The better the post-conversion dividend, the bigger the share price bounce. That’s the clear pattern emerging from the 26 Canadian income trusts electing to convert to corporations ahead of 2011 taxation. And the stronger the underlying business, the higher the dividend can be.

The December High Yield of the Month picks are likely to convert to corporations sometime between now and 2011. Neither, however, has declared what its dividend will be when it begins paying taxes. As a result, uncertainty still overhangs their market values; both are cheap, dish out high yields, and sell at steep discounts to the value of their assets as well as recent highs.

The bar of expectations, in other words, is set very low. And with both trusts backed by healthy, growing businesses and solid balance sheets, there’s a lot of room for upside surprises.

New Conservative Portfolio addition IBI Income Fund’s (TSX: IBG-U, OTC: IBIBF) core business is providing a range of professional services for the construction and improvement of urban land, building facilities, transportation networks and systems technology.

As such, it’s tapped into the global infrastructure boom, centered on Canada and the US but with a growing portfolio of projects in Western Europe, Asia (mainly China and India) and the Middle East.

Revenues are basically fee-for-service tied to long-term contracts. And IBI has been able to consistently add to its skill sets and client lists with a series of successful acquisitions.

The latest of these was the late-November close of the merger with Tetra Design, a California-based architecture, interior design and master planning firm whose customer base includes the Port of Los Angeles, the Port of Long Beach, the Los Angeles Unified School District, Los Angeles Community College District and the City and County of Los Angeles.

Not only does this client list represent a potentially blockbuster source of new infrastructure contracts in a largely untapped market for IBI. But the checks they write are all government-backed and therefore less vulnerable to recession ups and downs.

This deal follows a string of similar purchases this year, including a transit and education architecture firm in Ontario and a Northern California firm focused on research, planning, design and construction phase services for educational, administration and justice facilities.

Geographical and client diversification have paid off over the past couple years with steady returns for IBI overall. Despite a steep drop off in private sector construction–which particularly hurt operations in the southern US–third-quarter revenue rose 2.3 percent. Cash flow slid 8.3 percent, reflecting the changing Canadian dollar value of foreign-denominated assets and liabilities due to the appreciating loonie.

Excluding that item, however, distributable cash flow–the account from which dividends are paid–rose 27.7 percent in the third quarter and 37.7 percent for the nine months. The result was an effective payout ratio of just 66.6 percent for the quarter, or 82.1 percent including the currency impact.

More important, order backlog–the best indicator of future earnings–held steady, as IBI’s expansion into government and public institutional clients has offset much weaker conditions in the private sector.

Public sector work is now more than 65 percent of backlog, versus less than 40 percent in 2007. And it continues to grow in facilities work for health care, education, transportation terminals and networks and systems technology.

As for the private sector, management reports projects inked before the severe downturn in late 2008 remain generally on track. Meanwhile, business is picking up for residential projects in Toronto, Vancouver and Montreal.

And design stage work has started to rebound for industrial buildings in both the US and Canada. That points to a stabilization of revenue there, though full recovery may be some time off.

IBI has been aggressive in cutting costs in areas most affected by the downturn. Salaries and benefit costs were slashed 2.6 percent, and other operating costs were reduced 3.1 percent from year-earlier levels. Not counting currency impacts on asset values, cash flow margin for the third quarter came in at 20.1 percent, an actual improvement from the 19.1 percent of a year ago.

Meanwhile, the company has had no problems accessing more credit to fund growth. In September, management successfully raised CAD44.2 million versus a targeted CAD40 million from a convertible bond issue.

It also boosted its borrowing facility by 50 percent from CAD100 to CAD150 million and extended the term to August 2012 with no additional conditions.

The company boosted liquidity by paying off CAD9.6 million in notes and CAD10.1 million in term debt during the quarter.

Looking ahead, IBI is making a major push outside of North America. Projects include towing and traffic management design in Greece, a transportation corridor study in the Saudi Kingdom and “major” new urban work and planning of new communities in cities of the Middle East and elsewhere in Asia.

That has the potential to give a powerful lift to the roughly 10 percent of revenue operations outside Canada and the US currently contribute.

IBI Income Fund’s growing size and global reach have positioned it well for the industry trend of clients looking for one stop shopping of services.

It’s also in good shape to compete for the growing number of private finance initiatives, design-build projects and public sector outsource projects, which require it to expend greater resources to win business but if successful provide huge and very steady cash flow.

The lingering effects of the global recession will continue to weigh on private sector business in particular. But IBI has repeatedly proven its ability to grow through adversity since its founding in 1974, not the least during the recent downturn.

Further appreciation in the Canadian dollar versus other currencies could affect asset values, but management minimizes economic impact by deftly balancing receivables and payables. Finally, fees for service tend to track inflation over time.

It all adds up to an exceptionally solid trust yielding nearly 10 percent and selling for just 69 percent of growing sales. Management has also increased the distribution four times since Finance Minister Jim Flaherty announced his trust tax on Halloween night 2006.

