It’s a topic we’ve touched on in this space on previous occasions, and recent developments suggest it’s not going away: The melting Arctic ice cap threatens to unleash global geopolitical conflicts over resources, boundaries, self-government, rights of passage by sea and air, and naval and military presences.

An official government document made public in March suggested Russia would deploy units from the army and the FSB (Federal Security Service) in the Arctic. The paper declared Russia’s intent to develop Arctic forces to protect a continental shelf it said would become the nation’s “leading resource base” by 2020.

The document said Russian planned to put troops in its Arctic zone “capable of ensuring military security,” including the “creation of (an) actively functioning system of the Federal Security Service coastal guard.”

Russian Security Council Secretary Nikolai Patrushev followed up with an editorial in the March 30 of issue state-sponsored newspaper Rossiiskaya Gazeta ridiculing the idea that the Arctic is a global resource.

“The United States of America, Norway, Denmark and Canada are conducting a united and coordinated policy of barring Russia from the riches of the shelf. It is quite obvious that much of this doesn’t coincide with economic, geopolitical and defense interests of Russia, and constitutes a systemic threat to its national security.”

Other countries with territorial claims–the US, Canada, Denmark, Finland, Iceland, Norway and Sweden–were more than a little alarmed by this aggressive tone. Canadian Foreign Minister Lawrence Cannon responded quickly, saying that Canada “will not be bullied” by Russia.

Russian Foreign Minister Sergei Lavrov subsequently backed off the document and Mr. Patrushev’s commentary. Following the close of the Arctic Council meeting in late April, Mr. Lavrov explained that Russian had no intention of boosting its military presence in the Arctic, and that the moves his government was taking were based on strengthening the potential of the coast guard. These moves are necessary because the melting ice cap is leading to more human activity in the region. He also noted that existing laws could resolve disputes over access to resources.

And late last month, Arctic Front: Defending Canada in the Far North was awarded the Donner Prize as Canada’s best public policy book. A central criticism of Far North–that Canada has neglected economic and strategic advantages–seems flawed because the ability to exploit the resources was impaired by ice, and thus the geopolitical significance of the nearby terra firma wasn’t on any serious person’s radar.

That doesn’t mean, however, that the authors’ prescription–aggressive action to establish sovereignty and protect claims to resources–isn’t valid. And it appears Canada and the non-Russian Arctic nations are now rising to the contest.

Countries are beginning to use military muscle and diplomatic hardball to carve out their fair share of potential resources made accessible only because polar ice is melting. Had Canadians aggressively settled the territory that inspires their title the offshore rights would be less ambiguous. But aggressive public funding for remote communities isn’t a pillar on which to build a headline-grabbing political career. Any policymaker who proposed the kind of public investment required to make lively such an adventure would have either been a representative of Nunavut, for example, or had zero ambition to be prime minister.

But global warming continues to melt the ice in the Northwest Passage and the competition for northern resources is heating up. Canada, the authors warn, may be forced to defend this area from a position of grave weakness.

On the Rails

More pipeline capacity is needed to transport oil sands production, a growing source of oil supply to the US and still an intriguing prospect for emerging Asian economies such as China, but construction is expensive and time-consuming. Into that perceived breach has stepped Canadian National Railway (TSX: CNR, NYSE: CNI).

Canadian National’s (CN) proposal to ship oil sands production south to the US and west to British Columbia’s ports hasn’t generated much buzz in an environment where most observers have been focusing on the number of project cancellations in the energy space during the last six months.

Nor is it a particularly novel approach: During Canada’s first drilling rush after the 1947 Leduc discovery, before the first long-distance pipeline was built three years later, trains carried the black gold from Edmonton to bigger markets for processing.

But it does hold promise, as far as potentially moving oil sands product more economically than can be done via pipeline and to the extent that product can then be moved to Asian markets.

CN opened discussions with Alberta’s provincial government about its “Pipeline on Rails” six months ago. CN management argues that shipping by rail can be done faster and cheaper than via pipeline–and the tracks are already in place, obviating the need for a costly pipeline buildouts.

Though his government hasn’t conducted its own study, Alberta Energy Minister Mel Knight said the proposal is feasible. Mr. Knight said the government and CN had “very good meetings,” and said the Pipeline on Rails is “more than economical on a comparison to pipelines.”

The initiative has also drawn praise from energy executives. “This is a great idea,” said Connacher Oil & Gas (TSX: CLL, OTC: CLLZF) Vice President Cameron Todd. “They’re a breath of fresh air. These [oil sands plants and railways] are very complementary technologies.”

