Dominion Resources (NYSE:D) is pulling a Spectra Energy Corp. (NYSE:SE) and filing for its own limited partnership. But can "Dominion Midstream" snag the same success as Spectra Energy Partners, LP (NYSE:SEP)? Here's what you need to know.
What is a limited partnership?
Limited partnerships have very little to do with limitations or partnerships -- they have to do with taxes. In an effort to reward steady earnings from steady sources, the IRS allows any partnership that pulls around 90% or more of its cash flow from real estate, commodities, or (in this case) natural resources to pull in initial profit entirely tax-free.
Almost immediately following Duke Energy Corporation's spinoff of its natural gas assets to Spectra Energy Corp. in 2007, the newly formed corporation created its own limited partnership: Spectra Energy Partners, LP. While Spectra Energy Corp. provides the cash behind Spectra Energy Partners, LP's transmission, storage, and liquid asset operations, the partnership allows the "Partners" part to rake in tax-free revenue. Dominion Resources hopes to do the same.
Dominion Midstream means business
The company created a "Dominion Midstream" business in March and has just filed for limited partnership status. When it goes for its IPO, Dominion Midstream hopes to raise $400 million from the sale of common stock – a nice cash buffer for the beginning of a new partnership. In Dominion Resources' case, its LP owns all interest in Dominion Cove Point LNG LP, which subsequently owns the company's LNG facility in Maryland.
This combines a lucrative tax status with major LNG export potential. The facility was approved for natural gas exports to non-Free Trade Agreement countries last September -- only the fourth such approval in the U.S. at the time. It's already sold out its capacity to Japanese and India buyers, and expects to export up to 0.77 billion cubic feet of natural gas every day.
Where will Dominion stock go?
In reality, nothing will change about Dominion Resources. It's not building new natural gas facilities, it's not destroying its regulated utility business, and it's not selling off a stake of anything. For current shareholders, there's good news and bad news.
First, Dominion will essentially water down its worth by $400 million. That's bad news. It's doing this by selling off stock for its Dominion Midstream partnership (to be listed on the New York Stock Exchange under "DM"). But while current investors might feel as if they've been dooped out of well-deserved dollars, companies issue stock to raise money all the time. With a current market cap of $40.9 billion, this represents just a 1% dilution -- nothing to write home about.
And for $400 million, investors can now sleep easier knowing Dominion Resources is securing itself a major tax break on what could be a huge money-maker in the years to come. The U.S. has a massive supply of natural gas, and early movers on LNG exports are setting themselves to be pivotal players in the world's energy future.