Cheniere Energy Sabine Pass LNG. Source: Flickr/Roy Luck.
Most Americans paid more in taxes this year. However, thanks to a special tax loophole, energy companies building natural gas export terminals could end up paying no taxes when those facilities come online. That's because a company like Cheniere Energy, (LNG -0.73%) can put its Sabine Pass LNG export facility into Cheniere Energy Partners, L.P. (CQP 4.48%), which is a master limited partnership. Because Cheniere Energy Partners is an MLP, it is a tax-advantaged entity in that it pays no corporate tax, which enables its investors to really reap big profits.
That's a big advantage, especially in raising capital from investors. This is why we're likely to see other liquefied natural gas export terminal owners including Sempra Energy (SRE 0.74%) and Dominion Resources (D 0.52%) put these future LNG export terminals into MLPs as well. In one sense, therefore, the IRS really has become the key to fueling America's LNG export boom.
Dominion Resources Cove Point LNG Terminal in Maryland. Source: Flickr/futureatlas.com/blog/.
No hiding these plans
Sempra Energy was pretty open on its fourth-quarter conference call with investors that the company's planned Cameron LNG Facility would be a core asset to be put into a prospective MLP. While Cameron LNG won't be operational until 2018, Sempra is looking for ways to get its MLP launched well beforehand. It's exploring the option to start with creating an MLP around some of its existing storage and pipeline assets. The issue there is that the cash flow of those assets isn't as secure as MLP investors demand so it needs to improve cash flow certainty before moving ahead with that option. That's why its also exploring another option, which is to buy another asset that can be used to create an MLP. However, if neither option will create value for investors Sempra can simply wait until Cameron is ready to launch before packaging it into an MLP.
Cheniere Energy Sabine Pass LNG. Source: Flickr/Roy Luck.
Dominion Resources, on the other hand, is already one step ahead of Sempra as it has already filed to take its MLP public. Dominion Midstream Partners will own a preferred equity interest in Cove Point LNG. The current plan is to use the MLP tax advantage to raise about $400 million from investors to jump-start construction of Cove Point. While that's a small fraction of the proposed $3.8 billion investment to add natural gas liquefaction and export facilities to the existing site, the IPO isn't likely to be the only time Dominion will use its MLP to raise equity capital for this project.
Investor takeaway
MLPs are providing energy companies with a special tax advantage making it easier to raise capital to build these massive projects. In fact, if it wasn't for that advantage, it's possible we wouldn't see quite so many projects being considered. Given that the IRS' intention was to grow American energy production to enhance our energy security, I'd say that this tax advantage is doing just what it was intended to do.
