Both of the January 2010 High Yield of the Month selections are longtime Canadian Edge Portfolio holdings. Both have also recently undergone transformations that have made them very attractive going into 2010.

Atlantic Power Corp (TSX: ATP, OTC: ATLIF), as previously reported, completed its conversion to a corporation in late November 2009. Prior to that, the owner of interests in 13 power plants and the Path 15 transmission line in California had been organized as an income participating security (IPS), a security roughly 44 percent equity with the rest debt, and paying distributions in the same proportion.

The conversion conveyed several benefits. First, it eliminated uncertainty regarding how Atlantic would refinance the debt portion of the IPS, which was slated to mature in 2016. Second, it cut the company’s debt-to-capitalization ratio from 83 percent to a reasonable 50 percent. That, in turn, simplifies Atlantic’s capital structure, allowing the company to list shares on the New York Stock Exchange (NYSE). Hitting the Big Board allows Atlantic to expand its investor base in the US. That will make it easier to raise capital to fund growth, thereby increasing cash flow available to pay dividends.

US investors holding the shares in IRAs will now be withheld on Atlantic’s entire dividend at the rate of 15 percent. But those in taxable accounts received an after-tax distribution increase of 16 percent from the conversion, as the entire dividend is now qualified for US tax purposes rather than 56 percent debt interest. Canadians at the highest marginal rate enjoy a 19 percent boost.

At the corporate level, the deal has been structured so that Atlantic maintains its US “tax efficiency,” i.e. it won’t incur any material additional burdens for five years even if no additional tax planning is done.

In short, converting advances Atlantic’s business strategy, which in my view means higher distributions and a rising share price over the long haul. It also makes the company financially stronger, backing up management’s prior statement that it can “meet the current level of cash distributions into 2015 without any positive impact from future acquisitions or organic growth initiatives.”

Moreover, the company has already proven its ability to thrive in the worst of economic environments, actually increasing its payout in late 2008 as it completed a major acquisition.

All this good news hasn’t been lost on the market. Atlantic tacked on a total return of more than 90 percent in 2009, and the shares have again matched their November 2007 all-time highs. The yield is still attractive at more than 9 percent. But we’re a long way from Nov. 21, 2008, when the shares broke all the way down to a low of just USD4.59.

Ironically, that low was hit the very same day the company announced the closing of the CAD134.5 million purchase of the 155 megawatt Auburndale plant in Florida. That deal not only increased annual operating cash flow by more than CAD20 million. But it enabled a hefty 8 percent increase in the equity portion of the IPS distribution, and there was no debt assumed with the deal.

The events of Nov. 21, 2008, added up to a very strong buy signal for Atlantic, which we conveyed in Canadian Edge. The question is now whether or not the stock is still a good buy or if it’s time to take at least some portion of the 180 percent profit realized since.

As longtime CE readers know, when I make a recommendation I’m first and foremost buying a business. Atlantic isn’t an operating power utility; it’s basically an investment company specializing in power assets. Its value as a business depends on two things: the value of those assets and how well they’re run; and how well it manages the cash flows received. On that basis, it’s still quite a value, even at the higher price.

Atlantic is complicated. For one thing, during any given quarter some of its myriad assets will generate more cash flow than others. Also, the company owns 100 percent of some facilities, such as gas-fired Auburndale, Lake and Pasco in Florida. But it’s a decidedly minority player in others, such as the 400 megawatt Gregory plant in Texas.

There is, however, one constant to all of the company’s projects: high-quality “off-takers,” i.e. customers. Every customer is either a regulated utility or an investment-grade corporation, and most are both.

The only exception is Rumford Paper Co, the off-taker for a coal/biomass plant in Maine of which the company is the seller of an insignificant 20 megawatts of capacity, and for which the contract expired last year.

Never in the history of the power industry has a regulated utility ever defaulted on a contract to an independent power producer.

That includes the temporary bankruptcy of PG&E (NYSE: PCG) in the wake of the 2001 California power crisis. And that’s an extraordinary backstop for Atlantic’s financial results in the future, particularly given the industry’s massive deleveraging of recent years.

So is management’s willingness to adjust its portfolio to meet changing conditions. In November 2009, the company closed a deal to sell two assets that not only cut operating risk and provided cash to pay off debt, but was executed so that there were basically no material tax consequences. Management has also deftly and consistently minimized exposure to volatile interest rates, exchange rates and commodity prices.