CN’s economic feasibility study concludes that Canadian oil producers and their customers are paying CAD17.95 per barrel to ship oil from Alberta to US gulf coast refineries. Freight rates covering track and rolling stock expenses are forecast to be competitive with tolls for shipments on new pipelines from Fort McMurray to the Gulf Coast.

Any pipeline company would, of course, take issue with CN’s assertions. But until pipeline capacity is, in fact, expanded, CN management may be able to compete with existing pipelines on price while transporting up to 4 million barrels of oil a day. Affording cheaper access to the Gulf Coast as well as access to Canada’s west coast–for eventual shipment to California refineries or to Asia–means smaller producers will enjoy greater flexibility.

The estimated cost of building lines to ship 4 million barrels a day from the oil sands to the Gulf Coast is USD24.7 billion. A proposed increase in capacity to the west coast adding 600,000 barrels a day is another CAD4 billion. Such efforts would take years to complete.

In 2004, Enbridge (TSX: ENB, NYSE: ENB) inked an agreement with PetroChina (NYSE: PTR) to build a 400,000-barrels-per-day pipeline from Edmonton to the west coast port of Kitimat, British Columbia, to export synthetic crude from the oil sands to China and elsewhere in the Pacific and a 150-million-barrel-per-day pipeline running the other way to import condensate to dilute the bitumen so it will flow. The estimated cost: USDD2.5 billion. That project is on hold, a consequence of the economic downturn.

The CN study suggests rail is cheaper and faster–dramatically so if it’s diverted to Canada’s west coast for shipment to Asian markets. CN’s rail proposal eliminates the significant capital and financing costs involved with increasing pipeline capacity.

Costs of restoring CN’s network to a condition that would support the Pipeline on Rails are estimated in the millions, not billions, of dollars. CN is offering deliveries via the old railway branch line between Edmonton and Fort McMurray, which it recently bought from short-haul specialists Athabasca Northern Railway and Lakeland & Waterways Railway. The Pipeline on Rails is essentially new work on old track; with about CAD135 million in improvements to strengthen the line and its safety systems, heavy trains carrying diluted bitumen or synthetic crude will be able to average 40 kilometers an hour between Fort McMurray and Edmonton. The track could eventually be extended into the bitumen mining district north of Fort McMurray if industry demand merits such a step.By the end of the year, CN hopes to be shipping 10,000 barrels a day on the line between Edmonton and Fort McMurray. CN believes it can ramp up that rate to 300,000 to 400,000 barrels a day, with a medium-term goal of up to a million barrels a day on the existing network. Eventually, CN hopes to move 4 million barrels.

The Pipeline on Rails will deliver oil sands production through the use of insulated and heatable railcars or by reducing its viscosity by mixing it with condensates or diluents. Scaling up to 4 million barrels is simply a matter of adding cars; current rail capacity is sufficient to handle such volumes.

Alberta and Saskatchewan now depend on the US as their export market. Efficient rail transport could provide immediate cash flow to producers that would otherwise have to wait for the completion of incredibly costly upgraders and/or pipelines–or simply shut in their wells.

Access to the west coast also means access to world markets; a 2004 National Energy Board report on the challenges and opportunities in the oil sands said the US historically has absorbed any additional production of crude oil from Canada. But it concluded that “additional markets will be required to keep pace with oil sands expansion.”

The urgency to lock up and develop access to Canada’s oil sands has abated amid this recession. Output forecasts have been revised downward, and projects have been shut in, as is the case with all types of petroleum generation in recent months.

But the number “174 billion” isn’t going away. That’s the estimated number of barrels resting in the oil sands region, which makes Canada home to the second-largest known reserves on the planet, behind Saudi Arabia.

But the purchase of an additional 10 percent interest in the proposed Northern Lights oil sands project by Sinopec (NYSE: SHI) suggests renewed interest by the Chinese. Total (NYSE: TOT) sold the stake for an undisclosed amount; as a result of the transaction, Total and Sinopec will each hold 50 percent of Northern Lights, a proposed mining project in northern Alberta that was once expected to cost CAD10.7 billion for a mine and upgrader. The Chinese could make further moves in the oil sands because they believe oil prices will rebound, while the cost of investing has declined from two or three years ago, when the sector was booming.

China doesn’t have much refining capacity for the heavy oil such as that produced from the oil sands, but has significant plans to build new refineries. Before it starts construction, it wants to know what the crude is going to look like and how its going to get it home.

