Shipper Concentration Risk: Ridgeline's throughput is currently concentrated among a limited number of firm shippers, which exposes the pipeline to credit and volume risk that would not exist in a more broadly subscribed system. While the Pipeline's design capacity is 1.2 Bcf/d, current utilization of approximately 56.67% indicates that a substantial portion of the Pipeline's capacity remains unsubscribed.
(d) Regulatory Risk from Dormant Proceeding: This rate proceeding has been subject to a stay since February 6, 2023, a period of approximately two years during which Ridgeline has operated under significant regulatory uncertainty regarding the final determination of its tariff rates. This prolonged regulatory uncertainty represents a risk factor that the Commission has recognized as relevant to ROE determinations.
(e) Interconnection Uncertainty: The proposed interconnection with ATPC, which is the subject of Docket No. RP22-847-001, remains unresolved and the subject of active dispute between Ridgeline and ATPC regarding cost allocation and operational terms. The resolution of the interconnection proceeding will materially affect Ridgeline's future throughput and financial performance.
Taken together, these risk factors support an ROE at the proposed level of 12.50%, which falls within the zone of reasonableness established by Dr. Braswell's updated DCF analysis.
VI. WEIGHTED AVERAGE COST OF CAPITAL
A. WACC Calculation
29. Q. Please present Ridgeline's revised weighted average cost of capital.
A. Ridgeline's revised WACC is 9.2375%, calculated as follows:
The revised WACC of 9.2375% compares to the original WACC of 10.0625%, which was calculated as (0.55 × 14.00%) + (0.45 × 5.25%) = 7.70% + 2.3625% = 10.0625%. The reduction of 82.5 basis points in the WACC is entirely attributable to the 150-basis-point reduction in the proposed ROE from 14.00% to 12.50%. The cost of debt (5.25%) and the capital structure weights (55/45) are unchanged.
B. Return on Rate Base
30. Q. What is the revised return on rate base?
A. The revised return on rate base is $56.57 million, calculated by applying the revised WACC of 9.2375% to the total rate base of $612.40 million:
$612.40 million × 9.2375% = $56.57 million (rounded)
The original return on rate base was $61.62 million ($612.40 million × 10.0625% = $61.62 million). The revised return therefore represents a reduction of $5.05 million from the original filing. This reduction flows entirely from the lower proposed ROE and is a principal component of the cost-of-service adjustments presented in this supplemental testimony. The revised return on rate base is detailed in Exhibit AM-S6.
VII. OPERATING EXPENSES
A. Depreciation Expense
31. Q. What is the annual depreciation expense included in the revised cost of service?
A. The annual depreciation expense included in the revised cost of service is $14.68 million, unchanged from the original filing. This amount is computed using the straight-line depreciation method at an annual rate of 2.5% applied to gross plant in service of $587.2 million:
$587.2 million × 2.5% = $14.68 million
The 2.5% annual depreciation rate corresponds to an estimated useful life of 40 years for the Pipeline and its associated compressor station and ancillary facilities. This useful life estimate is supported by an engineering analysis of the expected service life of the pipeline's principal components, taking into account the characteristics of the 24-inch-diameter steel pipeline, the operational parameters of the compressor stations, and the anticipated patterns of use and maintenance over the Pipeline's life. The 2.5% depreciation rate is also consistent with Commission precedent for recently constructed natural gas transmission pipelines of comparable design and specification. A detailed depreciation rate analysis has been prepared and is presented separately as referenced in Exhibit AM-S3.
The depreciation expense is a significant component of the total cost of service, representing approximately 14.2% of the revised $103.15 million total. It was not affected by any of the deficiency items identified in the OEMR Deficiency Letter, and no change to the depreciation rate or method was required or proposed.
B. Operations and Maintenance (O&M) Expense
32. Q. What is the revised O&M expense?
A. The revised O&M expense is $13.92 million, an increase of $1.48 million from the $12.44 million included in the original filing. The increase reflects the Company's updated current-cost estimates based on actual operational experience accumulated since the Pipeline's October 1, 2021 in-service date.
At the time of the original filing in May 2022, the Pipeline had been in service for only approximately seven months, and the O&M expense estimate was based largely on engineering projections and industry benchmarks rather than actual operating cost data. The Company now has over three years of actual operating experience, including full calendar year data for 2022, 2023, and 2024, which provides a substantially more reliable basis for estimating ongoing O&M costs.
The revised O&M expense of $13.92 million comprises the following principal categories:
(a) Compressor Station Operations: $5.63 million, including fuel costs, turbine maintenance, emissions monitoring, and station personnel costs associated with operating three compressor stations with aggregate installed compression of 45,000 HP;
(b) Pipeline Maintenance: $3.24 million, including inline inspection, cathodic protection monitoring and remediation, pipeline integrity management program costs, and coating and repair activities;
(c) Right-of-Way Maintenance: $1.47 million, including vegetation management, erosion control, access road maintenance, and landowner relation costs along the 187-mile pipeline corridor;
(d) Field Personnel: $2.18 million, including salaries, benefits, and related costs for field operations staff assigned to pipeline and compressor station operations;
(e) Contract Services: $0.78 million, including costs for third-party inspection services, specialized maintenance contractors, and environmental compliance testing; and
(f) Environmental Compliance: $0.62 million, including costs for air quality monitoring at compressor stations, stormwater management, and hazardous materials handling and reporting.
These cost categories reflect Ridgeline's actual experience operating the three compressor stations and the 187-mile pipeline corridor, and the increases relative to the original filing are attributable to higher-than-projected compressor station fuel and maintenance costs, the implementation of the first full cycle of pipeline inline inspections (which were not yet underway at the time of the original filing), and general inflationary pressures on labor and materials costs. Supporting detail is provided in Exhibit AM-S7.
C. Administrative and General (A&G) Expense
33. Q. What is the revised A&G expense?
A. The revised A&G expense is $5.14 million, an increase of $0.32 million from the $4.82 million included in the original filing. The principal components of the A&G expense are:
(a) Management and Administrative Salaries: $2.07 million, representing the allocated costs of corporate management and administrative personnel, including a portion of my own compensation and the compensation of other corporate officers and staff who devote a portion of their time to Ridgeline's operations;
(b) Office Expenses: $0.68 million, including rent, utilities, and office equipment costs for Ridgeline's Charleston, West Virginia, offices;