When he first took office in February 2006, Prime Minister Stephen Harper brought with him the high-minded idealism that prompted him to criticize the Liberals then in power for placing commerce above human rights. He later met with the Dalai Lama, the spiritual leader of Tibet, a territory China claims as its own but that still harbors independent desires, in Ottawa, to the chagrin of China’s leaders.

This inauspicious beginning, fueled at least in Harper’s part by Reform Party principles better exercised in domestic opposition, has given way to economic reality and the practical need to engage the world’s emerging growth engine in a meaningful way.

“Our two countries enjoy a growing partnership, sharing significant interests in trade and investment, the environment and regional security,” Harper noted in a late October news release announcing his plans to visit China December 2 through December 6. “Canada is committed to a strong relationship with China that reflects our mutual respect and the need for practical co-operation.”

The events of the past 18 months have certainly impacted Harper’s thinking. As he had to do to maintain his minority, much less win a majority, the Conservative leader had to accept the fact that the federal government would sink into a budget deficit to prop up a faltering economy. Though it took him some time to warm to the idea, Harper is now enjoying the fruits of his non-ideological response to Canada’s recession.

Like his response to the recent domestic crisis, his handling of China illustrates Harper’s maturation from leader of a Western Canada-focused protest party to head of one of the G-20’s strongest pillars in the global financial system. It could be, too, that Harper’s ambition–he wants to lead a majority Conservative government–dictates that he engage with what is clearly the world’s dominant emerging economic and political power.

Industry Canada reports that from January to June Canadian exports to the US declined 28 percent. Exports to China, meanwhile, grew by more than 3 percent. China is now Canada’s third-largest export market. Imports from the US to Canada during the first six months of 2009 slid 17 percent, while goods moving from China to Canada rose almost 3 percent.

It’s now clear to Harper and his fellow Conservatives that Canada can’t depend on the US entirely for its economic health. The US will always be its top partner, but simply because China’s hunger for the resources Canada has in such abundance is so intense the prime minister and his government have to engage.

On the same day the China visit was confirmed the prime minster’s office announced plans for Harper to visit India from November 16 to November 18. The timing of the official announcements, too, betrays a bit of the newfound savvy on the part of the Canadians: Well aware of the longstanding rivalry between the two emerging Asian giants, the Harper government announced both trips on the same day so as not to allow either one too much attention at the expense of the other.

Same As It Ever Was

Around the turn from the 19th to the 20th century guys like Mark Twain introduced muckrakers like Ida Tarbell to Standard Oil board members like H.H. Rogers. You know the first guy; odds are you’re at least familiar with Tarbell and her ilk, and perhaps you know of Rogers, too.

By way of refreshing, Ida Tarbell was one of the finest practitioners of something called “investigative journalism.” H.H. Rogers was, in Daniel Yergin’s words, “the most senior and powerful member” of the Standard Oil board. The series of articles she published in McClure’s beginning in 1904 based in part on her conversations with him, The History of Standard Oil Company, was ranked No. 5 in The New York Times’ list of the top 100 works of 20th century American journalism.

Here’s Yergin, writing in The Prize: The Epic Quest for Oil, Money and Power (a new 2008 edition includes an epilogue addressing the mid-2000s price spike as well as the new global financial realities in the wake of the Great Recession):

Rogers was surprisingly candid with Tarbell. One winter day, for instance, she boldly asked him in what way did Standard “manipulate legislation.”

“Oh, of course we look after it!” he replied. “They come in here and ask us to contribute to their campaign funds. And we do it–that is, as individuals….We put our hands in our pockets and give them some good sums for campaign purposes and then when a bill comes up that is against our interests we go to the manager and say: ‘There’s such and such a bill up. We don’t like it and we want you to take care of our interests.’ That’s the way everybody does.”

Only when Tarbell revealed the existence of Standard’s extensive and efficient private intelligence unit–these guys knew about and harassed mom-and-pops in every nook and cranny–did Rogers break off the relationship. By the way, John D. Rockefeller bankrupted Ida Tarbell’s father.

Anyhow, this Bloomberg story on efforts to re-regulate the US banking system includes the following passage:

Banks and securities firms spent $193 million to fund political campaigns for the 2008 elections and raise even more money through events that their trade groups organize. They have successfully fought the administration’s efforts to limit executive pay and are battling against draft legislation governing the $592 trillion market for derivatives.

When it comes to consumer banking, the industry’s lobbyists are no longer all-powerful. Banks lost their bid to squelch new credit card rules that Obama signed into law in May. They lobbied for months before a bill that would have forced them to renegotiate mortgages failed in the Senate.

Now the banks and their trade associations are lobbying furiously to kill Obama’s plan to create the new financial protection agency, which was approved by the House Financial Services Committee in late October and is likely to face a full House vote by the end of 2009.