This is the second time Total has sold a piece of its oil sands holdings to an Asian firm. In November 2007, Total sold a 10 percent stake in its Joslyn oil sands project to Japan’s INPEX Corp (Tokyo: 1605, OTC: IPXHF).

Whether CN’s Pipeline on Rails sparks a new round of large-scale investment in the oil sands by Chinese, Japanese, Indian and other oil-starved countries as well as oil companies is an open question. It certainly changes the decision-making process, however, because it could have a significant impact on reducing total costs.

And it could help Canadian National replace some of the freight it’s lost due to the economic downturn.

Speaking Engagements

Eight score and one year ago, with the onset of the California Gold Rush, San Francisco earned a reputation as a prospector’s town. It’s time again to seek paths to prosperity–and to enjoy one of the most beautiful natural settings in the US, if not the world.

Venture west for the San Francisco Money Show Aug. 21-23, 2009, at the The San Francisco Marriott and discover how Roger Conrad, Elliott Gue and GS Early can help you profit in these adventurous times.

Roger will discuss utilities, Canadian income and royalty trusts as well as his new service focused on exploiting the greatest spending boom in history, New World 3.0.

Elliott will detail the new direction for Personal Finance and provide his forecast on energy markets for 2009.

GS, a constant at PF for two decades, will be there to speak on emerging tech, nanotech and defense tech.

Click here or call 800-970-4355 and refer to priority code 014310 to register as a guest of MLM.

The Roundup

The majority of Canadian Edge Portfolio holdings have reported first quarter results, and the numbers have been largely positive, particularly in light of the troubled global economy.

There are signs emerging, however, that the worst is over. What’s encouraging from our perspective is that our slate of Canadian trusts and high-yielding corporations has managed to survive the downturn and position for solid growth as the world returns to more normal levels of demand.

We’ll provide updates on the results for remaining holdings here and via Flash Alerts.

Conservative Holdings

AltaGas Income Trust’s (TSX: ALA-U, OTC: ATGFF) funds from operations for the first quarter fell from CAD0.87 a year earlier to CAD0.75 but still covered the distribution by a comfortable margin. The shortfall was mainly due to share issues used to finance construction and acquisition of new fee-generating assets, and therefore should be reversed in coming quarters.

Earnings also beat Bay Street estimates handily, despite slower throughput in the gas area of the business and lower spot market prices for power produced. The trust also earned a credit rating boost from S&P to BBB+. Meanwhile, debt to capitalization fell to just 33.6 percent as of March 31 from 37.8 percent in December and 45.1 percent a year ago, thanks to a CAD41.8 million reduction in debt. That’s extraordinary for a company still investing heavily in new assets and a testament to the business’ overall strength.

Looking ahead, the trust has several “carbon neutral” power projects in the works and is expanding its ethane and gas liquids recovery infrastructure at its Harmattan complex. Management has hedged out most commodity price risk for both its gas and power businesses. Coupled with strong liquidity, that makes profits predictable even if the economy does remain in the doldrums.

Still yielding well over 13 percent, AltaGas Income Trust is a strong buy up to USD20 for superior long-term growth and income.

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) had another solid quarter, as growth of Internet and other advanced services again outpaced the steady contraction of its traditional local and long distance phone operation. Distributable cash flow again covered distributions handily with a payout ratio of 83 percent, even after a 13 percent increase in capital spending to upgrade the network for faster services. The trust also completed the sale of its Defense oriented unit, focusing operations and boosting the balance sheet with proceeds of CAD16 million now, to be followed by CAD8.5 million later in the year.

The company’s “reset” of its cost structure is also paying benefits, resulting in rising margins during the quarter even as overall revenue slipped 1.2 percent. Internet revenue grew 10.8 percent on 8.6 percent customer growth and a 5.4 percent increase in revenue per user, as the trust’s data business continued to grow.

Coupled with no real debt due until 2011, this is the very picture of a healthy business that’s weathering the toughest market in generations. Bell Aliant Regional Communications Income Fund remains a buy up to USD25.

CML Healthcare Income Fund (TSX: CLC-U, OTC: CMLIF) reported first quarter revenue growth of 38.6 percent, fueling double-digit cash flow growth and driving its payout ratio down to 84.6 percent.

The keys were the trust’s US expansion, steady operations and rate increases at the Canadian operations, and cost controls. These are trends that should continue to show up on the bottom line for the rest of the year, even as the trust boosts efficiency by digitizing its information network.

A long-time player in Canada’s national medical industry, CML is in prime position to profit richly from President Obama’s moves to increase the government role in the US. And it has the financial power to make that happen as opportunities arise. Buy CML Healthcare Income Fund–still the unanimous buy choice of all four analysts who follow it–up to USD13.

