Williams (WMB) has filed a Section 4 rate case for Transcontinental Gas Pipe Line (Transco) with big implications for performance next year. Consensus estimates have been on the rise for WMB, and upside from the rate case creates another tailwind in 2025.
Transco filed the Section 4 case with FERC on August 30, citing expansions and maintenance projects undertaken since the pipeline last set rates. The pipeline also proposes to add a tariff surcharge to recover the costs of a modernization program.
In the WMB Financial Blueprint, East Daley Analytics forecasts a $118MM uplift in 2025 EBITDA from the Transco rate case (see figure). We currently forecast 2025 EBITDA of $7,683MM, so upside from the rate case accounts for 2% of our 2025 forecast.
Transco’s last rate case was settled in 2019, and the system’s cost of service has increased by $840MM since then, according to the pipeline’s recent filings. To maintain a reasonable rate of return, Transco requests to increase rates to account for the higher costs of service.
The rate matrix proposed in Transco’s initial filing had maximum firm transportation (FT) rates increasing by about 50%; however, the rates initially requested by pipes are rarely what FERC eventually approves. Customers have filed protests with the agency, arguing that a rate increase of that magnitude is not justified.
Recent tariff filings state that the increased rates will not go into effect until March 2025, giving shippers several months to negotiate and settle on lower rates with the pipeline. Historically, shippers have settled with Transco for an increase that is ~30% of what the pipeline initially requests.
Based on the historical settlements, EDA speculates that WMB will settle for an increase of ~12.5% to maximum FT rates. EDA arrives at the $118MM upside forecast in the Financial Blueprint by applying an ~12% increase to the 42.4% of Transco revenues exposed to maximum FT rates. This equates to about a 5.3% increase in total pipeline revenue.
Since March, consensus estimates have increased $120MM for Williams, and the upside from the latest rate case provides more fuel to grow future earnings. The rate case adds to a docket of seven Transco projects, the in-service of offshore Gulf of Mexico projects, and G&P systems primed for recovery to create a strong growth story for WMB in 2025. – Zach Krause Tickers: WMB.
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