Why Dominion is offering a master limited partnership

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Nov. 26 2019, Updated 9:32 p.m. ET

Dominion’s IPO

Recently, Dominion (D) completed the initial public offering (or IPO) of its master limited partnership (or MLP). It offered 17.5 million MLP shares at $21 per stock. As mentioned earlier, Dominion provides midstream natural gas and liquefied natural gas (or LNG) services in Maryland.

The MLP is called Dominion Midstream (or DM). It includes Dominion’s midstream assets and the LNG assets in Cove Point. A portion of the capital raised will be used to increase pipeline infrastructure for transporting gas.

MLP

MLP’s structure will benefit shareholders

The MLP’s structure will help Dominion save taxes and generate high free cash flows. According to accounting norms, profits from any partnership that draws more than 90% of its cash flows from gas and other natural resources is tax free.

Also, MLPs don’t have to pay corporate income tax. They can pay more cash to the shareholders. As a result, the MLP structure will unlock value for Dominion’s shareholders.

Other companies taking the MLP route

In the past, other energy companies have also floated partnership structures to benefit from lower taxes. Spectra Energy (SE) and Duke Energy (DUK) created MLPs in 2007 to separate their natural gas assets. In June this year, Nobel Energy (NBL) announced that it intends to form a MLP.

Many companies within the Utilities Select Sector SPDR (XLU) will also be looking to form MLPs to gain a tax advantage.

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