Second quarter numbers are all in for Canadian Edge Portfolio recommendations. Below, I highlight the ups and downs of the 16 trusts and high-yielding corporations that didn’t report in time to meet the deadline for the August issue.

First, however, I have a few general points.

One, as was the case with the 15 trusts whose numbers I picked apart in the August issue, all of our holdings generated sufficient cash flows/earnings to cover their dividends handily in the second quarter. This includes the energy producer trusts, which were helped by the boost in oil prices but hurt more by the continued slide in natural gas.

Two, most holdings’ numbers weren’t as strong as those in the second quarter of 2008. Most, however, did post an improvement from the first quarter of 2009.

That’s a pretty good sign that we’ve seen the business lows for this cycle, a viewpoint now espoused by no less an authority than the Bank of Canada, which recently stated the country’s recession “is ending.”

Three, none of our picks reported any difficulty raising new capital with either new borrowing or equity issuance. Several managed to reduce their debt loads by considerable amounts as well, and others announced continued asset expansion, including acquisitions.

That’s the best possible sign that our picks are managing this downturn, which in turn is a great indication of both dividend safety and the ability to ride the economic recovery that may already be unfolding in Canada.

If there was bad news from the first batch of earnings reported in the August issue, it was that hold-rated picks–Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) and Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–didn’t post strong enough numbers to earn upgrades.

Both certainly still have what it takes to stage breakout share price recoveries, if they’re able to overcome current challenges. But we’re still waiting for Ontario regulators to rule in a make-or-break case regarding Consumers’ sub-metering operations in that province.

Yellow, meanwhile, appears to have stabilized its troubled Trader publications. Its directory business remains strong and is expanding rapidly on the Internet as well. But until there’s a real upturn in cash flow, it’s vulnerable to a continued recession.

I’m perfectly content to let our bets ride on both of these, despite their losses over the past year. And again, both can certainly make it back, just as other CE recommendations have this year. But for now I don’t advise making new investments in them.

The second batch of earnings also showed some weak spots, though none grave enough to remove any recommendation from my buy list. As expected, the worst damage was in the energy sector, where natural gas prices have been under USD4 per million British thermal units (MMBtu) for nearly six months. That’s the longest stretch at such a depressed level since the period from mid-2001 through late 2002, not coincidentally the last time the US economy was mired in a recession that crimped demand for energy.

Natural gas this time around is suffering from the steepest drop in demand for electricity since the 1950s, triggered mainly by a nosedive in industrial demand. Judging from electric utility earnings comparisons between the first and second quarter of 2009, industrial demand appears to be stabilizing now. But inventories of natural gas in North America remain very high, as weather has been relatively mild this summer and gas production therefore hasn’t to date fallen as fast as demand.

Of course, the price of gas remains much higher elsewhere in the world. That’s a major reason why Vermilion Energy Trust (TSX: VET-U, OTC: VETMF), a buy up to USD30, was able to post second quarter funds from operations of CAD1.10 per share versus CAD0.88 a year ago. And it’s why major Canadian players are now pooling efforts to build North America’s first liquid natural gas facility for export.

Sooner or later, liquefied natural gas (LNG) exports, falling production and rebounding US demand will push North American natural gas prices higher. Until then, however, most producers are hunkering down for a prolonged period of weak prices, and so should we.

The good news is second quarter numbers from our picks in both the production and energy services sectors do show that they’re managing their way through this historic downturn. And again, that’s the key to their survival and ability to pay dividends now, as well as their ability to ride the recovery to come.

Portfolio Action

The bottom line is there are no changes to the Canadian Edge Portfolio based on second quarter numbers. Of course, every new reporting period brings with it a new opportunity for reflection and the potential for action. But for now, we’re sticking with all of our positions.

Below are some brief notes on each of the 16 trusts and high-yielding corporations to report. I’ll have a full review on each in the September issue, which will hit the web September 4.

