Strength of underlying businesses–not share price moves–is what shape Canadian Edge’s Portfolio strategy. Last year, when unprecedented credit and economic storms blew the financial markets apart, our approach kept us earning safe dividends in strong companies. And this year, when the sun came out again, our picks are up 50 percent on average.

Most of our oil and gas producers are still well below the highs they set in mid-2008, when black gold sold for roughly two times its current price and natural gas was three times higher. And most other trusts are still off from the highs they set in mid-2007, when the bear market/recession began.

A growing number of our picks, however, are getting close to a full recovery. And that’s a trend that should accelerate as 2011 nears and managements clarify what their plans are for dividends.

Unfortunately, a portfolio of 33 is always going to have its laggards. On the plus side, only one current CE Portfolio pick is down for the year. On the minus side, that one–Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF)–has been a rather spectacular failure, losing nearly 50 percent of its value since the beginning of 2009, in addition to what it lost in 2008.

To review, Consumers’ problems began last year when management decided to enter the sub-metering business, ostensibly to generate growth to offset the impact of corporate taxes in 2011. Sub-metering is basically the installation and operation of “smart” equipment that improves monitoring of electricity usage. The idea is better information will create opportunities to save energy, and thereby drive costs lower for all.

Consumers’ method of entry into the business was the acquisition of Stratacon, an already established player in both Ontario and Alberta with a solid reputation. Its customers were apartment landlords, who typically in Canada pay their renters’ electricity bills and are therefore highly motivated to seek energy savings. As a result, the numbers were good and the potential for growth substantial.

The Stratacon deal got its first brush with trouble as the credit crisis hit just when Consumers’ was putting together final financing.

Impressively, management was able to pull it off, but costs were higher than expected nonetheless.

Then, in May, the Ontario Energy Board (OEB) lowered the boom, responding to renters’ complaints by suspending sub-metering activity.

Upon appeal by the company and others, it then clarified that ruling in August, allowing sub-metering to resume, but only after providers had received permission from renters rather than landlords.

When the OEB announced its August ruling, I was encouraged by management’s upbeat assessment and believed that the halving of the October dividend to a new rate of 5.4 cents Canadian per month was sufficient to fund the effort. In fact, I thought it very likely the lowered rate (now a yield of nearly 17 percent on Consumers’ current price) would hold through the planned corporate conversion in late 2010.

That remains my belief. However, after studying Consumers’ third quarter results and the conference call that followed them, I’m forced to conclude I have more questions than ever about how long it will take for this trust to recover.

The results included at least one positive figure: a 1.5 percent increase in total revenue from year-earlier levels. That suggests at least some leveling off for the overall business, and both sub-metering revenue and core water heater rentals have enjoyed year-to-date growth. Rentals were up chiefly due to a 3.9 percent rate hike passed through in January.

On the other hand, operating cash flow was 13.9 percent lower in the third quarter of 2009 versus a year ago.

Meanwhile, distributable cash flow–the account from which dividends are paid–tumbled 28.4 percent but still left pretty decent coverage at the reduced dividend rate. The payout ratio was 64.7 percent. Unfortunately, management has yet to reverse the downtrend. Worse, new challenges are emerged that could keep Consumers’ back on heels well into 2010.

What to Do

That the sub-metering business remains troubled isn’t a big surprise. The good news is landlords representing 84 percent of the billing units affected by Ontario regulators’ decision have agreed to begin the “re-consent” process. In addition, the company has now signed its first new sub-metering contracts in Ontario since being allowed to resume operations.

The bad news is tenants will have to be convinced sub-metering benefits them as well as the landlord. And there’s no way of knowing now how successful that effort might be, or what Consumers’ might have to give up to get sufficient numbers of consents to satisfy regulators.

That means the third quarter problems of bad debt costs and lower-than expected revenue growth are certain to keep Stratacon’s profitability well below the projections management made when it initially inked the deal.

