Making money in good times is no big deal. Keeping the cash flow coming in bad times is another matter entirely.

Thankfully, by historical standards the recession of 2007-09 almost certainly won’t go down as the deepest or even the most severe downturn in memory. It’s now apparent the unprecedented fiscal and monetary stimulus injected by governments around the world since the September 2008 fall of Lehman Brothers has done its work.

Credit is again flowing. In fact, though weaker entities are still feeling the pinch, capital is cheaper than ever for financially fit companies and individuals. Even the previous sharp declines in industrial activity are leveling off and the US housing market that triggered it all is at last showing hints of stabilizing.

In Canada, the country’s central bank has declared its recession ending. Adjusted for inflation, Canada’s gross domestic product apparently shrank at an annual rate of just 0.5 percent in May 2009, another sign the country’s recession continues to moderate and giving credence to projections for positive growth in the second half of the year.

For Canada’s economy, two countries really matter: the US and China. And fortunately, both appear to be finally climbing out of the hole. China never officially entered a recession. But the country’s reacceleration of raw material imports is the best sign in months for the health of Canada’s vitally important commodity sector and indicates export growth to Asia is reviving.

Despite the growing importance of Asia, the US remains Canada’s most important trading partner. Moreover, the growing integration of the North American economy means the fate of many Canadian businesses depends on what happens here due to cross-border relationships as well as direct investment.

As second quarter earnings attest so far, the US slump continues to crunch Canadian companies with ties to our housing market and other consumer focused industries. But here, too, there’s good news: Overall US gross domestic product, adjusted for inflation, came in at a much better than expected pace in the second quarter of 2009, falling at an annual rate of just 1 percent.

That’s still in recession territory. But it’s also a sharp moderation from the -6.4 rate of the first quarter, which followed similar deceleration in the fourth quarter of 2008.

Unemployment is still high and rising. But if conditions haven’t yet bottomed, this is a clear sign they’re close to it, and that’s bullish for Canada.

The bad news is the recession and financial crisis of 2007-09 does still have a bite. That’s the clear implication from the distribution cuts in the Canadian Edge universe of trusts and high-yielding corporations, which this month hit the restaurant franchise business.

And there will almost certainly be more dividend cuts before this recession is officially over, particularly from the ranks of the heavily indebted, consumer-focused and possibly even commodity producers.

The bottom line: Conditions are improving, but this is no time to let down our guard. Rather, we need to continue to subject our holdings to the same discipline we’ve employed since this recession/bear market began more than two years ago. Companies and trusts that don’t measure up with their business numbers must be discarded. Only those that are staying healthy are worth keeping.

We’re still not even halfway through second quarter 2009 earnings season, so it’s still too early to draw conclusions on all of our picks. Happily, however, what we’ve seen so far is overwhelmingly good news. Everyone to report so far is still hanging in there.

Only a handful of companies have come in with truly blockbuster numbers, and even the strongest have noted at least some impact from the recession. Business plans, however, are hanging together, balance sheets are still strong and distributions remain well covered by cash flow, a fact confirmed by the growing stream of trusts confirming their post-2011 plans.

Here’s the roundup of what we’ve seen thus far. Note that the results of Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF) and Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) are highlighted in High Yield of the Month.

We’ll be rounding up the rest as they report over the coming weeks in Flash Alerts, CE’s weekly companion Maple Leaf Memo and, finally, in the regular September issue.

Steady As She Goes

The main bar for Conservative Holdings is always coverage of the distribution with distributable cash flow. Second is the performance of the major business lines, followed by access to credit, ability to grow and management’s intentions toward the distribution.

This quarter AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) came on strong on the first three. The payout ratio was consistent with previous second quarters at 93 percent, as all business lines performed well.

The trust continued to execute on its asset expansion program, particularly 1,900 megawatts of renewable energy development. The trust also inked a deal with NOVA Chemicals that will back the build out of its Harmattan co-stream project with a 20-year, fee-based contract.

Management anticipates a 20 to 30 percent boost in capital expenditures for 2009 and 2010 to fund its growth. That will be greatly enhanced recent successful debt and equity offerings, as well as reliable cash flows from the company’s infrastructure in gathering/processing, natural gas liquids and power generation.

All of these businesses have been affected to some degree by the recession. But AltaGas has been able to mitigate the impact with cost cutting (operating costs were down 8.9 percent in the second quarter) and hedging out commodity price exposure. Debt remains low at 36.1 percent of capital, well below the target of 40 to 45 percent.

