Veresen: Pipelines and Power
11/16/2016 8:00 am EST
Our latest Top Pick of the month is a Canadian firm originally set up to own and fund the Alliance pipeline and the Aux Sables Natural Gas Liquids plant in Illinois in 1997-2000, explains Gordon Pape, editor of The Income Investor.
Veresen (Toronto: VSN) was an income trust set up by Enbridge (ENB) in the days when pipelines from Canada to the U.S. could get built without becoming a political issue — and before ethane collapsed in price.
Veresen responded in a couple of ways. In 2012 it purchased the Hythe/Steeprock gas processing plants from Encana (ECA).
In late 2014 it bought 50% of the Ruby pipeline from Colorado to Oregon for US$1.425 billion. And in 2015, it partnered to buy half of Encana's Montney, B.C. gas-gathering assets.
Veresen has excellent visibility of earnings over the next few years. The Alliance pipeline's firm capacity was renewed for five years starting Dec. 1, 2015, with over 30 shippers, admittedly at lower rates.
In addition, 99% of its revenues and cash flow are now derived from either regulated assets or take-or-pay and fixed-fee pipeline contracts.
With its cash flow growing as debt is repaid at the Ruby pipeline and through the possible sale of its power assets, the dividend is sustainable and may even start to grow.
There is also the upside from its ownership of the Jordan Cove LNG export facility in Oregon, which would have the shortest route to Asia of any LNG facility and which has almost all necessary approvals.
With $1.5 billion of contracted capital projects that are fully funded without any equity issuance coming on stream in the next two years, the $1 dividend is entirely covered by distributable cash flow from existing take-or-pay or fee-for-service contracts.
Like all leveraged, capital-intensive businesses, Veresen is at risk if interest rates rise from present low levels, although most of its debt is fixed term, and much falls due after 2020.
The firm pays $0.0833 a month ($1 annually). The yield is 7.3%. There is a 15% withholding tax for U.S. investors.
Veresen is for investors looking for a reasonably high but sustainable yield with the possibility of some modest growth when its capital expenditure projects come on stream in the next two years.
By Gordon Pape, editor of The Income Investor