More alarming has been the erosion of Consumers’ core waterheater rental business, as competition has stepped up. The customer attrition rate rose to 3.5 percent in the third quarter, or 2.2 percent adjusted for processing backlog. That’s sharply above the 0.9 percent recorded last year and has forced Consumers’ and operating partner Direct Energy to ramp up marketing efforts, further cutting into cash flows.

All of these are challenges that can be overcome with time. And despite its missteps with Stratacon, Consumers’ management has been very effective in running a tight ship since its inception in the late 1950s. There are no immediate financial challenges and, despite the attrition rate, the basic waterheater business is stable.

Downside in the share price from here also looks limited. Unfortunately, so does the potential for real upside from a complete recovery, at least over the next 12 to 18 months. This is one business that isn’t becoming more valuable now. And that means there are better alternatives for our money.

In retrospect, it would have been better to sell Consumers’ any time in the past year and take our lumps. On the other hand, our strategy at CE is to let the strength of the underlying business be our cue. And until now, the positives have seemed to outweigh the negatives. That’s no longer the case, and I now recommend you take the loss. Sell Consumers’ Waterheater Income Fund.

In place of Consumers’, I’m adding a long-time How They Rate buy recommendation: High Yield of the Month Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF). The trust pays a yield of more than 12 percent, a few percentage points less than Consumers’. But in stark contrast to Consumers’, D+H is fresh from reporting solid third quarter earnings, thanks in large part to being able to successfully integrate a series of acquisitions. That not only makes the yield far safer but it’s also positioned the trust for solid long-term growth. Buy Davis + Henderson Income Fund up to USD15.

The only other move I’m recommending this month is for unitholders of Series S-1 Income Fund (TSX: SRC-U, OTC: SRIUF) to vote “For” the “Reorganization Proposal” offered by the Blue Ribbon Funds. The deal, which has basically been endorsed by every independent entity to review it, will combine Series S-1 with four other closed-end funds currently administered by the Citadel Group of Funds to create greater scale and efficiencies.

The key details are that the Blue Ribbon Funds will become the administrator of the new fund. It will be renamed Blue Ribbon Income Fund but day-to-day decisions will continue to be made by its long-time manager, Bloom. The combined annual administration and investment management fee will be reduced to 1 percent of net asset value, from current levels ranging from 1.1 to 1.5 percentage points.

Unitholders will have the right to cash in at 100 percent of net asset value (NAV) once a year, scheduled for November 27 this year and thereafter in December. The initial distribution yield will be approximately 10 percent of NAV, and Blue Ribbon will also pay a marketing fee of 40 basis points of NAV to investment dealers, presumably for marketing purposes.

Major moves by management to merge the fund will be prohibited without unitholder approval, and there will be independent oversight as well. And finally, the fund will be able to issue warrants that allow purchase of additional units, with US investors receiving any residual value in cash.

In addition to the Blue Ribbon proposal, Series S-1 unitholders have also received a proposal by management to combine with the Crown Hill fund. On review, however, I’ve come to the conclusion that the formerly “hostile” Blue Ribbon offer is superior. One reason is the Crown Hill offer proposes a dividend roughly 15 percent less as a percentage of NAV. Another is Bloom will not be retained as manager.

Like all mutual funds, Series S-1’s performance and future dividends are going to depend on how well management runs its portfolio, as well as how the Canadian markets perform. Bloom has had its ups and downs over the past year running the fund. But it has consistently outperformed and that’s really the bottom line.

Again, vote for the Blue Ribbon proposal at the November 17 meeting or through the proxy materials mailed to your broker. Plan to hold units in the Blue Ribbon for the foreseeable future as an alternative to owning individual trusts and high-yielding corporations.

Measuring Up

Happily, outside of Consumers’ Waterheater, our Canadian Edge Portfolio picks are measuring up with their third quarter numbers. Those that have sailed through the recession/credit crunch thus far continued to do so. But even those in particularly hard-hit industries showed signs of life. And all of them continued to support healthy balance sheets and generous cash distributions for investors. The upshot: I’m sticking with all of them.

Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) posted record generation of 1,381 gigawatt hours from its fleet of 42 hydro power plants and one wind facility. Excluding production from assets purchased in the past year, output rose 5 percent, a testament to geographic diversification and solid performance of its facilities.

Third quarter revenue and net income rose 60 percent from year-earlier levels. That was largely due to the absorption of the remaining renewable energy assets of parent and 51 percent owner Brookfield Asset Management (TSX: BAM-A, NYSE: BAM). The payout ratio came in at 50 percent of distributable cash, backing up management’s pledge to maintain its current dividend rate after converting to a corporation in late 2010. And debt remained low with no significant maturities well into the next decade.

Looking ahead, Brookfield Renewable’s chief objective is completing the construction of the Gosfield wind power project in Ontario. The first shipment of 50 turbines will occur in the first half of 2010, and commercial production is expected the fourth quarter. Output is fully contracted with built-in rate increases, ensuring production will be immediately accretive.

Ironically, the third quarter wasn’t a particularly good one either for water levels or wind availability. The latter, however, had no impact on Brookfield’s cash flows, as the fund receives revenue regardless.

The former, meanwhile, was mitigated by continuing system improvements, which are set to continue with CAD8.3 million in major maintenance spending planned in 2010.

The rest of the budgeted CAD25 million will go to growth ventures, spurring future cash flows.

The trust’s shares have returned over 27 percent since the announcement that it will convert to a corporation but are still 17 percent below their late 2007 highs.

I look for a return trip to the highs over the next 12 months in addition to the solid dividend, though control by parent Brookfield likely rules out a takeover bid. Brookfield Renewable Power Fund is a buy up to USD18.

Colabor Group (TSX: CLB, OTC: COLFF) is up about 11 percent since announcing its decision to go corporate back in July. The wholesaler and distributor of food and non-food products has continued to prosper in a weak environment as it attempts to build out a national presence from its leading position in Quebec.

The Canadian food distribution market is currently quite diffuse, giving the company numerous opportunities to grow larger with acquisitions, particularly in Western Canada. Revenue is backed by long-term customer and supply agreements stretching beyond 2013.

Last month the company reported solid third quarter earnings, indicating it’s weathering the downturn as well as absorbing recent acquisitions. The slump in Ontario hit the distribution segment particularly hard, as restaurants, fast food establishments and cafeterias cut back on volume of orders. That was only partially offset somewhat by better results in Quebec, resulting in a 4 percent drop in overall sales.

Nonetheless, cash flow moved ahead slightly and margins rose to 3.62 percent from 3.47 percent. That was thanks to building efficiencies through economies of scale as well as cost controls, such as a 22.6 percent reduction in debt interest expense. Net earnings, meanwhile, ticked up by CAD2.4 million.

The company continues to be challenged by tough conditions in food distribution, with a fast-food chain comprising 2 percent of the past 12-months cash flow not renewing its contract after February. But with no significant debt maturities before a CAD50 million bond in 2011 and dividends covered roughly 2-to-1 by distributable cash flow, it’s well positioned to keep paying its now quarterly dividend of 26.91 cents a share.

Since Colabor made its move to convert, confusion has reigned over when its next dividend would be paid. Our live quote service–see How They Rate–for example, still reports the company paying no dividend. As I’ve pointed out before, that error is unlikely to be corrected until the first quarterly dividend payment is made on Jan. 15, 2010. Meanwhile, investors should note that the dividend rate remains the same as when Colabor was a trust and comes out to a yield of over 10 percent. Buy Colabor Group up to USD12.

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) was the first Canadian Edge oil and gas producer trust to release third quarter numbers. And if the other picks follow its lead there will be little to worry about.

For starters, production reached a record 23,502 barrels of oil equivalent per day (boe/d), representing growth of 8 percent. That was despite a shut-in period of 2,500 boe/d during a period of low natural gas prices, which the trust expects to reverse by the end of the year.

