Two 10 percent-plus picks are worth a look this month: The Conservative Portfolio’s Algonquin Power Income Fund (APF.UN, AGQNF) and Aggressive Portfolio recommendation Penn West Energy Trust (PWT.UN, NYSE: PWE).

Neither has turned in a particularly stellar total return since added to the recommended list. That’s mostly due to bad timing on my part.

Both trusts came on board initially in July 2006, near the peak for the benchmark S&P Toronto Stock Exchange Trust Composite. Given the drop in natural gas prices and the fallout from the Halloween announcement of Canadian tax changes since, their relatively flat showing is actually quite impressive.

Both trusts have also faced some business challenges. Falling natural gas prices and Canadian dollar strength have made integrating last year’s takeover of Petrofund a little slower to add to Penn West’s profitability. Algonquin, meanwhile, was also set back by lower gas prices—which reduced energy rates at its Windsor Locks facility—and the impact of a falling US dollar on its US income. The failure of its proposed merger with Clean Power also hurt, as the latter was ultimately acquired by rival power trust Macquarie Power & Infrastructure (MPT.UN, MCQPF).

Despite the past year’s challenges, however, both trusts have continued to meet the primary criterion for Canadian Edge Portfolio membership: Their underlying businesses are still very strong and continue to grow. That’s the best formula for sustaining their double-digit distributions and ultimately generating powerful, long-term returns for investors.

Algonquin Power’s operations—generating mostly carbon-neutral electric power and running wastewater/drinking water treatment facilities—are by far the more steady. The trust currently has operating interests in 47 hydroelectric plants, two biomass plants, a municipal solid waste facility and three natural-gas fired stations.

It also holds preferred dividend equity stakes in five other biomass and six natural gas plants that produce steady cash flows. And it runs 17 water treatment plants in the US.

On a regional basis, Quebec is still the most-important location, particularly for hydro generation. The trust, however, also has a strong presence in Ontario, as well as New York, New England and the western US. Roughly 60 percent of first quarter 2007 and two-thirds of full-year 2006 revenue came from the US, from a combination of water infrastructure fees and power plant income.

Such broad diversification has many advantages. For one thing, hydro flows are rarely poor in every region of North America at once, so weakness in one place is usually offset by strength in another. And such a huge presence in the US means a hefty percentage of the trust’s income will be sheltered from prospective 2011 taxation in Canada.

Algonquin is also set to be a major beneficiary from carbon regulation because the vast majority of its facilities either emit no carbon dioxide or far less than coal-fired baseload capacity in North America. Management failed to take out fellow trust Clean Power this year. But its unwillingness to get into a bidding war with Macquarie was a sign of discipline that’s critical for any company making so many acquisitions on both sides of the border and is certain to do more deals.

Acquisitions that could potentially overextend the trust are among the risks to watch. Long-term obligations, including debt, are about three times annual cash flow, though only about half of total capital. The payout ratio, meanwhile, has been on the high side in recent quarters, with the distribution exceeding cash flow in the first quarter.

These numbers are certainly manageable, given the security of existing cash flows and likelihood of steady increases going forward. Power output, for example, is locked up under long-term (15 years average), government-favored contracts with very strong customers, including government entities. Reliance on hydro, wind and automatic pass-through of fuel costs at the gas plants minimize vulnerability to volatile energy prices. In fact, the portfolio should become increasingly competitive going forward as the trust improves plant efficiency and coal generation’s price rises with the cost of carbon regulation.

Ironically, the biggest risk in the near-term to the trust’s cash flow is one of its greatest strengths in the long haul: the US asset portfolio. The rising Canadian dollar hurts the cash flows from these operations to the extent currency exposure isn’t hedged.

Thus far, the impact has been offset by growth and hedging. But this will be a key factor to watch in the next few earnings reports, including the results due out in the next couple weeks.

It’s worth noting that management has been diligent about retaining cash reserves in good times and the current distribution rate has held since the beginning of 2001. Before that, Algonquin paid a variable rate on a quarterly basis in line with cash flow swings, dating from its inception in December 1997. That suggests dividend stability is a key priority for management and that the current high level will hold, barring a major setback.

