The silver lining: The long-term outlook for the strong businesses in the CE Portfolio continues to improve, particularly as it concerns prospective 2011 trust taxation.

This week, Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF) became the latest Portfolio holding to announce a conversion to a corporation, without a corresponding reduction to its distribution. The move is slated for late 2010, following a “strategic repositioning” of Great Lakes Hydro that will take place in the second half of 2009.

Last month, a unit of Great Lakes Hydro’s parent and 50.01 percent owner Brookfield Asset Management (TSX: BAM.A, NYSE: BAM)–Brookfield Renewable Power Inc–announced the sale of its Great Lakes area energy distribution system. This week, it essentially “sold” all of its renewable power generation assets in Canada to Great Lakes Hydro, a portfolio consisting of 15 hydro plants with a total capacity of 387 megawatts (MW) and a wind farm now under construction.

The deal will increase Great Lakes Hydro’s portfolio to some 1,700 MW of carbon-neutral power generating capacity. All of the acquired capacity is fully contracted under long-term power sales agreements, two of which are slated to be raised upon the completion of the transaction. That should provide substantial cash for further expansion in the rapidly growing market for green energy, including financing the estimated CAD147 million cost of the acquired wind power project.

As part of the transaction, parent Brookfield Asset Management will retain its 50.01 percent controlling interest by acquiring another 25,562,500 units through its Brookfield Renewable Power Inc unit. Great Lakes Hydro will also change its name to Brookfield Renewable Power Fund, with a new symbol to be announced. Note that name changes are not taxable events for investors.

The deal will add CAD100 million to Great Lakes Hydro’s annual distributable cash flow. As reported in this week’s Maple Leaf Memo, the CAD945 million price tag will be financed by a combination of CAD365 million in cash–raised by a bought-deal offering and private placement of units–with the balance from the shares and CAD200 million in debt to be purchased by parent Brookfield Asset Management.

The result is there’s little real cash to be exchanged here and no negative impact on Great Lakes Hydro’s financial strength, a fact underscored by the immediate affirmation of the trust’s credit rating by both Standard & Poor’s and Dominion Bond Rating Service.

The transaction must be approved by a majority of Great Lakes Hydro’s unitholders, other than parent Brookfield Asset Management, at a special meeting to be held August 19. The selling price of the assets is right in the middle of the fair value determined by PricewatershouseCoopers LLP on July 6, making it likely to pass muster.

This deal will provide the most obvious and immediate benefit to parent and majority owner Brookfield Asset Management by consolidating renewable energy operations in Canada into an entity that can both use scale to grow faster and kick more cash flow upstairs.

In this case, however, Brookfield Asset Management’s interests are perfectly aligned with ours and those of other ordinary shareholders. Simply, management is motivated to pay us big dividends, a fact it has now confirmed with its decision to convert to a corporation without cutting its payout.

Over the next decade, demand for renewable energy in North America is certain to outstrip producers’ ability to provide it, as government mandates kick in. That spells a major opportunity for Great Lakes Hydro/Brookfield Renewable Power to expand its asset base profitably and increase our distributions.

Yielding over 8 percent already, Great Lakes Hydro Income Fund is a solid buy up to USD16.

In addition, this transaction bodes well for Brookfield Asset Management’s timber unit Acadian Timber Income Fund (TSX: ADN, OTC: ATBUF), most recently recommended in CE’s July Feature article. Brookfield Asset Management and its affiliates currently own 45.3 percent of the trust and are therefore also motivated to maximize cash flows to unitholders, as management was with Great Lakes Hydro.

Great Lakes Hydro’s cut-less conversion is also a very good sign for owners of any other well-run trust, and particularly those that populate the Conservative Holdings. Together with the five trusts I mentioned in July’s In Brief, we’ve now seen six no-cut conversions. And the market reaction has been infinitely more favorable than it’s been to conversions involving distribution cuts.

That may seem like common sense, as nobody likes a dividend cut. But this is the kind of hard evidence that turns the heads of management, including the notoriously conservative executives who run today’s top-performing Canadian trusts.

As I’ve said many times, the ultimate decision on trusts’ post 2011 tax dividends is entirely up to their management teams. There’s absolutely no additional tax on individuals, which for US investors remains a withholding rate of 15 percent.

But we have no way of knowing for certain what management will do either. And as Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) showed earlier this year, even management that pledges to maintain current distributions in 2011 can have its hand forced by weak economic conditions.

Until a trust actually makes its move, there will be uncertainty as we get closer to January 1, 2011. And because investors abhor uncertainty, unit prices will be far less than what the underlying businesses are worth.

The good news is the trust universe now has half a dozen very positive examples to follow of no-cut conversions, with every indication of a lot more going forward. And if trusts don’t cut, that means no 2011 dividend shock, as has been priced in since Halloween 2006.

This remains a fear-charged market environment. As long as the global economy stays this weak, the gains we’ve seen in Canada since March 9 are at risk of unwinding further. And that’s sure to overshadow even the best of news on the dividend front.

Ultimately, however, the fading of 2011 trust tax fears is going to have a powerfully bullish impact, just as the Halloween 2006 tax announcement had an extremely negative impact. And that’s very positive news indeed for these uncertain times.

Stick with all of our recommended Canadian Edge Portfolio trusts.