Coupled with a successful hedging program and cost controls, that kept the payout ratio at 58 percent and the total debt-to-cash flow ratio at just 1.0. Production will surge again in the fourth quarter, ending the year at a projected 38,000 boe/d with the completion of the Highpine Oil & Gas acquisition.

The Highpine deal is especially important because it’s given the company a major developing resource play in the Cardium oil zone, a producing field since the 1950s with a new lease on life thanks to the advent of horizontal drilling techniques. Daylight also continues to pursue its multiple play strategy, in which it takes positions in promising areas already under development by larger players and learns from their efforts. And, after a nadir this year, it’s again ramping up capital spending going forward.

Like all oil and gas producer trusts, Daylight’s distribution after Jan. 1, 2011 depends on energy prices more than anything else. Management, however, has declared its intention to convert to a “dividend paying corporation” next year. It also has CAD1.4 billion in tax pools to defray future taxes and sold its natural gas (71 percent of third quarter energy output) at barely USD3 per thousand cubic feet in the third quarter. That’s a figure that will only rise in coming months, pushing up cash flow further.

Daylight’s not as cheap as it was earlier this year. But the units still sell for only about 75 percent of net asset value and a yield of 11 percent. Buy Daylight Resources Trust up to USD11.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) turned in another blockbuster quarter. Distributable cash flow per share surged to CAD0.73, pushing the payout ratio down to just 62 percent. The results again affirmed management’s commitment to convert to a corporation without cutting distributions. And they allowed the trust to pay investors a special distribution of 45 cents per unit, in the form of 22.5 cents cash and the equivalent of 22.5 cents of additional trust units.

The distribution is essentially a “true up” of earnings and distributions, eliminating taxable income in 2009 mainly from CAD59 million of proceeds due to the settlement of financial contracts. And it comes only after Keyera funded all its capital expenditures and debt reduction with cash flow from operations.

All of the trust’s key divisions turned in solid performances. Third quarter gathering and processing income rose 14 percent to the highest level in Keyera’s history, even in the face of what remains sluggish drilling activity in the Western Canada Sedimentary Basin. The trust managed this by investing systematically in plant optimizations this year, while focusing on areas of horizontal drilling, which is still relatively active. That kept fee-for-service revenue at the division rising, despite challenges to throughput.

The natural gas liquids (NGL) infrastructure business enjoyed a 36 percent jump in net income, as demand for its fee-based storage services surged. The company also completed several small organic NGL midstream projects that will boost cash flow for the rest of 2009 and into 2010.

Finally, Keyera’s marketing operation boosted its earnings by 10 percent, thanks to rising butane demand in western Canada, the acquisition of two more propane storage terminals in the Northwest US and strong management of any and all commodity price exposure.

Looking ahead, management expects to benefit from increased horizontal drilling activity in the west central and foothills regions of Alberta in areas surrounding Keyera’s plants. It also notes growing activity in both conventional oil and oil sands, both of which benefit its growing base of fee-for-service energy infrastructure assets. And it plans to spend another CAD80 to CAD100 million to develop new projects that should boost cash flows and the fund’s ability to pay dividends.

That’s quite an impressive combination and, selling with a yield of well over 8 percent, it’s hardly expensive. Buy Keyera Facilities Income Fund up to USD22 if you haven’t already.

Macquarie Power & Infrastructure Income Fund’s (TSX: MPT-U, OTC: MCQPF) third quarter results featured few if any surprises. In late September, management announced a plan to convert to a corporation by the end of 2010, maintaining the current distribution rate of 8.75 cents Canadian until the end of 2009 and then reducing it to the expected post-conversion rate of 5.5 cents Canadian per month.

The new level is projected to approximate 70 to 75 percent of “distributable cash” over the next five years. The current rate is anticipated to be roughly 105 percent of full-year 2009 distributable cash flow, with the shortfall supplemented by Macquarie’s “general reserve account.”

