After a decade long deliberation, Dominion Resources (D - Free Report) 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 gas.
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 investor attention.
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 cash distribution.
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. (WMB - Free Report) and Enbridge Inc. (ENB - Free Report) among others. All these stocks, including Dominion, are presently trading in line with the market, as exemplified by their Zacks Rank #3 (Hold).