Colabor Income Fund (TSX: CLB-U, OTC: COLAF), a new addition to the Conservative Holdings, reported solid first quarter earnings. Sales rose 42.7 percent over 2008 levels, triggering a 44.2 percent jump in cash flow. In addition, margins rose from 2.97 percent to 3.01 percent, demonstrating management is absorbing added scale well in this historically low margin business.

Distributable cash per unit after income taxes–the bottom line for every trust–rose 17.2 percent. That added up to a first quarter payout ratio of 87.8 percent, down from 98 percent a year ago. First quarter payout ratios are traditionally higher than those at other times of the year due to seasonal factors.

Total debt to annualized cash flow came in at 1.66-to-1, barely half the 3-to-1 ratio prescribed in various debt covenants. Cash flow to interest expense, meanwhile, as 5.71-to-1, versus a prescribed minimum of 3.5-to-1.

As of the end of the first quarter, some CAD61 million of the CAD100 primarily credit line was outstanding. This amount won’t be due or up for renegotiated terms until 2011.

Colabor today, alone of all trusts, is being assessed income taxes–but it’s also much larger and more profitable than ever. Thanks to its structure and the unique nature of its business, the company had only CAD90 million in current income taxes for the first quarter, an effective rate less than 1.5 percent of its earnings before amortization and income taxes. And being freed of share issue limitations has allowed it to continue adding scale through acquisitions.

Management stated that “cash flows from operating activities and the funds from operating credits are sufficient to support planned capital expenditures, working capital requirements, monthly cash distributions of CAD.0897 per unit and current income taxes and will comply with the banking syndicate’s ratio requirements.”

This assertion is certainly borne out in the first quarter numbers, and it’s a powerful endorsement of the trust’s 11 percent-plus yield. Colabor Income Fund is a buy up to USD10.

Innergex Power Income Fund (TSX: IEF-U, INRGF) turned in a predictably solid quarter. Despite generally erratic hydro- and wind-power conditions, the trust managed a boost in output and cash flow, bringing its payout ratio down under 99 percent from nearly 130 percent in the year ago quarter. First quarter is typically a period of seasonal weakness for most power trusts.

Looking ahead, the wind and hydro focused power producer looks well set to profit richly from the growing value of “carbon neutral” power. The healthy balance sheet allows room for growth, as does the generally favorable opinion of Bay Street on the trust, which now derives 27 percent of energy from the wind. Management has maintained it has the financial wherewithal to make more acquisitions and development, and I expect to see more in the months ahead.

Like all power trusts, Innergex can grow but is most valuable as a reliable dividend payer, in the case at a monthly rate of more than 10 percent a year. It’s yet to say where it stands on 2011 taxation. But given the built-in tax advantages of other power trusts, I expect it to continue paying a robust dividend reliably. Buy Innergex Power Income Fund up to USD12.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) has made a habit of reporting blockbuster results in tough times for the energy industry, and the first quarter 2009 was certainly no exception. The Foothills region of Alberta, where the trust’s assets are concentrated, remained vibrant. And management controlled commodity and financial risk, producing a near triple in cash flow from year-earlier levels.

The quarter’s distributable cash flow rose 183 percent to CAD1.87 per share. That level actually exceeded the trust’s annual distribution rate, as the first quarter payout ratio sank to just 24 percent. Natural gas liquids infrastructure cash flow rose 7 percent on asset additions, while marketing income surged 26 percent on improved asset optimization. Even gathering and processing income rose, as processing throughput actually rose despite weak spreads and slackened activity.

Long-term debt was slashed by nearly 30 percent as the trust successfully refinanced some and paid off more. Looking ahead, management points to the rollback of Alberta’s “Our Fair Share” initiative as a growing incentive for drilling in the high potential areas it serves. The trust has had to adjust some of its project spending in recent months, as activity in some areas has slowed, for example the deferral of the planned expansion of a gas plant in British Columbia.

Nonetheless, as the largest processor of gas in Alberta and with access and ability to process every variety of the fuel, it’s been able to consistently find other areas to invest and keep growth on track.

Unlike most trusts, Keyera has continued to increase its distribution since the Halloween 2006 announcement of the trust tax. That, plus the steady business, low debt and low payout ratio, augurs well for the dividend of nearly 11 percent, both in 2011 and well beyond. Buy Keyera Facilities Income Fund up to USD20 if you haven’t already.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) will maintain its distribution at an annual rate of CAD1.05 per share according to management’s statement in its first quarter earnings release.