Nothing in third quarter numbers indicated any deviation from that plan. Revenue of CAD32.7 million was slightly higher than last year’s CAD32.4 million, demonstrating once again the recession-proof nature of the trust’s power assets and its investment in the retirement community Leisureworld. Leisureworld revenue rose 6.1 percent on higher funding rates as well as a boost in occupancy to 99 percent from 98.7 percent a year ago.

Power production at the Cardinal gas cogeneration plant and the Erie Shores Wind Farm were steady and offset lower results at the Whitecourt biomass unit, which was offline for 18 days for needed maintenance. Overall, hydro operations were flat, as abnormally wet conditions at one unit were offset by atypically arid ones at another.

The payout ratio was slightly higher than last year’s at 158 percent of distributable cash flow, but only due to factors expected to lessen the rest of the year and beyond.

The upshot is little has changed at the trust since I upgraded its units to a buy again last month. The dividend rate set to kick in with the January 16 payment equates to a yield of a little under 11 percent and looks set to hold well past 2011, even as management cuts debt and sets the stage for more acquisition-led growth. Trading at less than book value, Macquarie Power & Infrastructure Fund rates a buy up to USD8.

Newalta Corp (TSX: NAL, OTC: NWLTF) management and employees must feel like it’s been all too long in coming. But the company’s 50 percent sequential growth (from the second quarter) in third quarter cash flow is a powerful vindication that sticking to its strategy is working. That’s building a franchise of waste-to-usable products across a wide range of industries and across Canada.

There’s still a ways to go. The weak economy has driven down revenue 23 percent below last year’s third quarter. Cash flow is 33 percent lower, though only down 11 percent excluding the impact of non-cash compensation and volatility in commodity prices and exchange rates.

Eastern Canadian operations, which serve industrial sites, were basically flat for the quarter, a bright spot. But that was more than made up for by sharply lower drilling activity in the energy patch, combined with lower prices for the residual oil manufactured and sold from Newalta’s cleanup process. Capital spending, meanwhile, was only about a tenth of third quarter 2008 levels, limiting operations for near-term growth.

On the plus side, the company cut long-term debt by CAD22 million and reduced its total debt-to-cash flow ratio to 2.56 from the prior quarter’s 3.05. Cash flow from operations covered capital expenditures plus dividends by more than 4-to-1 ratio, with the dividend payout ratio coming at just 10 percent. The company got a refund of CAD22 million in letters of credit during the quarter as a reward for improved finances, and expects to get CAD3 million more back next quarter.

Looking ahead, management states the focus of Newalta’s capital program will be to expand usage of its steam assisted gravity drainage oil recovery technology, with a focus on heavy oil. And it’s expected to have an additional CAD40 to CAD50 million for growth capital and debt repayment after dividends.

All that still may not signal that the company has yet turned the corner. But it’s pretty good reason to expect the gains in the stock we’ve seen since late March still have a ways to run. And that’s all the reason I need to stick with Newalta Corp in the CE Aggressive Holdings as a buy all the way up to USD10.

Pembina Pipeline Income Fund’s (TSX: PIF-U, OTC: PMBIF) strategy of building out its fee-based oil sands and conventional energy infrastructure assets continues to translate into strong cash flow growth.

Net operating income surged 19.5 percent from year earlier levels, as contribution from the Horizon Pipeline, the recently acquired Cutbank Complex gas gathering and processing facility and expense cuts offset a 10 percent drop in throughput at the trust’s conventional pipelines.

Conventional pipeline throughput is sensitive to production declines triggered by the steep drop in energy prices over the past year. Management expects this to reverse somewhat in coming months, as energy prices start to recover from their swoon. Meanwhile, the Nipisi and Mitsue oil sands pipelines are still on track to enter service in mid-2011, adding a significant new source of revenue. Revenue from other oil sands systems is based on capacity rather than throughput, and so is locked in no matter what energy prices do.

