Gas Up for This High Dividend

05/16/2013 9:00 am EST


Patrick McKeough

Editor, Successful Investor

This company keeps its dividend high by strategically acquiring businesses with long-term contracts, says Pat McKeough of TSI Network.

High-yielding Veresen (Toronto: VSN) looks to focused acquisitions to keep its dividend high.

Growth by acquisition can be risky, as newly purchased companies may develop unforeseen problems, especially in an unsettled economy. However, Veresen aims to cut that risk by adding plants with long-term contracts that are already in place.

The company owns pipelines, power plants, and gas processing facilities across North America. Veresen has three primary businesses:

  • A pipeline transportation business comprised of interests in two pipeline systems, the Alliance Pipeline and the Alberta Ethane Gathering System
  • A midstream business, including ownership interests in a world-class natural gas liquids extraction facility near Chicago, the Hythe/Steeprock complex, and other natural gas and natural gas liquids (NGL) processing energy infrastructure
  • And a power business with renewable and gas-fired facilities and development projects in Canada and the United States, and district energy systems in Ontario and Prince Edward Island

The company owns 50% of the Alliance gas line, which runs for 3,000 kilometers between Chicago and Fort St. John, British Columbia. Enbridge (ENB) owns the other 50% of the line. Veresen and Enbridge together hold 85.4% of the Aux Sable natural gas liquids plant.

In February 2012, Veresen paid Encana (ECA) $920 million for the Hythe/Steeprock natural gas gathering and processing complex. Encana signed a long-term deal to buy most of this facility's gas.

To diversify beyond pipelines and gas-processing plants, Veresen continues to expand its power generation business. The company now owns hydroelectric facilities in New York State and British Columbia, natural gas-fired plants in Ontario, California, and Colorado, and waste-heat plants in BC and Saskatchewan.

In the quarter ended December 31, the company's cash flow rose 6.2%, to $56.5 million from $53.2 million a year earlier. Its cash flow per share fell 9.4%, to 29 cents from 32 cents, on more shares outstanding. Profit margins at Aux Sable have declined along with NGL prices.

Veresen currently trades at 12.1 times its forecast 2013 cash flow of $1.10 a share. The stock has a high dividend yield of 7.2%.

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