No-cut conversions from trusts to corporations: Few expected to see many when Finance Minister Jim Flaherty made his infamous trust tax announcement on Halloween night 2006. But as Dividend Watch List demonstrates, that’s clearly the trend, as more and more trust managements elect to convert to a new breed of high-yielding income equities.

Two of the latest to announce such switches are Conservative Holding Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) and Aggressive Holding Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF). As the wide disparity in their yields indicates, these are vastly different companies.

Bird is one of the strongest construction franchises in North America, a distinction it proved beyond a shadow of a doubt the past couple years. Before the North American economic downturn began, the bulk of the company’s projects were in the private sector, with an accent on energy-producing regions.

The massive decline in energy-patch activity since mid-2008 didn’t dint Bird’s ongoing revenue stream, a testament to the quality of its projects and customers. It did, however, force management to move quickly to build a backlog in the public sector, which was dishing out contracts at a feverish pace to keep the Canadian economy moving.

The result was a dramatic switch in the company’s revenue mix from the volatile private sector to the much more stable public sector. Total annual revenue fell 15.1 percent for the year. But income before taxes–the key measure of Bird’s profitability–remained flat with the record year of 2008. Backlog–the key measure of future business–remained healthy at CAD901 million, only slightly below peak levels recorded at various times last year.

And Bird continues to win valuable new business. Last month, for example, the company was named the “preferred proponent” for a headquarters relocation project for the Royal Canadian Mounted Police (RCMP). The project is basically a joint venture with Bouygues Building Canada, limiting financial and operating risk to the company. The consortium plans to reach financial close this spring, at which time Bird will be able to boost backlog by its share of the contract, approximately CAD100 million. Work will then commence shortly thereafter, with a completion date of late 2012.

Meanwhile, it’s only a matter of time before activity in the private sector heats up again, providing a wealth of new contracts to bid on. In the past month several leading oil sands producers have announced plans to dramatically ramp up output over the next several years, including the Syncrude consortium and Canadian Natural Resources (TSX: CNQ, NYSE: CNQ) at the Horizon project. That means a lot of potential new business for Bird, which maintains a leading position and expertise in that sector.

Bird’s payout ratio has remained consistently low, with the fourth-quarter tally coming in at just 48 percent. That’s despite a 24 percent increase in the distribution last summer to the current monthly rate of CAD0.15 per unit. And as a construction company, it has to maintain a high level of cash, which basically means no debt worries, either.

With a strong, surprisingly recession-resistant business and conservative financial policies, Bird clearly had the means to preserve its distribution after converting to a corporation. On March 15 management confirmed it also has the will to keep paying out big, announcing it would maintain the same annualized dividend rate following conversion. This will be accomplished through quarterly payments of CAD0.45 per share rather than monthly distributions of CAD0.15 per unit.

The conversion plan has been approved by Bird’s board and will be voted on by unitholders during a May 10 special meeting. It will involve a tax deferred, 1-for-1 unit-for-share swap, with no immediate tax liability for either US or Canadian investors until shares are sold.

We’ve more than tripled our money in Bird since adding it to the Portfolio in late 2008. As I’ve pointed out before, however, Bird is still selling at a price nearly a third lower than the high it established in mid-2008, at the most recent peak for energy prices. That suggests a lot more upside as the Canadian economy picks up steam and global demand for energy increases.

Although Bird’s current yield is lower than other Conservative Holdings, it’s well superior to any other construction company in the world. And that payout is likely to rise in coming years as private sector business rebounds. The result is a safe stock with a healthy yield and strong growth potential. Bird Construction Income Fund is a buy up to USD33 for those who haven’t bought in already.

If Bird’s no-cut conversion was somewhat expected, Paramount’s decision to do the same clearly hadn’t been anticipated by the market. In fact, with the natural gas-focused producer’s units still yielding more than 12 percent, it’s likely few had been paying much attention.

The result is another opportunity for more aggressive investors to take a piece of one of the most innovative energy companies in Canada at a price barely half the value of its assets in the ground. Every producer’s cash flows are ultimately tied to energy prices. But Paramount’s aggressive hedging has set up a projected 2010 payout ratio of just 42 percent, leaving abundant cash to continue paying off debt and funding the company’s always unique development program.