Like US master limited partnerships, Pembina’s ability to grow depends on being able to finance major projects such as these at reasonable rates. The good news: This month the fund sold CAD260 million in 10-year notes at an interest rate of just 5.91 percent, paying off its bank debt and–coupled with proceeds from the Canadians-only dividend reinvestment plan–permanently funding the Cutbank deal.

Pembina management’s stated plan for 2011 remains to convert to a corporation in 2010, and to maintain its current distribution rate through 2013. Beyond that, the key will be the company’s ability to continue finding new projects to grow cash flow.

During its conference call, management stated it expects a payout ratio of 95 percent in 2010, utilizing tax pools available from asset construction (such as Nipisi and Mitsue) to shield income from taxes to be paid out in dividends in 2011 and beyond.

That’s a simple model, and it provides solid support for the trust’s dividend of nearly 10 percent. That’s also a pretty good case for the units to take out the old high in the USD18-to-USD19 range once the conversion is made and the cloud of uncertainty the blown away. Buy Pembina Pipeline Income Fund if you haven’t already up to USD16.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE), the second CE oil and gas trust to announce earnings, saw its output slip slightly by 1.4 percent in the third quarter versus 2008 tallies.

Production, however, was at the upper end of 2009 guidance of 175,000 to 180,000 boe/d, a level management expects to maintain in 2010 as well. And it demonstrated once again the flexibility of Canada’s largest conventional producer trust in navigating a period of unprecedented energy price volatility.

Energy output was 59 percent weighted toward oil and gas liquids, similar to previous periods. Some 80 percent of capital is now going into oil projects, with a focus on long-life projects. The company sold its light oil for an average price of USD64 per barrel during the quarter and gas for just USD3.13, leaving plenty of upside in the fourth quarter.

The payout ratio came in at just 54 percent, and cash flow was high enough to cover capital spending as well with roughly CAD19 million left over for debt reduction and other uses. Net debt was cut CAD600 million in the first nine months of 2009; reducing it further remains a key management priority as its conversion to a corporation in approaches.

As for its post-conversion dividend policy, management has said little definitive, other than it will “use a combination of organic growth and dividends to provide a return on capital that will position us with other senior independent North American oil and gas producers.” Given the lower yields paid by Canadian seniors, that would seem to imply a substantially lower dividend rate than what Penn West is currently paying now.

On the other hand, Penn West currently trades for only about 92 percent of book value and 55 percent of the net asset value of its reserves in the ground. That’s sharply lower than, for example, similarly sized Nexen Corp’s (TSX: NXY, NYSE: NXY) valuation of 4.48 times book value. And the long life nature of most of Penn West’s reserves and production are much more conducive to paying big dividends.

As I’ve said before, I’m not a mind reader and therefore–unlike some analysts apparently–don’t presume to know what Penn West management is going to do with its distribution, which obviously depends heavily on what energy prices do as well. What I am certain of, however, is the trust’s units at their current level are basically an opportunity to buy oil at $30 to $35 a barrel again.

That’s more than enough reason to keep owning it, no matter what happens to the payout. In fact, it’s a pretty good reason to buy Penn West Energy Trust up to USD20 if you haven’t already.

RioCan REIT’s (TSX: REI-U, OTC: RIOCF) performance during the North American recession stands in stark contrast to all but a handful of real estate investment trusts on either side of the border.

Like Canada’s banks, the country’s biggest REIT was never tempted during the boom times by the heavy leverage and what amounted to speculation on property values that ruined so many rivals.

As a result, management has been able to approach the downturn strategically from the beginning, maintaining its balance sheet strength and dividend while positioning itself to buy good properties from distressed owners by raising cash.

This fall it began making moves, inking CAD400 million in deals to buy eight Canadian properties with a total of 1.4 million square feet.

The REIT also bought out partners’ interests in two major shopping centers for CAD38 million and took an 80 percent interest in seven grocery anchored shopping centers in the US for USD141 million. It also took a 12 percent equity interest in the seller, Cedar Shopping Centers NYSE: CDR).

All of these deals are expected to be immediately accretive to funds from operations (FFO), the best measure of REIT profitability, even if the economic environment remains weak.