Actual results were trimmed by a 7.8 percent drop in revenue due to lower availability rates at the hydro, wind, biomass and natural gas power plants that cut output by 4.8 percent. The hydro and wind plants were affected primarily by seasonal and weather factors, while the gas and biomass plants were taken offline at a higher rate for maintenance. Lower output was partly offset by higher rates and a payment from the Ontario Electricity Financial Corp.

Distributable cash flow for the quarter slipped to CAD0.30 per unit from CAD0.33 a year earlier. That was still enough to cover the payout by a comfortable margin, with a ratio of 88 percent. But it was lower coverage than last year’s 80 percent. The investment in Leisureworld produced a 15.3 percent boost in revenue, on higher rents and stable occupancy, providing a solid cushion to cash flow.

On the financial front, the trust has no major near-term commitments and remains in good shape to make an acquisition if opportunities arise. Looking ahead, management’s top priority is devising a 2011 strategy, which it expects to announce by the end of the year. Given Macquarie Group’s dedication to paying dividends, I expect a new model that will focus on yield, though the possibility of a steep dividend cut can’t be ruled out entirely.

On the plus side, the share price of just 92 percent of book value and high yield are more than enough compensation for the near-term uncertainty. Still solid Macquarie Power & Infrastructure Income Fund is a buy up to USD8 for those who don’t already own it.

Yellow Pages Income Fund’s (TSX: YLO-U, OTC: YLWPF) consistent growth of recent quarters stalled in the first quarter, as distributable cash flow per share was flat at CAD0.35. The culprit, ironically, wasn’t the directory business, which has literally evaporated for its US counterparts. The print business continued to hold its own, while the online division continued to surge. Overall, online revenue grew by 29.2 percent and now represent nearly 17 percent of overall sales on an annualized basis.

Rather, the pain was felt in the vertical media operation (20 percent of revenue, 12 percent of cash flow), where a decline in automotive and real estate advertising took down revenue by 23 percent and cash flow by 30 percent. The trust invested in these operations in order to diversify and therefore shore up cash flow. The negative turn in these business, which continues a fall off that began in the fourth quarter, illustrates they’re somewhat more cyclical than the core print/online directories business, and are likely to be a drag on operations as long as this recession lasts.

Yellow’s first quarter distributable cash flow did cover its distribution comfortably, with a payout ratio of 82.9 percent. Management, however, has elected to take a more conservative route, cutting its distribution by 31.6 percent to an annualized rate of CAD0.80 per share. It’s also stated a new goal of maintaining a 60 to 70 percent payout ratio coming into its planned conversion to a corporation in 2011. That’s something of a change from its previous assertion that it would be able to hold the current level of distribution and bring down the payout ratio simultaneously. Management’s implication is that will use the saved cash to bring its debt down. I suspect the move also has to do with concerns about the vertical media business in the weak economy.

Whatever is the case, the cut was definitely priced in already, evidenced by the market’s non-reaction. In fact, there seems to have been at least some relief that Yellow is apparently avoiding the fate of the bankrupt US directory companies. The bottom line is the low bar has saved the trust from a steep drop in the wake of the distribution cut, and management’s actions should make Yellow a stronger company for both the near term and as we approach 2011.

Nonetheless, when a business makes this kind of strategic shift, a little investor caution is called for. Yellow Pages Income Fund is now a hold.

• Artis REIT (TSX: AX-U, OTC: ARESF)–May 13
• Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF)–May 14
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–May 21
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–May 12
• Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF)–May 15
• Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF)–May 12
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–May 12

Aggressive Holdings

Ag Growth Income Fund (TSX: AFN-U, AGGRF) reported a 57 percent revenue increase, which lifted cash flow 118 percent and net earnings 436 percent from year-earlier levels. Much of the credit goes to a well-executed expansion of production facilities. But credit also goes to what’s still a very robust market for corn handling equipment, despite the dip in corn prices over the past nine months.

Management remains bullish on 2009, stating that by its reckoning US corn plantings would be the third-largest on record. It’s also seeing no problem with access to credit for its customers, a key factor in continuing to grow revenue.

Meanwhile, outside of opportunities for expansion, Ag’s own credit needs are light, and management expects early conversion will ease its ability to access equity markets as well. All in all, this is a very positive story. It will depend on commodity prices to some extent for long-term health, which is why Ag is in the Aggressive Holdings rather than the Conservative Holdings. But Ag Growth Income Fund is a solid buy up to USD30 for those who don’t already own it.

