After a decade long deliberation,
) has finally decided to form a Master Limited Partnership (MLP).
The timing is immaculate given Dominion's high quality assets and
the recent Department of Energy (DoE) approval to export natural
DOMINION RES VA (D): Free Stock Analysis
ENBRIDGE INC (ENB): Free Stock Analysis
SPECTRA ENERGY (SE): Free Stock Analysis
WILLIAMS COS (WMB): Free Stock Analysis
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In fact, selling natural gas in the overseas market could be a
cash churning business for these energy companies. DOE's approval
was well accepted in the market with Dominion shares gaining
nearly 2% in a day's trading, closing at $59.78 yesterday.
MLPs have become an important investment vehicle for energy
companies since the first MLP was launched in 1981. MLPs have
indeed gained prominence over the last three decades due to tax
advantages and lower cost of capital. MLPs generate ample cash
flow, which are regularly distributed among unitholders in the
form of cash distribution.
What an MLP Means to Dominion?
Dominion will form an MLP comprising its natural gas assets that
is scheduled to begin operation in 2014. The MLP will initially
include the Cove Point liquefied natural gas terminal in Maryland
and Dominion's interest in Blue Racer Midstream LLC. This is
expected to generate $1 billion of earnings before interest,
taxes, depreciation and amortization (EBITDA), annually. Dominion
also has plans to add another group of assets which will generate
another $1 billion of EBITDA.
Dominion is presently involved in a number of development
projects and will require ample funds to carry out these
activities. The projects in which this proposed MLP will be
involved in will generate free cash flows. Moreover, the
predictable and stable revenue streams of the MLP will attract
Dominion will require a capital investment of nearly $3.4 billion
to $3.8 billion to add liquefaction capability at the Cove Point
plant. Though Dominion will not find it difficult to secure funds
from other sources, the MLP structure will make it all the more
convenient to raise fresh capital from the markets. In this low
interest rate environment, we believe the Dominion MLP will
attract investors looking for assured returns in the guise of
The MLP will also allow Dominion to enjoy a special tax
exemption, which the partnership can pass on to its unitholders.
Also, the cash distributed from an MLP to its unitholders is not
subject to taxes, thereby saving it from double taxation. This is
generally not applicable for companies and their shareholders at
the time of dividend payouts.
Other Companies with MLPs
Many other operators in the space have also opted for an MLP
structure. Worth mentioning here are names like
Spectra Energy Corp.
Williams Companies, Inc.
) among others. All these stocks, including Dominion, are
presently trading in line with the market, as exemplified by
their Zacks Rank #3 (Hold).