This Week in “Truth to Power”

That phrase in quotes in the subhead is now well past aggravating, but sometimes something happens that makes you realize what meaning it once held.

“I’ve read your bill and I think it’s terrible,” responded Steve Randy Waldman when prompted to discuss the Obama administration’s efforts to reform the US financial regulatory system. Waldman is the proprietor of the blog Interfluidity, status that got him invited to meet, along with seven other “financial bloggers,” with senior officials from the US Treasury Dept. Waldman’s wrapup of this curious coming together is here. Other participants reflect here, here, here, here, here and here.

The Roundup

Quarterly results reported by Canadian Edge Portfolio holdings thus far reveal that all but one–Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF)–continue to meet recession benchmarks. Underlying sales and market share were solid, debt was kept under control, costs were held down, and distributions were well covered with distributable cash flow.

Oil and gas producers’ dividend coverage was accomplished mainly because of steep reductions in distributions made over the past year as management teams dug in for hard times. Conservative Holdings, however, have largely held their distributions steady throughout the recession, a remarkable achievement that all but Consumers’ showed every sign of continuing while the North American economy recovers.

By this time next week, most of the rest of the Portfolio should have reported as well.

The December CE will include a full wrapup of all of the numbers reported since the November issue.

Conservative Holdings

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) reported third quarter earnings and funds from operations (FFO) per share were roughly one-fifth lower than a year ago, in large part because of a 12.2 percent increase in outstanding shares to finance growth. Acquisition and construction capital spending must be absorbed up front, so there’s always a lag before the new assets begin producing income.

The deal also added more debt, though debt-to-capital remains very low at 38.7 percent and Dominion Bond Rating Service lifted its rating. Third quarter distributions were 85 percent of FFO, in line with prior quarters.

Operationally, the extraction and transmission arm benefited from fewer maintenance turnarounds at facilities, the addition of new assets and lower overall operating costs. Energy services increased earnings due to a liabilities adjustment for natural gas transactions. Lower power prices, meanwhile, hurt overall results in electricity production. And field gathering and processing volumes were below year ago levels, as producers shut in output.

Looking ahead, AltaGas should benefit from a higher percentage of its revenue coming from long-lived, fee-for-service assets. The company’s natural gas business has remained profitable throughout one of the worst periods for drilling ever and is well-positioned to profit from an increase in activity. Meanwhile, it’s continuing to build a major presence in low-cost renewable energy, a growth industry for years to come.

The trust is still officially targeting a post-conversion annualized dividend rate of between CAD1.10 to CAD1.40 per share, while affirming it will maintain the current monthly rate of CAD0.18 as long as it stays a trust. That would be an effective reduction of 35 to 49 percent from the current rate. AltaGas Income Trust is a buy up to USD20.

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) saw its overall revenue drop 14.5 percent from last year’s levels as the volume of energy patch construction projects declined. Income before taxes, however, rose 7.1 percent, even as the trust boosted its order backlog back above CAD1 billion, as it continues to win government-backed and therefore recession-proof contracts.

The monthly distribution of CAD0.15 per share was again well covered by net income, with the payout ratio on that basis just 44.5 percent. Given that the company maintains huge cash surpluses and no debt, that’s a level that should be easily maintainable even after 2011 taxes, though management has to date not said what its plans are.

Again, I’m not a mind reader, and it’s up to management what it will do about its dividend. But these are the signs of a very strong business. Bird Construction Income Fund therefore remains a buy up to USD33 for those who haven’t already picked up shares.

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.

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. Brookfield Renewable Power Fund is a buy up to USD18.

Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) hit several key metrics in its third quarter. Wind power production rose 12 percent above its long-term average, hydro production was 5 percent above average, and the payout ratio was 95 percent of distributable cash flow. That continued the pattern of steady declines despite lower year-over-year power plant output due to weather conditions. And management was able to continue to accumulate cash, a key corporate goal.

The nine-month payout ratio was 93 percent, down from 101 percent last year. Management’s approach has been to accumulate assets over time that improve cash flow and further shore the current distribution rate, and that strategy remains on track. That should bode well for the dividend after 2011, when the trust will almost certainly convert to a corporation, though management has yet to set definite parameters.

But at just 1.5 times book value and yielding nearly 10 percent, it’s hardly expensive either. Buy Innergex Power Income Fund up to USD12 if you haven’t yet.

Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) reported a 43 percent jump in gross margin and a 26 percent increase in distributable cash flow in its fiscal second quarter. Customer additions were at a record, and distributable cash after all marketing costs–what amounts to capital spending for Just Energy–rose 19 percent. The trust’s green energy programs remain extremely popular, with 41 percent of new customers taking an average of 78 percent green.

Just Energy will pay a special distribution of between CAD0.10 and CAD0.15 per share to “true up” income and limit taxes. More important, however, CEO Rebecca MacDonald states “the growth we have noted in the second quarter is another step toward our goal of growing our cash flow by the 2011 trust tax conversion date with the expectation that a converted Just Energy would be able to pay CAD1.24 in dividends replacing the more heavily taxed CAD1.24 distribution.”

