Dominion Midstream: Buying Adequate Income With Growth Potential

Dominion Midstream Partners (DM) is all about LNG exports and pipelines. Similar to other large energy and integrated natural gas companies, last fall Dominion Resources (D) spun off MLP assets into a new trading company, Dominion Midstream. Investors looking for MLP growth above the industry average should look at DM, especially after the recent stock price disaster. Strong earnings growth will fuel substantially higher distributions over time.

D dropped down ownership of its Cove Point MD LNG terminal. Initially built as an import facility, Cove Point is in the process of converting to an export LNG facility. 32 of the 33 permits necessary are in place and the $3.8 billion conversion is expected to be operational in 2017. At that time, Cove Point will be the closest export facility to the Marcellus and Utica gas fields. 

DM has contracts with two large Asian companies to purchase all of Cove Point’s 4.6 million tons of planned annual output. With Japan shifting away from nuclear power to natural gas, Sumitomo Corp. has contracted for half of the facilities capacity. GAIL Limited, India’s largest natural gas processing and distributing company, has signed up for the other half of Cove Point’s capacity. These contracts are fee-based take-or-pay where the commodity price risk is offloaded to the buyers. 

In addition to Cove Point, Dominion Resources dropped down interest in the 1500 mile Carolina Gas Transmission CGT pipeline. Purchased from SCANA Corp (SCG) for $495 million, DM paid D $295 million in 2-yr notes and issued $200 million in units. The pipeline connects the Carolinas and Georgia to new gas fields in the Marcellus.  

In addition to Cove Point and CGT, Dominion Midstream Partners purchased a 26% ownership interest in the Iroquois Gas Transmission System. DM issued approximately 8.6 million common units to affiliates of National Grid PLC (NGG) and New Jersey Resources (NJR) to acquire the ownership interests. Iroquois is a joint venture with TransCanada (TRP) to ship gas from Eastern Canada to New York City.  

Dominion Midstream management does not expect additional drop downs or acquisitions of assets until the 2017 to 2020 time frame, when it expects to acquire Dominion Resources’ interest in privately-held Blue Racer Midstream pipeline and midstream processing assets and the Atlantic Coast Pipeline currently under permitting.  

Blue Racer's services include natural gas gathering, compression, and processing; condensate handling; and the fractionation, storage, transportation and marketing of natural gas liquids for the Utica and Marcellus shale areas. Founded in 2012, the $1.5 billion joint venture began with Dominion Resources contributing midstream assets and Caiman Energy II (58% owned by Williams Partners LP (WPZ)) contributing $713 million in private equity capital. Blue Racer is in an expansion phase with new facilities being completed annually. Blue Racer is currently spending about $500 million in capital expansions and has a goal to become a preferred midstream service provider for the expanding Utica field.

Atlantic Coast Pipeline has applied to build a $5 billion, 564-mile interstate natural gas transmission pipeline. The pipeline will be owned by Dominion Resources 45%, Duke Energy (DUK) 40%, Piedmont Natural Gas (PNG) 10%, and AGL Resources (soon to be part of Southern Company (SO)) 5%.  When completed, the pipeline will transport gas from the southern Utica/Marcellus to Virginia and North Carolina, and is anticipated to be in service during 2018. The primary target customers are electric power plants, utilizing 20-year binding contracts. Upon completion, it is expected Dominion Resources’ interest will dropped down into DM. 

DM management has set the growth bar pretty high with a 22% anticipated distribution growth rate over the next few years. The current annualized distribution of $0.75 a share offers a yield of 2.7%. While the yield is below its peer’s average of around 7.0%, its distribution growth profile could to be very beneficial. If management meets its aggressive growth target, the yield on today’s cost would exceed 6% within 3 years and exceed 7.5% in 4 years. 

Dominion Resources has committed to buying about 2 million DM units over the next 12 months. Dominion Resources owns the general partner of Dominion Midstream along with 11.8 million units of DM, or 31% of shares outstanding. Dominion Resources’ CEO commented, "This program demonstrates Dominion's confidence in and commitment to Dominion Midstream. It also confirms that our company sees upside unit valuation in Dominion Midstream and views the partnership as an attractive investment with significant growth opportunities”. 

Dominion Midstream has one of the brightest futures in the MLP sector. By nature, MLP investors are long-term thinkers; DM investors should be amply rewarded down the road as these expansion projects reach completion and begin to contribute to distributable cash flow.  

 

Disclosure: Long DM, D

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Malcom Connor 6 years ago Member's comment

You write some great stuff, would love to see more by you.