ARC Energy Trust (TSX: AET-U, OTC: AETUF) was hit by a steep drop in oil and gas prices in the first quarter, which it was only partially able to shield against by hedging.

The good news is it was able to continue paying at a strong rate while continuing the robust development of its key play in the Montney Shale area, where it intends to spend half its capital budget in 2009. The bad news is, to meet those capital needs in a tough environment management has elected to trim the distribution once again, this time to a monthly rate of CAD0.10 a share.

As I’ve said repeatedly, however, the key for any energy producer in this environment isn’t to avoid distribution cuts at all costs. Rather, it’s to survive the tough times while remaining in position to profit when the economy inevitably bounces back and prices rebound. And with its Montney property, low operating costs of just CAD10.12 per barrel of oil equivalent produced, its low debt-to-annualized cash flow ratio of 1.57 and again very low payout ratio of just 56 percent, ARC’s among the surest bets to do just that.

Average realized prices for oil and gas in the first quarter were USD46.44 per barrel and USD5.20 per thousand cubic feet, respectively. That builds in a big increase in cash flow from the 50 percent of output coming from oil production, where spot prices now are averaging more than USD10 per barrel greater. It also means a potential drop in natural gas income, though that’s likely to be mitigated by hedging.

To be sure, it’s going to take higher energy prices to really pump up ARC’s distribution and share price. And management is likely to continue focusing on investing in the Montney without taking on debt, meaning it will be frugal with its cash. But as a conservative bet on energy that pays a big dividend, ARC Energy Trust is a still a top pick up to USD16 for patient investors.

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) reported net income of CAD1.3 million (CAD0.04 per unit) for the three months ended March 31, down from CAD9.5 million (CAD0.28 per unit) a year ago on declining industrial demand and the shut-in of its Beaumont facility until late in the quarter.

Revenue and earnings for the Sulphur Products & Performance Chemicals segment were CAD99.7 million and CAD9.1 million, respectively, compared to CAD98.9 million and CAD19.9 million a year ago. Sales volume was lower, but the unit benefited from higher pricing and the impact of a weaker Canadian dollar on US-dollar denominated revenue. Pulp Chemicals revenue was CAD11.9 million, down from CAD14.8 million in reduced demand for sodium chlorate. Chemtrade’s International unit recorded a revenue decline of 52 percent, as global demand for sulphur and sulphuric acid weakened sharply.

Distributable cash for the period was CAD9.6 million (CAD0.31 per unit), down 46 percent from CAD17.9 million (CAD0.53 per unit) a year ago. The payout ratio rose to 96.4 percent from 56.1 percent.

Chemtrade CEO Mark Davis noted, “Now that the Beaumont plant is back to normal operations, we believe that over the next 12 months we will generate distributable cash after maintenance capital with expenditure above our current distribution rate.” Even at current levels of demand–that is, assuming the green shoots emerging in the global economy don’t develop into growth trunks–the rest of 2009 should be better because Chemtrade incurs the majority of its capital expenditures and plant maintenance costs in the first half of the year. Chemtrade Logistics Income Fund remains a buy up to USD7.

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) came in with record energy production, up 15 percent from year-earlier levels, as its drilling program continued to pay off even in a tough environment. Coupled with price hedging, that held the trust’s payout ratio down to just 48 percent.

Daylight was also able to arrange CAD170 million in financing and continue its pace of acquisitions of prime properties. That was all achieved despite average realized prices of only USD5.26 per million British thermal units (MMBtu) for natural gas and USD46.17 per barrel for light oil.

Looking ahead, production is expected to rise at a robust clip for the full year, though less so in the second quarter. Realized oil prices are likely to rise. Realized natural gas prices, however, may well head the other way, barring a recovery from currently very low spot prices. The 48 percent payout ratio and solid balance sheet provide some cushion against this.

At the end of the day, Daylight, like every other trust, depends on energy prices that are volatile and, at least in the near term, very depressed. Despite their recent surge, the shares still trade at a sizeable discount to net asset value, the yield is generous and I’m very encouraged by these results. Daylight Resources Trust is a buy up to USD11.

Enerplus Resources (TSX: ERF-U. NYSE: ERF) also took a hit to its first quarter numbers from lower energy prices. Realized selling prices of USD42.41 per barrel of oil and USD5.13 per thousand cubic feet of natural gas were even lower than ARC’s and on the low side of the industry. The trust also announced it would put its Kirby Oil Sands project on the shelf at least temporarily, due to bad economics at current oil prices.

