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Income and Yield

One way to add yield to your portfolio

It's a pipeline but it comes with more risk

One way to add yield to your portfolio

By Dianne Maley

Globe Investor Magazine Online, April 22, 2009


The Source: Bill Harris, principal and portfolio manager, Avenue Investment Management

The Idea: Buy Fort Chicago Energy Partners LP units (FCE.UN-TSX)

You're an income investor with a portfolio of bonds, banks and utilities and you want to enhance your yield a bit. You likely already own the big pipelines, Enbridge Inc. and TransCanada PipeLines Ltd.

Now consider Fort Chicago, an income trust so beaten down that it yields an impressive 14 per cent. Fort Chicago, based in Calgary, owns and operates the Alliance Pipeline, which delivers natural gas from Western Canada to the Chicago area under long-term contract.

It also has power interests and a natural gas liquids plant in Illinois. Units of Fort Chicago units are trading on the Toronto Stock Exchange at about $7. update*On Wednesday Aprill 22, they closed at at $7.11.

"Here's a pipeline, just the most stable thing," Mr. Harris says. "It's the toll booth model. It's not swinging, but it's a great franchise at a fair price."

Fort Chicago was hit hard when financial markets plunged last fall. It hasn't bounced back quite as smartly as its larger, more diversified peers such as Enbridge and TransCanada, Mr. Harris says.

The trust acknowledged the difficult fourth quarter in its most recent financial report, but pointed to its long-term contracts as it argued its units were undervalued. Management forecast distributable cash flow of 96 cents to $1.27 a unit this year with a payout ratio ranging from 79 per cent to 104 per cent - high but still reasonable for a pipeline, Mr. Harris says.

Based on its current price, that points to a yield on 2009 distributions of at least 14 per cent.

The Payoff: Fort Chicago's high yield may be an ideal way to boost your portfolio's overall return at the margins, Mr. Harris suggests.

He cautions against loading up on the units, which are considered riskier than Enbridge or TransCanada because the trust is less diversified. The payoff could prove enduring: Even after it converts to a corporation in 2011, Mr. Harris estimates Fort Chicago will yield in the 8-per-cent range. (The yield will be relatively high because the current price is comparatively low.) The Big Risk: Management say they intend to grow Fort Chicago's asset base. How they do that will be critical, Mr. Harris says. If they expand within their existing lines of business, perhaps in natural gas liquids, they could do well, he says. But there's always the risk that pressure on the company to grow and diversify after 2011 could lead management to venture into new and unfamiliar fields.

Why Listen to Bill Harris? Mr. Harris has been in the investment business for 15 years. His firm's portfolio was down 22 per cent last year, but is up 7.3 per cent year-to-date with an average yield of 4.5 per cent. Mr. Harris says his best calls recently were buying Agnico-Eagle Mines Ltd. at $30 (it's now nearly $56*) and Goldcorp Inc. at $20 (it's now $33*) at the depths of the market crash last October.

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