Will This Project Transmit More Dividends?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We know that we’re investing in companies and not ticker symbols. As shareholders we’ve entrusted the management teams of these companies with our hard earned capital. We don’t ask a lot in return, other than don’t squander it, at least try and earn us a decent return. So of course it goes without saying that when a company decides to invest capital on our behalf it better be for good reason.
One company that I’m starting to watch more closely for this very reason is Dominion Resources (NYSE: D). They, like virtually every American company with exposure to energy, are investing big time to build out their business. As more of their projects come online it’s good to take a quick look to see why they developed the project in the first place to ensure that management is being wise stewards of investor capital.
Recently, Dominion announced that their Transmission business was placing the Appalachian Gateway Project into service. This is a project they completed on time and within budget and it will bring West Virginia and western Pennsylvania natural gas to market. This project along with their Gathering Enhancement Project in the region represented an investment of over three quarters of a billion dollars. Was it money well spent?
Before we answer that question consider that Gateway consists of about 110 miles of new pipeline beginning in West Virginia and ending at a storage facility jointly owned by Dominion and Spectra (NYSE: SE). In addition to the new pipes that were laid, the project included four new compressor stations and upgrades at two existing stations. Meanwhile the Enhancement project includes expanding their natural gas gathering, processing and liquids facilities in West Virginia which will increase the efficiency of the gathering system allowing producers to ship more gas.
These projects are part of a $2.2 billion dollar build out at Dominion Transmission that’s planned through 2016. These projects when combined with the rest of the nearly $10 billion in growth projects throughout their utility and generations businesses will help to grow operating earnings annually by 5-6% starting this year. They have a targeted dividend payout ratio of 60-65% meaning that as these projects add to earnings, we should expect them to add to the dividend as well. Since 2008 they’ve raised their dividend from $1.58 a share annually to its current rate of $2.11 a share.
Dominion’s gas transmission business is a nice hidden gem for the company. Located in the heart of the Marcellus and Utica, they are perfectly positioned to benefit from the production growth in the region. They’re not the only one’s investing heavily in the boom to transmit gas from the production basins to the end markets.
Spectra for example is currently executing on an $8 billion CapEx plan with another $12-18 billion in potential projects. Industry titan Enterprise Products (NYSE: EPD) has $7.5 billion worth of projects under construction to be completed though 2015 in addition to having just completed $2 billion in projects through the first half of this year. Another industry heavyweight, Kinder Morgan (NYSE: KMI) has identified almost $10 billion worth of growth capital that they’ll be spending over the next five years. Even smaller midstream players like MarkWest (NYSE: MWE) are spending billions, in 2012 alone they’ll spend between $1.1 and 1.5 billion on growth projects.
The great thing about these energy projects is that because of the economics companies can use a balance of debt and equity to fund the projects. That allows them to almost immediately start transmitting higher distributions to their owners once the projects come on line. Both the Gateway and Enhancement projects from Dominion represent just a small part of their growth projects that’ll be coming online over the next few years. They have another $1 billion in additional potential gas infrastructure projects under consideration, making potential dividend increases all the likely.
latimerburned owns shares of Enterprise Products Partners L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dominion Resources, Enterprise Products Partners L.P., Kinder Morgan, and Spectra Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.