As for the current portfolio, occupancy remained strong at 97.3 percent, up from 96.9 percent at the beginning of 2009 and 97 percent a year ago. Rental revenue rose CAD6.8 million in the third quarter versus 2008 as rents remained stable and same-property growth rose 1 percent sequentially.

That was despite unanticipated vacancies of 665,000 square feet and CAD2 million in bad debts year-to-date due to tenant bankruptcies. RioCan has since been able to release 62 percent of the vacated space while retaining 94.1 percent of all expiring leases for the first nine months of 2009, a testament to the underlying quality of its properties.

Ironically, RioCan’s unwillingness to use its cash hoard–averaging CAD300 million for most of the quarter–on anything but prime properties has come with a price this year. With central banks pushing risk-free interest rates toward zero, interest on its short-term deposits has lagged even its relatively low cost of capital. The result is third quarter FFO of CAD0.30 per share again lagged the dividend, pushing the payout ratio to 115 percent.

Now that at least some of that capital has been put to work to buy properties, that ratio should fall sharply in coming quarters. The REIT is also offering to buy back up to 5 percent of its outstanding units and is aggressively paying down debt. And management expects FFO to “be in excess” of its annual distribution rate of CAD1.38 per unit in 2010.

RioCan units have surged past my buy target over the past couple months.

Given these results, however, I’m raising RioCan’s buy target to USD18, which is still more than a third lower than the REIT’s late 2007 high.

TransForce (TSX: TFI, OTC: TFIFF) managed to beat Bay Street expectations handily for the third quarter of 2009. Much more impressive, however, is management’s ability to stay on course with its multi-year goal of consolidating the highly fragmented Canadian transport and logistics industry, despite what’s arguably the worst environment in decades.

The September acquisition of ATS Andlauer Income Fund’s (TSX: ATS-U, none) Retail Solutions division will add CAD120 million in annual revenue, as well as 447 employees and a primary customer base of 165 owner operators. To finance the deal, the company successfully launched a public offering of 7,040,000 common shares, raising CAD41.2 million. That’s a feat that would have been simply impossible earlier this year with the stock at less than a third of its current price. And it’s a compelling testament to TransForce’s resilience and long-term sustainability.

Of course, current conditions are hardly peachy. Year-to-date, revenue is off 21 percent and cash flow is down 19 percent from last year.

And while third quarter cash flow margins were steady versus 2008 levels, cash flow itself was 25 percent lower and net income per share came in at CAD0.19 versus CAD0.31 a year earlier.

Interest on long-term debt was cut 33 percent, and other fixed costs and general and administrative expenses were slashed 15.7 percent.

But every area of the business has suffered during this recession, and particularly operations in Western Canada.

This is the newest area for the company, and it still ranks No. 3 in market share. The rising Canadian dollar is also taking its toll by making the country’s industrial exports less attractive, which in turn depresses truck traffic.

The key, however, is that TransForce is weathering the crisis in good shape with growing market share and management expects to do “much better in 2010.” In the near term the dividend remains well covered, and the balance sheet is solid. The company is well-positioned to make still more acquisitions at the right price, should management decide to act.

Selling at 1.22 times book value, 34 percent of sales and less than half its early 2006 high, TransForce rates a buy up to USD8.

Trinidad Drilling (TSX: TDG, OTC: TDGCF) continues to endure some of the worst conditions of any industry. All eight Energy Services sector listings in How They Rate have cut distributions at least once in the past year, with four no longer paying anything, as drilling activity has slowed to a crawl. Drilling utilization fell to a multi-year low of 21 percent in Canada in the third quarter, while US drilling slid 54 percent from last year’s levels.

All that’s to be expected in this industry, which is even more leveraged to energy prices than oil and gas producers because falling energy prices hit the bottom line with both rental rates and utilization.