On a final note, I’ve received several queries about non-Portfolio recommendation Student Transportation of America (TSX: STB, OTC: SUNDF). To clarify, Student Transportation hasn’t been de-listed; STB is the new symbol–it no longer as the “-U” attached because the bond portion of the security has been separated from the common stock.

This, according to a July 6 press release, is the “final step in our transition from the IPS structure which began in 2004 to a more typical common share company.” Those interested in more detail can find plenty of information on the company’s website, including an extensive rundown in the company’s fiscal third quarter Management Discussion & Analysis.

I continue to rate Student Transportation of America common a buy in How They Rate. I also advise selling the bond portion, which is now listed separately.

Ag Growth International (TSX: AFN, OTC: AGGZF) turned in another solid round of numbers in the second quarter, as a 19 percent jump in revenue combined with cost controls triggered a 61 percent surge in cash flow and a 121 percent upward explosion in earnings per share.

The market for the company’s portable grain handling equipment remained robust and, better, is expected to stay so for the rest of the year thanks to the highest corn acreage planted in US history.

Ag Growth has now converted to a corporation, a move it made without cutting its distribution. The shares have since given us a windfall gain, as much in response to the elimination of 2011 concerns as strong results. But Ag Growth International still has plenty of upside left and remains a solid buy up to USD30.

ARC Energy Trust (TSX: AET-U, OTC: AETUF), like most energy trusts, benefited from the rebound in oil prices during the second quarter 2009 and suffered from the continued plunge in natural gas prices.

More important, however, it held production steady, kept debt and costs under control and maintained its capital spending program, now being aided by a long-awaited drop in drilling costs. That’s a good sign for ARC’s long-term health and the near-term safety of its dividend.

Still a Bay Street favorite, ARC Energy Trust remains a buy up to USD17 for those yet to get in who want a relatively low-risk bet on a rebound in natural gas. Note we’re still waiting on the trust to announce a clear post-2011 strategy, but it continues to state it will be a “dividend paying entity” after converting to a corporation.

Artis REIT’s (TSX: AX-U, OTC: ARESF) focus on the Canadian energy patch should have made it vulnerable to the region’s downturn in the face of lower energy prices. And in fact, we have seen several rival REITs buckle this year.

Artis, however, actually posted solid growth in both revenue and cash flow, as it raised occupancy to 96.2 percent and boosted rents on expiring leases by 8.1 percent.

As I’ve pointed out, Artis has had two advantages coming into this economic downturn. One is a portfolio of properties with rents mostly well below market. And that continues to be true despite weak market conditions in Alberta especially. The other is management’s focus on controlling costs and debt when times were good. Both continue to serve Artis well.

The payout ratio remains just 68 percent, and Artis REIT is still a buy up to USD10 for those who don’t already own it. Note as a REIT, Artis is exempt from 2011 taxation.

Atlantic Power Corp’s (TSX: ATP-U, OTC: ATPWF) numbers reflected the value of management’s ability and focus on eliminating as many uncontrollable influences on profits as possible.

The company saw cash flows fall at some projects and rise at others, but the bottom line was an overall second quarter payout ratio of just 68 percent and 71 percent for the first six months of 2009. Those are the lowest rates in company history and back management’s affirmation of its monthly distribution at least through 2015.

The company also announced a favorable rate settlement for its Path 15 power line in California, successful asset dispositions and additions and low-cost hedging of natural gas that will further lock in hefty cash flows going forward.

The shares have surged but still yield more than 12 percent. Buy Atlantic Power Corp up to USD10. Note Atlantic Power will face no new taxes in 2011, as it’s already organized as a corporation.

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) turned in strong second quarter 2009 numbers, as earnings per unit hit CAD1.13, up from CAD0.97 a year ago. The payout ratio sank to just 40 percent and, though Bird hasn’t articulated its 2011 plans, that’s a good sign the dividend could easily hold after taxes should management go that route.