All this adds up to dividend security that’s worthy of a much higher valuation for Atlantic shares. As for growth, much will depend on management’s ability to win investor support when it lists NYSE to ensure a competitive cost of capital. It definitely has it in Canada, as shown by the market’s ability to absorb Caisse de depot placement du Quebec’s sale of its entire 18.99 percent ownership stake in a single day, and with minimal impact on the share price.

Getting that same degree of support here will depend heavily on continuing to generate strong results. And while there’s certainly upside from the current raft of projects, notably the Rollcast biomass venture which has two facilities fully permitted and ready to build, there are also a lot of moving parts. Management’s decision to take all essential functions in house will cut costs but also puts all the more pressure on the current team to perform.

I would certainly never tell anyone not to take a profit if they’re over-weighted in a single stock. Equally, no investment is foolproof. An adverse tax ruling, a prolonged period of low power prices or any number of unforeseen circumstances could potentially take down a relatively small and complex outfit like Atlantic.

On the other hand, based on its solid assets, strong numbers and management’s record of success, the company’s future looks very bright. I continue to recommend a buy on Atlantic Power Corp up to USD11, as part of a balanced and diversified portfolio.

Since I started Canadian Edge, my general view on the plethora of closed-end funds holding trusts and high-yielding corporations has been dismal. Too often, investors get the bad and ugly as well as the good.

Many have historically relied too much on leverage and capital gains to maintain payouts, rather than straight distributions from the holdings.

Most also suck as much as 2 to 3 percent of assets off the top in fees each year, while diluting ownership with various offerings and acquisitions to further boost assets.

I’ve generally shunned most funds, with the exception of the six tracked in How They Rate. Two are members of the CE Portfolio: EnerVest Diversified Income Trust (TSX: EIT-U, OTC: ENDTF) and the other High Yield of the Month, Blue Ribbon Income Fund (TSX: RBN-U, OTC: BLUBF).

Blue Ribbon became a member when it merged with the former Series S-1 Income Fund, a longtime member of the Portfolio, on Dec. 31, 2009. Under the terms of the deal, Series holders received 0.770898 units of Blue Ribbon for every Series unit they once held. This was the final step of a complex deal involving the union of eight closed-end funds run by Citadel Funds and Crown Hill Capital Corp.

The deal itself was the result of a fierce battle between Citadel and Blue Ribbon Fund Management Ltd, a venture of Bloom Investment Counsel and Brompton Funds Management.

Under the agreement, all of the features of the Blue Ribbon reorganization proposal were approved, including a broadened investment strategy, investment restrictions and the retention of Bloom Investment Counsel as investment manager.

The greater scope of the fund will allow expenses to be spread over a larger number of units, with the result they’ll impact results less and improve liquidity of the fund units.

Restrictions include a reduction on management fees to 1 percent of net asset value (NAV) and an annual redemption right for unitholders equal to 100 percent of NAV. The wider investment mandate now includes preferred stocks and debt instruments, a move that will increase the security of yield and should leaven out volatility over time.

Blue Ribbon units have appreciated about 10 percent since the agreement was approved. They still trade at a discount of about 6 percent to NAV. Management has set the first monthly distribution at 5.5 cents Canadian, for a annualized yield of roughly 7 percent.

Where that payout goes from here will depend largely on what happens to the holdings. Total returns will be heavily affected by the overall Canadian market, as they are with any fund. That’s why I generally prefer buying individual trusts and high-yielding corporations to funds. But if you’re looking for a way to own a lot of trusts at once, Blue Ribbon is about the most reliable way to do that. Buy Blue Ribbon Income Fund up to USD9.

For more information on Atlantic Power Corp and Blue Ribbon Income Fund, 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. 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.

These are substantial companies–Blue Ribbon has a market capitalization now of more than CAD120 million, while Atlantic’s is CAD708 million–so any broker should be able to buy them, either with their Toronto Stock Exchange or over-the-counter (OTC) symbols. Ask which way is cheapest.

Atlantic’s dividend is now 100 percent qualified for US tax purposes, though dividends paid before 2010 are roughly 56 percent debt interest (taxed as ordinary income) and 44 percent equity dividend. Check your 1099 for exact percentages.

Blue Ribbon’s dividend is considered ordinary income, owing to the fact that it’s a mutual fund rather than a qualified corporation. Tax information to use as backup for filing–whether or not there are errors on your 1099–can be found in the Income Trust Tax Guide.

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.

As a converted corporation, Atlantic is in no way, shape or form exposed to trust taxes that kick in Jan. 1, 2011. Blue Ribbon is exposed to 2011 taxes only through its individual holdings, which may or may not reduce distributions as part of converting to corporations.