I added Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) to the Portfolio in December 2008 for its ability to generate extremely stable revenue under the worst possible circumstances. Since then, the owner and operator of hydroelectric and wind power plants has turned in strong numbers for two of the worst quarters in decades for the North American economy.

The trust’s fourth quarter operating income rose 37.5 percent, paced by a 42 percent increase in generation. That triggered a 51 percent jump in cash flow from year earlier levels and brought cash on hand up to CAD23.7 million.

For an encore, Innergex turned in a five-fold increase in first quarter 2009 earnings, adjusted for one-time items, and a 37 percent jump in distributable cash flow. The trust’s wind farms produced 11 percent more power, combining with strong performance at the Quebec hydro facilities to offset weaker output at dams in British Columbia and Idaho.

The vast majority of Innergex’s output is sold to provincial authorities in Canada, essentially backing their payables with government taxing power. The rest is sold to investment-grade US utility Idaho Power, a subsidiary of IDACORP (NYSE: IDA). Importantly, there’s never been a default by a regulated US utility on an independent power contract.

Innergex’s current contracts have an average life of 15 years. Hydro contracts in Quebec feature built-in annual rate increases tied to consumer price inflation, with a minimum yearly boost of 3 percent and maximum of 6 percent. The hydro facility in British Columbia enjoys annual boosts of 50 percent of Canada’s Consumer Price Index (CPI). Meanwhile, the windfarms in Quebec have built in rate hikes equal to 18 percent of the rise in the CPI.

The upshot is Innergex is actually an inflation beneficiary, because revenue boosts will always exceed increases in expenses. These government-mandated rates are meant as an incentive to encourage green power. The advantage is compounded for US investors, as the monthly dividends are paid in Canadian dollars which generally move in tandem to energy prices and hence inflation.

With demand for carbon-neutral electricity surging in North America, renewable energy companies such as Innergex have an unprecedented opportunity to expand their generation assets, and hence future cash flow and distributions. Innergex has proven its ability to develop and integrate new assets in the past, and management states it’s on the lookout for more.

The chief challenge is financing, and it’s proven a bridge too far for many developers. Not so Innergex, which maintains an extremely conservative financial strategy. Some 91 percent of debt is either at fixed rates or else is hedged against interest rate swings. The average rate of 5.82 percent for the first quarter is up just 13 basis points from the 5.69 percent rate of a year ago despite one of the most turbulent credit markets in memory. That’s a remarkable testament to financial management.

As for resources, the trust has only CAD500,000–issued for letters of credit–drawn on total credit facilities of CAD10 million. It has three reserve accounts totaling more than CAD15 million, set aside for maintenance expenditures, fluctuations in hydrology and wind flow, and as “levelization.” The latter category of reserves helps to hold monthly distributions constant through seasonal volatility in cash flows, which are traditionally stronger in the spring and summer quarters.

Long-term debt of CAD229.4 million yields a conservative debt-to-enterprise value ratio of 46.4 percent. No credit lines are due until 2013 and no long-term debt matures before 2016.

Innergex last raised its distribution in February 2008, by 3.6 percent, after completing the acquisition of a 38 percent interest in the 109.5 megawatt Baie-des-Sables wind farm in Quebec. That was a deal dubbed by management “the most important in its history,” as it diversified power sources out of hydro and allied the company to the green energy movement.

In mid-2008, Innergex bought out the minority interest of partner IHI in five hydro plants it was already operating, bringing its interest there to 100 percent. Given the weak economy and tight credit market, however, management did not change the dividend, electing instead to use the new cash flows to pay down debt and add to reserves.

As a result, no one should expect to see a bump up in the payout until the economy improves and/or management is able to make another accretive deal. That may not be too long in coming. But in any case, there’s the 10 percent plus yield to make the wait more pleasant. Buy Innergex Power Income Fund up to USD12.

Artis REIT (TSX: AX-U, OTC: ARESF) was expected by many to fall to earth with its first quarter numbers given the steep slowdown in Canada’s oil patch, where it does most of its business. That’s certainly been the fate of many weaker REITs operating in the area. But the negative environment didn’t seem to bother Artis too much, as it turned in another strong report.

Growth did slow from the fourth quarter’s torrid rate of 22 percent for revenue and 10.1 percent for distributable income. Revenue, however, nonetheless grew a solid 12.2 percent. Same-store operating income–which basically takes into account only costs, vacancy rates and rent growth–was up a solid 6.3 percent.