The good news for Enerplus is that its venture in the Bakken region is actually paying off better than expected. That plus the  natural gas assets acquired in the 2007 Focus Energy takeover have ensured low cost supplies (operating costs CAD9.84 per barrel of oil equivalent) and give management a lot of flexibility to manage its output in a difficult environment. First quarter output actually rose 7 percent, though management expects to back that off a bit in coming quarters.

Enerplus’ financial strength remains its greatest assets, with debt of just 0.6 times annualized cash flow among the lowest in the industry this quarter. That’s again a very large point for the trust’s potential longevity and ability to weather this very difficult environment. And it’s a very big reason why the shares have nearly doubled off their recent lows.

Enerplus Resources remains at the mercy of energy prices’ ups and downs like all trusts, but it remains a buy up to USD22 for those who don’t already own it. Note that management has stated it intends to remain a big dividend payer well after 2011, when it intends to convert to a corporation.

Newalta Income Fund (TSX: NAL, NWLTF) reported a CAD4.4 million (CAD0.10 per share) first quarter loss. Revenue declined 25 percent to CAD112.5 million as low oil prices and uncertainty about the economy hit drilling activity in Western Canada. Funds from operations for the quarter declined to CAD6.8 million from CAD27.2 million in the same quarter a year earlier.

Newalta’s Western Division revenue and net margin declined by 30 percent and 55 percent year-over-year, respectively, due to the 49 percent and 38 percent declines in crude and natural gas prices, respectively. Eastern Division revenue and net margin declined 17 percent and 74 percent, respectively, on a 58 percent decline in lead pricing and a weak Ontario economy.

Management has seen some improvement thus far in the second quarter; waste shipments have risen, and customers are ramping up project activity.

Newalta had already initiated a hiring freeze, suspended salary increases and restricted travel and other discretionary expenses in an effort to control costs. These measures will continue for the foreseeable future. Newalta has also reduced its capital spending budget for 2009 by 60 percent from its original forecast to CAD40 million. Management has also reduced long-term debt. Newalta Income Fund is a buy up to USD5.

Paramount Energy Trust’s (TSX: PMT-U, OTC: PMGYF) first quarter results were boosted by significant mark-to-market gains in the trust’s hedging portfolio. Paramount recorded net earnings of CAD78.6 million primarily due to a CAD95.1 million unrealized gain deriving from decreases in AECO and NYMEX forward prices for gas.

Production for the period decreased from 183.8 million cubic feet per day in the first quarter of 2008 to 167.1 million cubic feet; the production decline stemmed from the sale of non-core assets, cold-weather downtime in January, and the fact that Paramount held back new production to take advantage of reduced royalties announced by Alberta in March to take effect in April.

Realized prices declined 11 percent from year-earlier levels to CAD6.46 per million cubic feet. The trust realized CAD14.4 million in hedging gains during the period.

Funds flow was down to CAD41.2 million (CAD0.36 per unit) from CAD56.2 million (CAD0.51 per unit) a year ago. Paramount paid out 52.2 percent of funds flow to unitholders.

Revenue for the quarter total CAD97.1 million, down from CAD121.9 million a year ago.

Paramount has planned an additional CAD25 million for capital expenditures over the final three quarters of 2009, to be used for land purchases and other strategic expenditures. As of May 5, 2009 Paramount had an average of 107,380 gigajoules per day hedged from April 2009 to March 2011 at an average price of CAD7.44 per gigajoule; the average AECO price for this period is CAD5.05 per gigagoule. Paramount’s current CAD0.05 per unit per month payout is sustainable given the trust’s hedging portfolio and its conservative assumptions for the balance of 2009. Paramount Energy Trust is a buy up to USD5.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) also produced some strong numbers for its first quarter 2009. The payout ratio came in at just 52 percent, as production gains and cost-cutting offset a drop in realized selling prices to USD44.50 per barrel for oil and USD5.37 per MMBtu gas.

As with Daylight, Penn West is likely to benefit from higher realized prices for oil and lower prices for gas, provided current levels hold, though it’s ultimately at the mercy of where those prices go.

More encouraging, however, was management’s progress dealing with the debt load, a legacy of several years of aggressive acquisitions. The trust completed its purchase of Reece Energy Exploration last month, for example. This task was aided by successful asset dispositions, though the application of savings from recent distribution cuts and share issues were also key.

Penn West has something of a credibility problem with many analysts stemming from a March distribution cut after the CEO had stated publicly that it could hold the current level at USD50 per barrel oil. That almost certainly accounts for the trust’s selling price of less than half net asset value and the fact that of the 13 analysts covering it, there are no buys, 11 holds and two sells.