If there was any bad news in AltaGas’ earnings release, it was clarification that it intends to trim distribution to an annual rate between CAD1.10 and CAD1.40 a share when it converts to a corporation, probably in late 2010. That’s from a current rate of CAD0.18 a month, which management intends to maintain until conversion.

The trust’s rationale is that it will deploy the additional capital to fund its growth ventures. On the plus side, that means growth to a yield that will initially be between 6.5 and 8.3 percent, based on AltaGas’ share price.

Moreover, the trust’s move was anticipated by the market, as the units have rallied slightly since and insiders remain strongly bullish. All told, I’m a little disappointed by the magnitude of the cut, but this is a solid situation with a lot of upside going forward. And the removal of 2011 uncertainty is a plus. Buy AltaGas Income Trust up to USD20.

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) had another solid quarter. Distributable cash flow rose 1.8 percent, covering the more than 10 percent yield by more than a 2-to-1 margin.

That margin may shrink in coming months, as the trust rolls out an ambitious broadband buildout with the government of New Brunswick.

The project should greatly expand what’s been the salvation of Bell Aliant’s revenue–i.e., migrating its basic telephone service customer to broadband service.

Bell Aliant enjoyed a 10 percent increase in Internet revenue in the second quarter, offsetting a 4.3 percent loss in traditional phone lines and triggering a 1.9 percent boost in cash flow.

The trust also continues to make great progress trimming costs and boosting Internet television sales. It was also successful issuing debt during the quarter, selling CAD350 million of six-year notes at a premium of only about 250 basis points above Treasuries.

We’re still waiting on Bell Aliant to give us the word on its post-2011 plans. Management has hinted it will likely trim the payout at least somewhat to a level it feels is “sustainable,” despite two years of tax breaks that will effectively minimize taxes paid. Based on that, I expect a post-conversion Bell Alian to pay out something like 8 percent based on its current share price. Until we get hard news, the uncertainty is going to hang over the shares.

But with few risks and selling at just 81 percent of book value, Bell Aliant Regional Communications Income Fund is a buy up to USD27 for those who don’t already own it.

Colabor Income Fund’s (TSX: CLB-U, OTC: COLAF) second quarter numbers showed again why it can afford to convert to a corporation this year without cutting distributions.

The food wholesaler saw sales rise 1.8 percent and cash flow 5.8 percent, triggering a 52.1 percent jump in net earnings. The payout ratio after income taxes fell to just 68.7 percent, down from 71 percent in 2008.

Those results came despite the continued weakness in the Canadian economy, which has bankrupted some retailers this year and is a testament to the company’s diversification and growing scale.

Colabor remained well in compliance with its debt covenants, with interest coverage by cash flow at more than 6-to-1 versus a requirement of 3-to-1. With the conversion lifting all restrictions on issuing shares that leaves the company a lot of room to continue growing at others’ expense in this environment.

And that actually means potential growth in the already hefty distribution. Buy Colabor Income Fund up to USD12 if you haven’t already.

Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) boosted second quarter revenue by 8.7 percent, mainly due to the addition of submetering operations. Adjusted cash flow ticked up 0.3 percent, not including the loss on disposals of equipment, as its waterheater business remained generally solid despite the weaker economy.

The trust, unfortunately, again failed to cover the distribution with distributable cash flow, with the second quarter payout ratio coming in at 117 percent. That was almost entirely due to the submetering business, which has thus far boosted interest expense due to the cost of the acquisition of Stratacon, as well as increased operating costs and capital expenditures. Meanwhile, it has failed to add sufficient revenue to cover these costs, as growth remains hamstrung by Ontario regulators.

As management promised with its first quarter earnings release, it has stopped the bleeding to the overall enterprise. Maintaining the distribution going forward–even not taking into account 2011 taxation–will depend on winning access to the Ontario market for its submetering business.

The bad news is there’s yet been no decision on the company’s appeal of regulators’ prior ruling that installation services from smart metering were not allowed in residential complexes.

There has been, however, one positive development. The regulators’ staff has made a “submission” supporting Consumers’ petition which, if adopted, will allow the trust to resume operations full bore. Management has in fact been gearing up to move quickly in that direction.

Winning access is the key to distribution growth. Management continues to state it can maintain the payout based on cash flow and cash-on-hand “for the foreseeable future.” Sooner or later, however, if the company can’t ramp up on the submetering front, it will have to trim its distribution. I’m more hopeful than I was last month. But until Ontario regulators rule, Consumers’ Waterheater Income Fund is a hold.

Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) posted 36 percent growth in distributable cash flow after margin replacement, fueled by a 25 percent jump in gross margin. Sales rose 8 percent as the trust’s retail energy business added 6 percent more customers and boosted its margins per customer by 14 percent on the popularity of its green energy program.

The overall payout ratio–including a 16-fold increase in marketing expenses to garner more business–came in at 97 percent. That was the first time the second quarter payout ratio, a seasonally weak period, has come in below 100 percent in the trust’s history. And it comes despite the impact of a tough recession.

Results will get a further shot in the arm in the second half of 2009 by the acquisition of Universal Energy Group, a competitor with 570,000 customers. Management expects to update its guidance of 5 to 10 percent profit growth for fiscal 2010 as the consolidation is completed.

Just Energy’s results demonstrate the advantages of diversification, as US customer growth offset weaker than expected additions in Canada. Meanwhile, customer attrition rates were all in line or below expectations, a result of good service.

In its conference call, management stated its “intent is to grow our cash flow by the tax imposition date with the expectation that a converted Just Energy would be able to pay $1.24 in dividends replacing the more heavily taxed $1.24 distribution.” That’s still short of announcing a no-cut conversion date.

But as long as the business is healthy, it’s another good reason to buy Just Energy Income Fund, formerly Energy Savings Income Fund, up to USD12.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) gave investors a double-dose of good news with its second quarter earnings.

First, all of its business segments reported solid results. Gathering and processing income rose 10 percent despite lower drilling activity in the Canadian energy patch’s worst depression in decades. Natural gas liquids infrastructure net rose 32 percent on strong demand for fee-based storage and fractionation services. And the marketing arm produced steady income as well, though less than last year, despite also very rough conditions.

Overall, Keyera earned enough distributable cash flow to cover its dividend by nearly 2-to-1. And it continued to build out its fee-generating asset base incrementally, setting the stage for further cash flow gains, particularly as the economy cycles out of its slump.

The second piece of good news was Keyera’s announcement that it will convert to a corporation in January 2011 and that it “is positioned to maintain current distribution levels.”

That’s not a real surprise to anyone who has followed this first-rate energy infrastructure player. But it’s always nice to see such strength confirmed. Keyera Facilities Income Fund has rallied strongly off its lows of earlier this year but is still a buy for those who don’t already own it up to USD20.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) had several highlights for investors with its second quarter number.

It announced a new credit deal, eliminating refinancing risk until 2012 at least, backed by conservative leverage of just a 45.1 percent debt-to-capital ratio. And it again affirmed its current distribution rate of CAD1.05 per share, an upper-teens yield at the trust’s current price.

The Cardinal power plant–the trust’s single biggest asset–had another solid performance, achieving a capacity factor of 82.9 percent despite maintenance and a request from the Ontario Electricity Financial Corporation to shut in 318 hours of capacity.

The Erie Shores wind farm, meanwhile, had a superior quarter with 97 percent availability versus 96.5 percent a year earlier, boosting its capacity factor to 25.7 percent (superior for a wind plant) from 24.9 percent a year earlier. The hydro facilities were solid despite lower water conditions, as were biomass plants.

And Leisureworld grew revenue 6.7 percent on a more than 2.5 percentage point boost in occupancy to 94.7 percent.

Macquarie management has yet to articulate its strategy for 2011. However, management has now promised to release details of its plans “before the end of 2009.” I’m betting on a distribution cut. But given the high yield, there’s an awful lot priced in now and Macquarie has been known to surprise in income investors’ favor.

All told, this is a low-risk enterprise selling for just 95 percent of book value. It’s come back a long way, but I’m still looking for a lot more upside. Macquarie Power & Infrastructure Income Fund is still a buy up to USD8 for those who don’t yet own it.

Pembina Pipeline Income Fund’s (TSX: PIF-U, OTC: PMBIF) earnings haven’t missed a beat since I made it a charter member of the CE Portfolio in mid-2004. And the second quarter of 2009 was absolutely no exception.

A 15.2 percent boost in revenue and 18 percent increase in net operating income was keyed by a doubling of earnings from the trust’s oil sands infrastructure, the result of the completion of the Horizon Pipeline system as well as several new projects underway.

That more than offset the impact of falling commodity prices on the Midstream & Marketing business. That business will get a major shot in the arm in the third quarter and beyond by the addition of the Cutback facility in a deal that was completed this summer.