Bottom-line distributable income per share rose 2.4 percent from year-earlier levels, identical to the fourth quarter’s rate of increase. Cash flow coverage of interest, meanwhile, actually rose to 2.29-to-1 from 2.26-to-1 a year earlier.

The drop-off in overall revenue is a clear sign Artis is finding it more challenging to land new expansion projects from either construction or acquisitions. That’s certainly to be expected given the steep slowdown in Canada’s energy patch and the accompanying tightening of credit.

Equally clear, however, is the fact that the REIT is doing more with what it has, keeping overall profitability high. Overall portfolio occupancy, for example, rose to 96.8 percent including committed space, up from 96.5 percent a year ago. That’s despite the unexpected vacancy during the quarter of a major tenant in British Columbia due to the economic turmoil. Meanwhile, average renewal rental rates on expired leases were increased 14.1 percent, and some 48 percent of expirys in 2009 have already been renewed.

One of the main reasons I elected to keep Artis when this recession began to worsen last year–despite its exposure to the energy patch–was the fact that rental rates for its existing leases were so far below market. That, in effect, represents an enormous cushion for cash flow that’s proving its worth this year many times over. And because lease life portfolio-wide is staggered over a period of years, there’s plenty of time for the energy boom to resume, and for rents to move higher still.

As for financing, Artis had CAD13 million in cash as of the end of the first quarter. There were CAD11.4 million in additional cash proceeds expected to be realized from a series of completed asset sales and another CAD27.5 million in undrawn credit balances. That’s against roughly CAD25 million debt coming due by the end of 2010 of the REIT’s overall tally of CAD702 million, mostly mortgages on properties. Debt-to-gross book value is just 51.8 percent, well below the 70 percent laid out in the REIT’s charter.

Looking ahead, Artis is likely to keep its books conservative, confining its growth activity to redevelopment projects, at least until there’s a noticeable bottom for the Alberta economy. Even that, however, should keep revenue on an upward curve, coupled with rate increases on the still below market rents at the REIT’s properties.

Given up for lost by many last year, Artis shares have staged a solid comeback since March 9, soaring almost 90 percent. Yet a longer-term chart reveals a still badly battered stock selling at just 84 percent of book value and a yield of well over 13 percent.

These are simply numbers that don’t jibe with this REIT’s underlying strengths. Artis is still the one REIT in the Conservative Holdings that has exposure to a worsening of the recession. In fact, it’s still cheap precisely for that reason, as investors fear a worsening of the energy patch crash.

On the other hand, trading for a fraction of its highs of the not-too-distant past, it also has by far the most upside. And the stable payout ratio of 63 percent–actually down a percentage point from the fourth quarter of 2008–is a very solid foundation for the distribution.

My projection is a return to double digits for Artis’ share price, though that will likely have to wait until Canada’s energy patch can pick itself. Meanwhile, we can enjoy the yield. Buy Artis REIT up to USD10.

On Taxes

Innergex is subject to trust taxation beginning in 2011. Like all power generation trusts, however, it will enjoy several advantages for sheltering income that will minimize the impact on the distribution, whether it’s organized as a corporation or as a trust. Management’s objective remains to pay distributions with cash flow from operations, less what’s needed for maintenance of assets, which argues for a high yield in any case.

Artis has conformed to the necessary accounting and operating procedures laid out by Ottawa to continue qualifying as a real estate investment trust. As a result, it will retain its current tax advantages after January 1, 2011, as will most REITs.

The upshot is neither trust has much 2011 risk. And as that date approaches, uncertainty will diminish and their shares should get a lift.

Both pay dividends that are considered qualified for income tax purposes in the US. Tax information to use as backup for filing them as qualified–whether or not there are errors on your 1099–can be accessed via the Income Trust Tax Guide under the heading “Links to US Tax Statements.”

As is customary for virtually all foreign-based companies, the host government–in this case Canada–withholds 15 percent of distributions paid to US investors at the border. This tax can be recovered by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation, though unrecovered amounts can be carried forward to future years.

For more information on Innergex and Artis, visit How They Rate. Click on the “.UN” symbol to go to the website of our Canadian partner MPL Communications for press releases, charts and other data.

These are substantial companies, so any broker should be able to buy them, either with their Toronto or US over-the-counter (OTC) symbols. Ask which way is cheapest. Click on the trusts’ names to go directly to their websites.