Early this month the company dramatically enhanced its efforts at the latter by closing a previously announced CAD126 million acquisition of properties in west central Alberta. Financed with an issue of units at Paramount’s best price in some time, the properties have current daily production of approximately 10.1 million cubic feet of natural gas and liquids production (1,685 barrels of oil equivalent).

Importantly, some 20 percent of output is from light oil, by far the highest priced fossil fuel in the current environment. Management hasn’t said whether it will expand this output from what are expected to be substantial undeveloped reserves on lands acquired in the deal.

As part of the agreement, the trust agreed to farm-in undeveloped rights in the Cardium trend for 37 sections, 22 of which are believed prospective for light oil. This includes a two-well horizontal drilling commitment for Paramount, with a rolling option to earn on additional lands on the same basis.

If the light oil reserves are developed, it will be Paramount’s first foray into something besides natural gas production. It will hardly be the first innovative move made by CEO Susan Riddell Rose, the daughter of a Canadian energy industry legend who continues to chart a profitable course for Paramount despite some of the most adverse industry conditions ever recorded.

The trust, for example, continues to earn a tidy sum in government subsidies from simply not developing the gas reserves it owns that are located on top of known sources of bitumen used in oil sands production. Similarly, the conversion to a corporation is also being set up in a way that best benefits the future for Paramount and its unitholders.

Management’s proposal–which includes a post-conversion monthly dividend of CAD0.05 per share, same as now–will be voted on in a special meeting slated for May. The actual conversion, however, won’t take place until late 2010, at which time trust tax advantages will be exhausted anyway.

Beyond that, distribution policy, in management’s words will be “subject to future fluctuations in commodity prices and other operational variables, and potential changes in capital requirements as (the company) continues to add and develop the growth-oriented portion of its asset base.” But then, those are the same conditions that every oil and gas producer everywhere operates under.

It hasn’t been easy being a Paramount unitholder the past several years. Both the unit price and distribution amount have been shaved roughly 80 percent since the early 2006 peak, which coincided with the spike in natural gas prices that followed hurricanes Katrina and Rita. The good news is today’s distributions and unit price are based on natural gas prices that have fallen equally far.

That leaves a lot of room for upside, even as the company is prepared to weather further weakness. Moreover, as last month’s major acquisition attests, management does have the ability to raise capital to make deals that take advantage of rivals’ weakness and position the company for future growth.

To be sure, Paramount isn’t for the faint of heart. Nor is this a great play for impatient investors, as recovery will depend on what happens to North American natural gas prices, which are still in a deep slump.

Management’s action on corporate conversion and, more importantly, the dividend are clearly keeping the faith that the company intends to stick to its core business of developing high-percentage reserves in its own way–and sharing the spoils with investors in the form of a high cash distribution.

That’s why I continue to hold Paramount in the Aggressive Holdings, despite the ups and downs in its business as well as its own fortunes. Buy Paramount Energy Trust up to USD5.

For more information on Bird and Paramount, visit How They Rate. Click on the TSX 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. Paramount has a market cap of CAD621 million, and Bird’s is nearly CAD500 million. Both should be easily purchasable either on the Toronto Exchange or on the US over-the-counter market.

Ask which way is cheapest. Click on the trusts’ names to go directly to their websites. Paramount is listed under “Oil and Gas,” while Bird is under “Business Trusts.” Click on their US symbols to see all previous write-ups in Canadian Edge and its weekly companion Maple Leaf Memo.

Both trusts’ distributions are considered 100 percent qualified for US tax purposes–and they will be after these companies convert to corporations in late 2010. Both companies provide tax information to use as backup for US filing–whether or not there are errors on your 1099–on their websites. Tax information to use as backup for US filing–whether or not there are errors on your 1099–is available 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. If you hold these trusts outside an IRA, the 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. Form 1116 recovery will also be possible after these trusts convert to corporations.

Distributions from both Bird and Paramount should be exempt from 15 percent withholding once they convert to corporations, if they’re held in an IRA or other tax-deferred retirement account. For more information on IRAs and withholding, see recent Canadian Currents articles on the CE website.