Of course, MacDonald goes on to state that “this cannot be assured.” But citing the accretive impact of this year’s Universal acquisition on 2011 earnings and beyond, she states she’s “optimistic this is a reasonable expectation.”

That’s very good news for unitholders, who continue rake in dividends of over 9 percent in addition to the hefty capital gains we’ve seen this year. Just Energy Income Fund remains a buy up to USD14.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) reported 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.

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. 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. Macquarie Power & Infrastructure Fund rates a buy up to USD8.

• 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
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–November 13
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–November 11
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–November 12

Aggressive Holdings

ARC Energy Trust (TSX: AET-U, OTC: AETUF) sold its oil at an average price of just USD67.74 during the third quarter of 2009 versus USD114.20 a year ago. Its gas, meanwhile, fetched just USD3.25 per thousand cubic feet versus USD8.68. That cut overall revenue and cash flow from operating activities roughly in half.

Looking beneath those numbers, however, ARC’s vitals are still very strong. Production basically held flat (a 2.3 percent decline) and the company cut its operating costs from CAD10.19 to CAD9.68 per barrel of oil equivalent. The company continued to develop its prolific Montney shale play on time and on budget, boosting needed infrastructure.

And net debt was actually cut 8.8 percent, as the trust financed its efforts with internally generated cash flow coupled with an equity issue. The distribution was extremely well covered with a payout ratio of just 56 percent.

ARC plans to convert to a corporation, probably by the end of 2010. At that point, it intends to continue to pay a high dividend, though the actual amount will depend more heavily on what happens to energy prices than anything else. ARC Energy Trust is a buy up to USD20.

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) reported that third quarter 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.

Management 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.

Newalta (TSX: NAL, OTC: NWLTF) reported 50 percent sequential growth in third quarter cash flow, a powerful vindication that sticking to its strategy–building a franchise of waste-to-usable products across a wide range of industries and across Canada–is working.

There’s still a ways to go, however; the weak economy drove down revenue 23 percent below last year’s third quarter, cash flow 33 percent lower.

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. Newalta remains a buy up to USD10.

Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) reduced its third quarter output of 100 percent natural gas by 17 percent from year-earlier levels. That was mostly due to a decision by management to shut in production for now in order to wait on higher prices. Realized gas prices slipped to CAD7.51 per thousand cubic feet, only down 14 percent from year-earlier levels due to management’s policy of aggressively hedging output.

The trust’s payout ratio, however, came in at only 30.7 percent of funds from operations, down from 44 percent a year earlier. That was entirely due to the cut in the distribution, but it does bode well for the current level of payout even in today’s abysmal conditions. So does continued debt reduction, as net debt was cut another CAD23 million during the quarter to CAD295.5 million.

Paramount’s dividend depends on what happens to natural gas prices more than anything else. And to be sure, gas is one banged up market. On the other hand, management continues to prove its skill at keeping the business on track, and this is one trust that’s certainly in super position when gas does recover. Paramount Energy Trust is a buy for speculators up to USD5.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) reported that output slipped 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.” Penn West Energy Trust is a buy up to USD20 for those who don’t already own it.

Trinidad Drilling (TSX: TDG, OTC: TDGCF) continues to fare well 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. Overall 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.

Trinidad’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.

Trinidad Drilling, despite a 74 percent surge in its share price this year, remains a solid buy for aggressive investors up USD8.

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) shut in approximately 1,000 barrels of oil equivalent production a day in the third quarter in Canada. That pulled down overall output from second quarter 2009 as well as year-ago levels.

The company, however, continued to advance its drilling program elsewhere, particularly in Europe. The offshore Irish field Corrib in which the company acquired an interest earlier this year continue to advance toward an in service date of late 2010, at which time it will dramatically boost output.

Like all trusts, Vermilion suffered from the sharp drop in energy prices over the past year, with fund flows from operations per share falling almost in half. The payout ratio, however, still came in at just 59 percent, as cash flow essentially covered distributions and capital expenditures outside of Corrib.

Management expects to meet production guidance for 2009 and 2010 and continues to ramp up capital spending. Its stated goal is now “to maintain current distribution levels” after converting to a corporation at the end of September 2010. The pending sale of the company’s stake in Verenex Energy (TSX: VNX, OTC: VRNXF) to the Libyans should provide a healthy chunk of cash for the effort by early next year at the latest. Vermilion Energy Trust, our most conservative oil and gas producer play, is a buy up to USD30.

• Ag Growth International (TSX: AFN, OTC: AGGZF)–November 12
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–November 11
• Enerplus Resources (TSX: ERF-U, NYSE: ERF)–November 13
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–November 11
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–November 12