Meanwhile, Pembina’s traditional energy pipeline had another solid quarter, weathering especially tough conditions for conventional oil and gas producers. And it as able to issue 10-year debt at a premium of just 300 to 325 basis points, a clear sign it’s having no problem supplementing operating cash flows to finance future growth.

Pembina management has in the past maintained it will be capable of paying distributions at their current rate at least through 2013, after it converts to a corporation in 2011. In its second quarter earnings call, however, management went further than ever, affirming it expected its current asset base to be capable of supporting the current payout for a least five years, and most likely beyond though it was uncomfortable projecting out more than that.

Obviously there are no guarantees in business. But this is about as close as conservative Pembina management will come in affirming the trust’s intention to make a no-cut conversion. And that’s a strong vote of confidence for a trust in a recession proof business, armed with a strong balance sheet and paying out more than 10 percent. Buy Pembina Pipeline Income Fund if you haven’t already up to USD16.

RioCan REIT’s (TSX: REI-U, OTC: RIOCF) second quarter results don’t appear to be all that impressive at first glance, with its payout ratio rising to 115 percent. The shortfall, however, is almost entirely due to one-time items and management’s aggressive efforts to expand its portfolio at a time while others are weak.

These include adding 229,000 feet of greenfield development and the buildout of existing targeted assets, which required the use of additional debt to finance. Meanwhile, despite bankruptcies that trimmed the bottom line by CAD0.5 million–CAD2.1 million year-to-date–in bad debts, same property net operating income actually rose 0.7 percent, as occupancy rose to 97.1 percent and the REIT was able to raise rents in most markets.

Looking out over the next year, the company has some CAD550 million in cash and available credit lines to do deals. But it also continues to demonstrate its skill in issuing new capital at good rates. That’s not a strength many are paying attention to now, given continued worries about the Canadian economy. As the economy cycles out, however, it will pay off with faster growth.

Meanwhile, management’s focus on tenant quality continues to keep default risk low as it weathers what it calls the “economic tempest of 2008-09.” All told, this is a solid REIT paying a high, safe yield, and it’s poised for rapid growth as the Canadian economy recovers. Buy RioCan REIT up to USD16 if you haven’t yet.

TransForce’s (TSX: TFI, OTC: TFIFF) numbers reflected the tough environment all transporters are currently in.

Second quarter revenue fell 17 percent, excluding fuel cost surcharges, which are automatically passed through to customers. Cash flow, meanwhile, is off -21 percent for the first six months versus year earlier tallies.

In management’s words, “activities across many sectors is down” and therefore “so is demand for our services.” The Package and Courier segment (15 percent of overall revenue) saw sales drop 76.6 percent. Specialized Transport Services (22 percent) was taken down 20 percent and Truckload Services (34 percent) suffered a 30 percent shortfall.

The good news, however, is the dividend is still well covered by earnings, with a payout ratio of 48 percent. Earnings per share were basically flat at 21 cents, as management continues to enjoy success cutting costs and realizing the benefits of scale, attained through its disciplined program of consolidation with acquisitions of recent years. In addition, management has cut CAD50 million in debt this year, putting it well on its way to its full-year goal of CAD100 million.

The bottom line is TransForce is weathering the toughest of conditions and emerging stronger than ever from them. That’s why the shares have rallied so strongly this year, rewarding the company’s long-suffering shareholders. And it’s why this one is almost certainly headed a lot higher in coming months. TransForce is a buy up to USD8 for all those who don’t already own it.

Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) has effectively been on CE probation since reporting dismal first quarter 2009 numbers and slashing its distribution, reversing a previous assertion by management that it could maintain its current payout rate even after converting to a corporation.

On downgrading the trust to hold at that time, my key criterion for keeping it was that second quarter numbers show no further deterioration, and that management had a handle on how the recession was affecting the overall company.

Here’s how they fared. Distributable cash flow per share came in flat at 35 cents, down from 36 cents a year earlier. Not counting restructuring costs, income from operations was up slightly (2.7 percent), while consolidated adjusted revenue slid 2 percent.

Online revenue continued to grow robustly by 22.5 percent, reaching 17.9 percent of the total sales in the quarter and illustrating the continued success of management migrating the business to the Internet.

Overall cash flow from the core directory business rose 3 percent, excluding one-time items, largely on cost savings though margins slipped slightly to 58.9 percent of revenue. Consolidation initiatives are expected to improve that in the second half of the year.