Coupled with low debt, the low payout ratio, and healthy growing business, that portends well for IBI’s future dividends, though uncertainty will remain until management makes its announcement. Buy IBI Income Fund up to USD16.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) units are up 67 percent this year and have nearly tripled from their early-March low. However, they’re still barely half their mid-2008 highs, and they sell at a solid discount to the value of the trust’s oil and gas reserves alone.

And that’s leaving out entirely the worth of its growing portfolio of fee-for-service energy midstream assets that contributed 57 percent of third quarter funds from operations.

Bay Street is decidedly lukewarm on the trust, with all five analysts covering it rating the units a “hold.” Forecasts, meanwhile, are for flat performance for cash flow and distributions.

Why the gloom? The easiest explanation is Provident remains a company in transition.

Two years ago the trust had extensive midstream and oil and gas production assets–focused on heavy oil–in both the US and Canada, the result of an extensive acquisition spree that also left it with relatively high operating costs and debt.

Today, it’s purely Canadian and continues to aggressively shed heavy oil exposure and debt, even while adding to its portfolio of fee-focused midstream assets.

Last month it made two major moves. The company completed the previously announced sale of heavy oil assets in the Lloydminster region of Alberta for CAD70 million in cash and CAD17 million in project equity.

That was part of a larger initiative announced in August that included dumping CAD225 million in “non-strategic” oil and gas assets in Saskatchewan.

The goal of the initiative–itself the result of a broad strategic review–is to “streamline” the structure of the organization to cut costs CAD12 million a year, cut debt and invest only in “high-impact” production and midstream assets.

Management also stated its intention “to remain a cash distributing, diversified energy enterprise” and affirmed its monthly dividend rate of CAD0.06 despite posting a second-quarter payout ratio of 97 percent.

The other major move was the purchase of another significant energy infrastructure asset in the Sarnia area, a commercial storage facility from Dow Chemical Canada. The transaction is expected to close in early 2010 and will add active cavern storage capacity of 12.1 million barrels, less than half of which is currently used for hydrocarbons.

These moves are promising, and there are some signs they’re already reshaping Provident into a much stronger trust. Net debt, for example, has been cut 24 percent to a manageable CAD556 million.

Third quarter funds from operations were 61 percent lower than year-earlier levels, due mainly to a 66 percent drop in realized selling prices for natural gas prices (51 percent of output), 57 percent for natural gas liquids (5.5 percent) and 40 percent for oil (43.5 percent).

But interest expense was reduced 44 percent, and net debt-to-book value capitalization was reduced to 28 percent from 31 percent, while net debt-to-annualized cash flow was roughly flat.

In the upstream division, most costs per barrel of oil equivalent (boe) produced have remained steady. That’s despite the impact of lower output due to divestitures and reflects effective cost controls.

And though operating costs per boe rose year-over-year, they’re expected to back off on better economies of scale going forward.

Capital spending appears to be on track with management projections in both upstream and midstream operations.

Like all energy-producing trusts, Provident’s cash flows and the dividends it will be able to pay going forward depend heavily on oil and gas prices.

A realized price of less than USD3 per thousand cubic feet for natural gas in the third quarter leaves a lot of room for upside. So does the USD62 fetched per barrel of oil sold and the generally weak spreads realized in the midstream business.

The result should be higher cash flow and a lower payout ratio in the fourth quarter. But until the numbers are in, no one should count them.

There’s also still a risk that former affiliate BreitBurn Energy Partners LP’s (NSDQ: BBEP) continuing dispute with business partner Quicksilver Resources (NYSE: KWK) will spill over to affect Provident. And though that’s increasingly unlikely, the possibility is likely to hang over the stock until a scheduled April 2010 trial.

The upshot is, despite its great strides recently, Provident remains a higher-risk energy bet than the core group in the Aggressive Holdings. But still yielding solidly in double-digits, it’s considerably cheaper as well, particularly given the improved quality of its assets. Provident Energy Trust is a buy up to USD7.

For more information on IBI and Provident, visit How They Rate. Click on the “.UN” symbol to go to the website of our Canadian partner MPL Communications for press releases, charts and other data. These are substantial companies, so any broker should be able to buy them, either with their Toronto or OTC symbols. Ask which way is cheapest.

Click on the trusts’ names to go directly to their websites. And click on their US symbols to see all previous writeups in Canadian Edge and its weekly companion Maple Leaf Memo.

Note that both trusts’ dividends are considered qualified for tax purposes in the US. Tax information to use as backup for filing them as qualified–whether or not there are errors on your 1099–is listed on the Canadian Edge website.

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

Neither trust has affirmed its dividend paying plans for 2011 and beyond. The point, however, is the businesses are strong and market expectations are low for both, evidenced mainly by high yields. Consequently, it won’t take much for an upside surprise.