Dividends in the Pipeline

09/15/2010 11:52 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Canadian gas pipeline operator Fort Chicago plans to maintain a payout of nearly 9% after converting to a corporation, writes Gordon Pape in The Income Investor.

Based in Calgary, Fort Chicago (Toronto: FCE-UN, OTC: FCGYF) has facilities in both Canada and the US. The limited partnership (LP) runs three types of operations: pipelines, natural gas liquids, and power generation.

One of the cornerstones of the business is Fort Chicago's 50% stake in the Alliance Pipeline. It's a 3,000- kilometer, high-pressure natural gas line that connects Alberta fields with markets in the midwestern United States.

The pipeline feeds another Fort Chicago business, the Aux Sable Liquid Products natural gas liquid (NGL) extraction and fractionation plant near Chicago. Aux Sable has the exclusive right to extract and sell the NGL transported by Alliance. Clients include petrochemical, refinery, specialty chemical, and propane heating markets throughout the Midwest.

Fort Chicago also owns 100% of the Alberta Ethane Gathering System (AEGS), three interconnected pipeline legs spanning the southern and central portions of Alberta, which are more than 1,300 kilometers long. Design capacity exceeds 320,000 barrels per day.

Fort Chicago's power-generating business includes wholly or partially owned facilities across Canada and the US from Prince Edward Island to California. The emphasis is on clean power, with most of the plants using natural gas or waste heat to generate electricity and steam.

The LP also has a 50% interest in the Alton gas storage project in Nova Scotia, which is currently under development. Alton will eventually have the capacity to store four to six billion cubic feet of natural gas in stable underground salt caverns.

Fort Chicago offers a well-diversified and stable business. The monthly distribution of 8.33 Canadian cents per unit (C$1.00 per year) is very attractive, and the LP has a consistent record of maintaining or raising its payments. The current level has been in place since late 2007. The November 2009 announcement of the LP's plans [to convert to a corporation by the end of 2010 and to maintain the current payout as a dividend] provides investors with a measure of certainty.

Any pullback in NGL prices would obviously be bad news for the LP. Other risks include the usual concerns associated with pipeline and power-generation businesses, currency risk relating to the cross-border nature of Fort Chicago's operations, and interest-rate risk stemming from the LP's long-term senior debt of C$1.46 billion (as of June 30). Overall, we rate this security as "higher risk".

Based on the August 20th closing price of $11.20, the projected 12-month yield is 8.93%. Fort Chicago is suitable for investors seeking above-average cash flow who are willing to accept the degree of risk involved. This limited partnership runs a solid, diversified business and the units pay an attractive yield.

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