The highlight of DTE Energy Co’s (NYSE:DTE) earnings conference call wasn’t that it topped analyst prediction’s nor that it guided to higher full year profits. It was the fact that the firm was considering creating an MLP for some of its assets.
DTE joins a growing line of natural gas utilities that spun off their transmission and gathering networks into the corporate structure.
As we’ve noted before, MLPs offer sponsoring firms beneficial tax benefits, large cash flows and hefty distribution payments.
For natural gas utilities, the appeal of using a MLP is certainly great. These pipelines — which feed businesses, homes and other utilities’ generation assets — are as boring as they come and offer stable and growing cash flows that make using a pass-through entity incredibly lucrative.
Add in the ability to use that cash to expand and drop assets down into the MLP — which in turn, increases distributions — and you have a recipe for success.
And you don’t have to wait for DTE to join the parade MLPs. There are plenty of top utility contenders that have taken the plunge into MLPs. Here are three to buy today.
Natural Gas MLPs to Buy — Dominion Midstream Partners, LP (DM)
Multi-utility Dominion Resources, Inc. (NYSE:D) is a behemoth in the sector and features a wide variety of generation & transmission holdings. Those holdings include nearly 33,000 miles worth of natural gas transmission/distribution, gathering, and storage pipelines as well as 947 billion cubic feet of gas storage capacity.
All of those holdings could end up being placed inside its new MLP, Dominion Midstream Partners, LP (NYSE: DM), through “drop-down” transactions. Dominion has announced that it is planning on doing just that for several of these infrastructure assets.
In the meantime, DM is holding one major piece of infrastructure: the Cove Point liquefied natural gas (LNG) facility. Originally designed to import natural gas, the facility is one of the only LNG facilities approved for exporting to non-trade agreement nations.
That unique capability makes it a real growth element for DM stock’s cash flows going forward. In fact, DM estimates that future drop-downs from D as well as the Cove Point facility should help it see an average compounded annual growth rate of 22% for its cash distributions over the next five years.
Natural Gas MLPs to Buy — Columbia Pipeline Partners LP (CPPL)
Utility NiSource Inc. (NYSE: NI) is one of the largest natural gas utilities in the United States, serving more than 3.3 million residential, commercial and industrial customers. And given that large customer base and scope, NI has built up an impressive amount of natural gas transmission infrastructure.
Much of that will be placed inside of an upcoming spinoff of a standalone natural gas pipeline, midstream and storage company — dubbed Columbia Pipeline Group, Inc.
While that transaction should be completed by mid-year, NI didn’t waste any time and already began unlocking the pipeline group’s value by launching a new MLP: Columbia Pipeline Partners LP (NYSE: CPPL).
So far, CPPL has been a roaring success. The company’s IPO was the largest MLP IPO in history and made more than $1.24 billion for NiSource/Columbia. That money will go to work acquiring additional assets to CPPL’s 15,000 miles of natural gas pipelines, 300 billion cubic feet of underground natural gas storage capacity and other midstream facilities. Those assets should help boost CPPL’s cash flows and dividends.
And while the MLP just went public this month, CPPL has a history of rising earnings and profits. While it may be new, Columbia Pipeline Partners could be one of the best MLPs to own for the long haul.
Natural Gas Utilities MLPs to Buy #3 — Spectra Energy Partners, LP (SEP)
If you’re wondering what the NiSource/Columbia MLP transaction could possibly look like down the road, look no further than Spectra Energy Partners, LP (NYSE: SEP).
Back in 2007, mega-utility Duke Energy Corporation (NYSE: DUK) spun off its midstream businesses as Spectra Energy Corp. (NYSE: SE). DUK still handles the utility side of things, while SE moves all the energy to Duke’s power plants and natural gas customers.
Duke launched SEP to house some of its pipelines and assets. Then it took its GP/LP relationship to the nth degree and dropped-down allof the firm’s midstream infrastructure into SEP.
That move helped SEP realize some pretty good distribution growth over the last year or so.
However, SE isn’t done with SEP yet. Spectra has around $35 billion worth of growth projects in its pipeline to complete over the next five years. Ultimately, that will continue to boost SEP’s cash flows and distributions.
Management at Spectra estimate that SEP’s distributable cash flows will rise at a compound annual growth rate (CAGR) of 12.7% through 2017. That growth is expected to translate into an 8% dividend increase each year.
SEP currently yields a healthy 4.30%
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.