These results should go a long way toward assuaging some of those credibility concerns, and I continue to recommend Penn West Energy Trust up to USD15.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) derived some two-thirds of its first quarter cash flow from its midstream business, which processes and sells natural gas liquids. That business continues to expand as management devotes a rising amount of cash flow to expanding its asset base, including the construction and expansion of two major storage caverns set to be completed later this year. Despite the economy, midstream throughput actually rose 4 percent in the first quarter, even as margins improved.

The growth of the midstream business will continue to help stabilize profits in 2009, despite energy prices ups and downs. Oil and gas output actually slipped about 11 percent, as the trust continued to deal with relatively high operating costs (CAD14.26 per barrel of oil equivalent) and a tough financing market, though production is anticipated to stabilize around 24,600 barrels of oil equivalent per day for the full year.

There’s still the question of the lawsuit by Quicksilver Resources (NYSE: KWK) over the sale of Provident’s interest in BreitBurn Energy Partners (NSDQ: BBEP) in the US. The latter has continued to have problems paying its distribution and the case isn’t going away soon. On the other hand, Provident did manage to slash 42 percent off its interest expense, a major plus for its longevity. And most of these cases tend to be settled at some point. For its part, Provident maintains BreitBurn’s woes are more a function of falling natural gas prices

Provident’s average realized selling prices of USD36.23 for oil and USD4.75 per thousand cubic feet for natural gas leave a lot of room for upside. And the trust continues to trade at a big discount to the value of its reserves alone, even leaving out the growing midstream business. That all makes Provident Energy Trust a buy up to USD6.

Trinidad Drilling’s (TSX: TDG, OTC: TDGCF) strategy of relying on long-term contracts has been tested by the collapse of the drilling industry in North America. So far, however, it appears to be holding firm, as the company has been able to renegotiate 17 contracts effectively to hold the revenue.

Not surprisingly, rig utilization rates in both the US and Canada did fall in the first quarter from last year’s levels. Trinidad’s rates, however, continue to remain well above those of rivals. Meanwhile, the payout ratio remained very low at just 25 percent of cash flow, the company bought back 8 percent of its shares and refinancing commitments are minimal. In fact, the company was able to actually expand its credit line on reasonable terms, even in a depressed environment for its sector.

Trinidad has pulled in its horns regarding expansion, halving its capital spending plans for 2009 this month. And it also recorded an asset impairment of CAD23 million. And as long as the energy market remains weak, we’re going to see more of this kind of news. When drilling activity does revive, however, Trinidad is sure to be one of those still standing, and in line to grab all the business it can handle. That’s really the play here, and like all things energy it will require patience.

But at a price of just 57 percent of book value, the bar is low and the upside is high. Aggressive investors can buy Trinidad Drilling up to USD5.

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) remains the trust most insulated against the storms raging in the energy market, thanks to very low debt (its debt-to-annualized cash flow ratio is 0.9) and location in all three major world energy markets (Europe, the Far East and North America). But it’s certainly not immune to the weak economy and low energy prices.

First quarter production remained steady across the company’s global properties. But sharply lower realized selling prices triggered a 21.1 percent drop in revenue, and management has cut planned 2009 capital spending in half, pending some recovery in natural gas prices.

The trust’s payout ratio is still very low at 57 percent, but that’s well above the sub-30 percent range it’s been hugging in recent quarters. Meanwhile, dividends and capital spending actually exceeded overall cash flow in the quarter, common for most trusts but rare for Vermilion, which has generally maintained the very conservative policy of generating free cash flow.

The good news is this bad news will almost surely prove to be short-lived. For one thing, Vermilion managed to slash its first quarter operating costs from CAD14.01 to CAD11.52 per barrel of oil equivalent. Promising new finds should continue to hold output steady on a global basis.

Meanwhile, though the Libyan government’s prospective bid has delayed matters, the trust is on the verge of selling its 41 percent stake in developer Verenex (TSX: VNX, OTC: VRNXF), which will generate more than enough cash to both fund further expansion and effectively wipe out the trust’s remaining debt load.

The long and the short of it is that Vermilion remains an exceptionally steady energy play in an otherwise extremely fractured and volatile industry. A further dip in energy prices could pressure even Vermilion’s distribution. But if prices even stabilize from here, the distribution will remain solid. And five-year, debt-adjusted per share reserve growth is a robust 5 percent. Vermilion Energy Trust remains a buy up to USD30.

• Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV)–May 14 (Sold; See Canadian Edge, May 2009.)
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–May 13