As was the case in the first quarter, it was the vertical media operation that presented Yellow with its greatest challenges. The slump in auto and real estate advertising carried down revenue by 26.6 percent, or 22.4 percent factoring out the sale of US operations. Cash flow margin fell to 32.1 percent from 35.8 percent a year earlier as cash flow fell 34.3 percent.

All in all, this was pretty much as expected. Management also issued guidance for flat overall revenue and cash flow for fiscal 2010. On the plus side, that’s enough to support the reduced distribution and in fact to allow Yellow to tackle its debt.

On the other hand, the company is still at risk to this economy and there will be little upside until macro conditions improve.

Accordingly, I’m sticking with Yellow Pages Income Fund for now, but it’s still a hold; if third quarter numbers turn up worse than expected, I’ll be out.

Getting Aggressive

Aggressive Holdings all have commodity price exposure. Natural resources are Canada’s bread and butter, and producers do have more upside than other businesses.

The flipside is that we have to be prepared for downside when commodity prices tumble, as they have since summer 2008. But having survived the worst with our picks, we can now look forward to some big gains in coming months to add to those we’ve seen since early March.

My criterion for holding this group over the past year has basically been survival. That remains primary, with debt a major concern as well as demonstrated ability to weather a period of low prices with disciplined hedging and low cost and long life reserves. And, happily, my picks have measured up so far.

Energy and other commodity producers typically report later than other trusts and high-yielding corporations. As a result, only two of my selections have reported to date. The good news is both came in with superior numbers that, despite unsettled commodity prices, continue to support current distribution rates.

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) reported record output in its second quarter, boosting it 11 percent over last year’s tally. Coupled with strong hedging, that allowed the trust to overcome the negative impact of falling natural gas prices to post a payout ratio of just 54 percent for the quarter and 51 percent year-to-date.

Like many other strong trusts, Daylight has been taking advantage of the weakness of its industry to snap up quality reserves on the cheap. Last quarter, Daylight closed the purchase of Intrepid Energy and permanently financed the deal with a CAD172 million unit offering.

The trust has another CAD190 million in available bank credit for further deals if desired. Debt-to-annualized cash flow remains a modest 1.1-to-1, one of the lowest rates in the business and a testament to conservative management.

Ultimately, how Daylight fares will depend on a recovery in natural gas prices. Realized selling prices in the second quarter of just USD3.53 per million British thermal units and USD60.54 per barrel of light oil are well below the current market, a good sign that cash flow should improve in coming quarters. That’s the best possible sign Daylight will still be paying a big dividends in 2011 and beyond.

But as is the case with all commodity producers, Daylight Resources Trust is a buy only for those who can live with some volatility up to USD11.

Vermilion Energy Trust’s (TSX: VET-U, OTC: VETMF) large presence in Europe and Australia will protect its income from Canadian trust taxation in 2011.

In fact, management has stated repeatedly that it doesn’t expect to see any impact from the new tax, whether it elects to convert to a corporation or remains a trust-like entity.

As for operations, second quarter production was roughly flat with first quarter tallies, as increased output in Canada and France were offset by lower volumes in the Netherlands and Australia. Price differentials in Asia and Europe–where gas is more expensive than in North America–protected the trust against the worst volatility of commodity prices. Meanwhile, the trust benefited from higher oil prices globally.

The result: A 25 percent boost in funds from operations per share to CAD1.10 per unit. That pushed the payout ratio down to just 51.8 percent. Meanwhile, debt-to-annualized cash flow came in at just 0.7-to-1, despite the purchase of a major interest in an oil and gas field off the coast of Ireland that will ramp up overall production by 30 percent when production commences in late 2010 and 2011.

The only negative with the announcement concerned the sale of the company’s 42 percent interest in oil and gas exploration firm Verenex (TSX: VNX, OTC: VRNXF). The government of Libya continues to hold up the purchase of the company by Chinese national oil company CNPCI. Negotiations continue on an amicable solution.

A sale would deliver cash to Vermilion that could literally zero out debt, a major plus. In the meantime, however, the lack of a sale is more of a nuisance than anything else and not a threat to the trust’s dividend or its growth.

These results confirm that Vermilion has not only weathered the worst market for energy globally in years, but that it’s also still well positioned for powerful long-term growth. That’s what has historically made this trust the safest in its class and suitable for even the most conservative investors. These results confirm that’s still the case. Buy Vermilion Energy Trust up to USD30 if you haven’t already.