What’s been the real surprise is how well Trinidad has fared relative to its peers. US rig utilization, for example, fell 22 percent from 2008, less than half the damage to the industry as a whole. And Canadian drilling utilization was 36 percent, abysmal but far higher than that of rivals.

The company’s third quarter revenue skidded 34.2 percent, cash flows were off 33.7 percent and cash flow from operations–the account from which dividends are paid–was down 47.7 percent. The CAD0.22 per share earned, however, was much more than enough to cover the CAD0.05 per share quarterly dividend.

Cash flow was also sufficient to fund the delivery of two new rigs into US operations and  the redeployment of four existing, underutilized rigs in Mexico and Chile. All of them are under long-term, take-or-pay contracts for 100 percent utilization, meaning Trinidad gets the revenue as long as the customer stays in business. Even net debt was reduced by 6 percent over the past year, as the company strengthened its balance sheet with internal cash flow and share issues.

The core of the company’s strength is its focus on deep-drilling capacity and advanced technology, its wide and expanding geographic diversification, and very conservative financial and operating management. That’s what has enabled it to not only weather the crisis better than rivals but to remain profitable and poised to be a big player when the industry inevitably recovers.

That’s the real reason why Trinidad Drilling, despite a 74 percent surge in its share price this year, remains a solid buy for aggressive investors up to my new target of USD8, where it still trades at just 85 percent of book value.

Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) kept its recovery on track in the third quarter. The big number was distributable cash flow (DCF) per share, which came in at a steady CAD0.35, comfortably covering the CAD0.20 per share in distributions paid during the quarter. But the numbers behind DCF were equally impressive.

Online revenue grew organically (excluding acquisitions) by 26 percent, as Yellow continued to launch new services to serve its customers. The company also maintained its leading market share in Canada with the three leading directory sites.

Overall “adjusted revenue”–which factors out everything but what pertains to the operating business–slipped 3.8 percent in the quarter. The core directory business remained healthy despite the recession, with adjusted revenue rising 1 percent largely on the introduction of new web-based products. Rather, as has been the case in prior quarters, the damage was done at the Trader operation.

Slumping real estate and automobile advertising clipped revenue by 25.2 percent, although the drop was only 21.1 percent when leaving out the sale of US operations and other restructuring. The good news is losses appear to be slowing thanks to cost-cutting initiatives and the strategic refocus of Trader on “Dealer Smart Solutions” that maximize efficiencies for advertisers.

Most encouraging is Yellow’s progress in strengthening its balance sheet ahead of management’s oft-stated plans to convert to a corporation in late 2010. The trust has now fully paid down its bank lines of credit and continues to aggressively retire near-term debt. As a result, there are no longer any significant maturities coming due before 2011 and net debt has been reduced by CAD277 million since June 30.

Ironically, Yellow’s progress seems to have won it few believers to date. Investors are apparently unwilling to forgive the dividend cut in early 2009 and remain wary about all trusts’ plans for 2011. That’s why the units yield nearly 15 percent and sell for less than half of book value.

The good news is if the earnings recovery stays on track, the market recovery will inevitably follow. And given these results, that’s again a bet worth taking. Buy Yellow Pages Income Fund up to USD8 if you haven’t already.

The Rest

Here’s the rest of the Canadian Edge Portfolio along with the dates they’ll be issuing their earnings. We’ll be analyzing them as they appear and relaying the results via Flash Alerts over the next few weeks, as well as in CE’s weekly companion Maple Leaf Memo. The December issue will have a full roundup of all of them, just as I’ve reviewed those above.

Conservative Holdings

• Artis REIT (TSX: AX-U, OTC: ARESF)–November 11
• Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF)–November 10
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–November 10
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–November 11(estimate)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–November 13
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–November 11
• Innergex Power Income Fund (TSX: IEF-U, OTC: INGRF)–November 6
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–November 6
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–November 12

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)–November 12
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–November 11
• ChemTrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–November 11
• Enerplus Resources Fund (TSX: ERF, NYSE: ERF)–November 13
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–November 9
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–November 11
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–November 12
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–November 9