As we saw with Primary Energy’s (PRI.UN, PYGYF) demise earlier this year, poor plant performance is always a risk with power trusts. Unlike Primary, however, Algonquin doesn’t rely on a handful of plants but a very broad-based portfolio, so it can absorb problems at a single project or even several.

And in any case, performance remains strong across the board. Recent share weakness notwithstanding, Algonquin Power Income Fund is a buy up to USD9, either on the Toronto Stock Exchange or using the five-letter US over-the-counter symbol.

Penn West is even easier for Americans to buy, thanks to its New York Stock Exchange listing. Meanwhile, its large size, long-lived reserves, generally stable operating costs and solid balance sheet place it among the highest-quality oil and gas producer trusts.

Last year’s purchase of Petrofund made PennWest the largest conventional oil and gas trust in Canada, with more than 130,000 barrels of oil equivalent in daily output. Nonetheless, growth will remain a primary goal of management to 2011 and beyond—both through acquisitions and its existing property portfolio—as the trust attempts to reach “major” status before it loses its tax advantages.

Management has been clear that it will remain a trust at least through 2010, in order to retain those advantages. After that, it’s keeping its options open, though it’s likely to maintain a dividend-paying model, in large part to better capital access for growth.

Last month, Penn West completed the purchase of C1 Energy, the latest in an ongoing series of small acquisitions designed to build out production in key areas. Given its hefty market capitalization of USD7.43 billion, the trust has substantial ability to issue shares without triggering the growth limits set by the Canadian government.

The most exciting area of potential expansion, however, is on lands the trust already owns, namely the Peace River/Seal oil sands project. Peace started out as a relatively insignificant conventional fossil fuels project. Substantial drilling, however, revealed huge deposits of bitumen—the raw component of oil sand production—that can be tapped into with conventional horizonal drilling.

Most oil sands projects require substantial mining and processing. In contrast, according to Penn West management, Peace’s output can be processed with a pump; the output goes right into the pipeline, is blended with oil and processed. As a result, costs are similar to a conventional oil operation and production can commence immediately.

Management’s current projections call for taking Peace’s output from a current level around 3,500 barrels a day to 20,000 by 2011. That amount is equivalent to more than 15 percent of Penn West’s current output, and it alone goes a long way to offsetting likely declines in the trust’s conventional reserves, even if management makes no further acquisitions.

The trust has also purchased related facilities to get output to market, including a 15 percent interest in a major pipeline, with the goal of ramping up output even further going forward. And it has numerous acres of undeveloped land in the region as well, which it continues to expand on.

Even under the most optimistic projections for Peace, oil sands will remain only a segment of the overall trust’s output. But the tax pools generated from these new reserves will be substantial, allowing Penn West in management’s words to have “up to three years of very low taxes…if we choose to remain a trust” after 2011. That gives the trust a lot of flexibility as it continues to battle for major changes to the Flaherty plan in the meantime.

The easiest way for Penn West to grow dramatically in coming years would be a takeover/merger of another major energy trust, particularly one with a slightly stronger balance sheet, somewhat longer reserve life/lower decline rate and complementary assets. One that comes to mind is ARC Energy (AET.UN, AETUF). Both trusts have major conventional oil and gas reserves in western Canada, and both are developing a revolutionary recovery technique called “CO2 flooding,” which has the potential to massively ramp up recovery and output.

Trying to guess who may merge with who’s, of course, always extremely speculative. Such a deal, however, would only be icing on the cake for Penn West, which has all the strengths to reach far-greater heights on its own.

Until we see a massive recovery in natural gas prices, a further dividend hike is unlikely, particularly given the trust’s expansion plans. But the 12 percent-plus current level is certainly generous enough for holding what’s essentially a vehicle for solid, long-term growth, and turbo-charged results if energy prices rise as I expect them to. Penn West Energy Trust remains a solid buy all the way up to USD38, particularly for those who don’t already own it.