Management sounded a cautionary note with its numbers, stating that they were based on robust project backlog and that Bird is depending on gaining new business in order to repeat them. Several days earlier, however, it took a giant step in that direction by adding CAD170 million in new backlog, mostly from government contracts. No-debt Bird Construction Income Fund is a buy up to USD30.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) has been a clear target of investor skepticism about the Canadian residential rental market this year. Happily, it answered its critics forcefully with strong second quarter earnings, as a conservative financial and operating focus coupled with a diversified base of properties more than offset weakness in certain markets such as Alberta.

Distributable income per share ticked up 4.2 percent, as occupancy remained steady at 97.2 percent and expenses were reduced to barely 43 percent of revenue. The payout ratio of just 78 percent is a clear sign the dividend of around 8 percent is safe. Buy Canadian Apartment Properties REIT up to USD15 if you haven’t yet.

CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) posted another steady quarter as demand for its services remained recession resistant both in Canada and in the US, where it continues to absorb a recent acquisition of testing centers.

Revenue rose 12.9 percent in the quarter and the payout ratio was steady at 90 percent. There’s still some uncertainty about what CML will do in 2011 when it faces new taxation. To date, management’s only statement on the issue has been to affirm it doesn’t intend to convert before it has to.

The good news is the shares are cheap and insiders and Bay Street are bullish. Buy CML Healthcare Income Fund if you haven’t yet up to USD13.

Enerplus Resources (TSX: ERF-U, NYSE: ERF) is maintaining a conservative focus as it deals with uncertain and volatile energy prices. Output fell 6 percent in the second quarter, as it focused on more profitable operations and devoted its cash flow to developing its most promising properties, including in the Bakken region.

Debt remains among the lowest in the industry at just 0.7 times annualized cash flow. The trust cut operating costs and the payout ratio–despite an average realized price of just USD3.49 per MMBtu for its natural gas–came in at just 43 percent.

Management has affirmed its intention to be a dividend-paying corporation in 2011, though what it can pay will depend on energy prices. Enerplus Resources is a strong buy up to USD25 for conservative investors who want to bet on energy.

Innergex Power Income Fund (TSX: IEF-U, OTC: INGRF) turned in another solid second quarter, as new additions to its hydro and wind power fleet offset less favorable conditions for both sources of energy.

The payout ratio came down to 87 percent, the lowest thus far for the trust in the second quarter. That’s a good sign of a high dividend in 2011 and beyond, though thus far management hasn’t given us anything definitive to go on regarding its future organization. Yielding around double-digits, Innergex Power Income Fund is a buy up to USD12.

Newalta’s (TSX: NAL, OTC: NWLTF) environmental cleanup business has suffered not only from the continued slump in Canada’s energy patch but also from the slide in the country’s eastern industrial region.

Management has dealt with the damage in two major ways, by keeping its focus on winning market share and by conserving cash flows. The latter led to dividend cuts over the past year. The good news is the current rate looks solid at a payout ratio of just 16 percent.

Meanwhile, there are few companies–Newalta is now a corporation–that offer anything close to the upside this one does when the Canadian economy bounces back. That, in effect, is why I continue to hold Newalta units in the Portfolio, which have bounced back strongly from their March lows but remain well below trading levels of a couple years ago. Newalta is a buy up to USD5 for patient speculators.

Northern Property REIT (TSX: NPR-U, OTC: NPRUF) recorded an 8.1 percent jump in its distributable cash flow per share, driving its payout ratio down to just 66 percent for the quarter.

That’s particularly astounding, considering the hit Canada’s energy and natural resource patch took over the past 12 months. And it’s a testament to management’s conservative focus, controlling debt and strategy of signing on only the most creditworthy of tenants.

As a REIT, there will be no additional taxes in 2011 and beyond. And as a strong one, investors can count on the payout to hold, even if the recession lasts a bit longer. Buy Northern Property REIT up to USD20.

Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) produces only natural gas, so one could have expected its cash flow to plunge in the second quarter putting its dividend at risk.

As it turned out, however, management’s strategy of essentially hedging out commodity price risk delivered a solid increase in cash flow, while the decision to monetize certain hedge positions by cashing them out allowed it to continue cutting debt.

To be sure, Paramount’s fortunes ultimately do rise and fall with natural gas. But management is proving its ability to weather the current nightmare environment while staying positioned for a gas rebound. Though not for the faint of heart, Paramount Energy Trust is a great speculative gas bet up to USD5.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) has faced a legion of skeptics since management was forced earlier this year to backtrack on a pledge not to cut its distribution unless oil prices plunged.

Second quarter results aren’t likely to satisfy everyone. But with production topping expectations and debt dramatically reduced, things are certainly moving in a positive direction again. Some have speculated on a dividend increase later this year.

In my view, that could happen if oil (58 percent of output) remains strong and gas firms. That decision, however, is likely to depend heavily on what Penn West management decides to do to prepare for 2011. Happily, this is a deep value situation no matter what they do. Penn West Energy Trust is a buy up to USD15.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) reduced second quarter interest expense per barrel of oil equivalent produced by 30 percent from year-earlier levels. That didn’t prevent cash flow from sliding in the face of sinking natural gas prices (84 percent of output). But coupled with proven reserve life of 17 years and the industry’s lowest production costs by far, it points to a company able to withstand the crisis in the energy patch far better than almost any rival.

The payout ratio has risen to 86 percent, a level that indicates some risk from a further drop in gas prices as well as 2011 taxation, which management has thus far not addressed definitively.

Peyto, however, continues to trade at a fraction of the value of its assets in the ground and that’s the bottom line on value for any energy trust. Peyto Energy is the lowest-risk trust play on natural gas and a buy up to USD12 for those who don’t already own it.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) continues to see the benefits of focusing on midstream energy assets as well as oil and gas production.

Midstream contributed almost three-quarters of second quarter 2009 income, delivering much-needed cash flow as the production arm continued to be hurt by low oil and gas prices.

Along with its earnings numbers, Provident also announced the results of its “strategic review” and its intention to remain a “cash distributing energy enterprise.”

The high payout ratio of 97 percent in the second quarter is far more secure than it looks, given that it’s backed by much steadier midstream operations. The trust trades at a steep discount to asset value, and management is sticking with the payout for now, based on its forecast for the rest of the year.

On that basis, I’m sticking with Provident Energy Trust as a buy up to USD6. But no one should expect a quick recovery, certainly not before we see higher oil and gas prices.

Trinidad Drilling (TSX: TDG, OTC: TDGCF) has been able to weather the depression in North American energy much better than most to date. That’s because it’s traditionally focused on long-term contracts, deep drilling rigs and markets outside of Canada like the US and Mexico.

It’s also held debt at controlled levels and, in retrospect, executed a timely conversion to a corporation, which has eased its ability to raise capital as well as shepherd cash flow amid horrific industry conditions.

As second quarter 2009 showed, not even Trinidad is immune from these conditions, as rig rates and capacity rates–though still well above industry averages–nonetheless dropped sharply. The good news is the company still covered its dividends with earnings in the quarter (payout ratio 56 percent after one-time items) and management pointed to signs of stabilization in its market.

As anyone who’s owned shares in the bombed-out energy services industry knows, these haven’t been easy stocks to hold over the past year. Trinidad is by far the worst performer in the Canadian Edge Portfolio, despite a comeback from its March lows. But Trinidad is proving itself a survivor in this market, and that’s a sure ticket to a dramatic recovery when conditions finally do improve.

Again, it’s not for the conservative, and that’s why it’s an Aggressive Holding. But for patient investors who can handle the ups and downs, Trinidad Drilling remains a buy up to USD5.