For a few weeks in May, it was a lot like autumn 2008. Fear reigned supreme. Rumor trumped the facts that were right in investors’ faces. And trading volatility soared to levels not seen since the fall of Lehman Brothers.

Nothing was spared on the bad days. Our picks took a double hit from the falling market and the decline in the Canadian dollar, as investors ran for the “safety” of US Treasuries.

Of course, there was one major way that last month’s Flash Crash differed from the big meltdown of 2008: The declines were short-lived, as buyers rushed in the fill the gap left by panicky sellers, many of whom were no doubt whipsawed out on bad days due to poor use of stop-losses.

Buyers no doubt came back for a variety of reasons. The most compelling, however, is that although today’s troubles are serious, they’re just not in the same ballpark with what happened in 2008, at least not yet.

Then, the entire global financial system was at risk to a wipeout, as the plethora of failing mortgage-backed securities came crashing down. Then credit markets froze, making it impossible for even investment-grade corporations to borrow at decent rates. Economic growth went in full reverse, with the US economy shrinking at an annualized rate of more than 6 percent in two consecutive quarters, the fourth of 2008 and the first of 2009. Industry shutdowns and unemployment soared, even in areas considered recession-resistant.

The troubles of European sovereign debt have been splashed over the papers for weeks now, along with the bear theory that they’ll spawn a global credit contagion along the lines of 2008. But the London Interbank Offered Rate (LIBOR) is still well behaved, far off the highs of that time. The US Treasury-to-eurodollar (TED) spread, which rises when the global lending markets are stretched, is a quarter of its 2008 highs.

Corporate bond yields and risk spreads with benchmark Treasuries are near record lows, and even cash-strapped municipalities and junk corporate credits are able to sell debt. Finally, even the European nations at the heart of the problem–including Spain and Italy–are finding a market for their much maligned bonds.

Clearly, Europe faces challenges. But they’re going to have to get a whole lot worse to trigger anything for the rest of the world that approaches what we saw in 2008. And sovereign debt is a whole lot easier to keep track of than mortgage-backed securities were in 2008. That makes it far more likely that monetary authorities will be able to contain any would-be contagion than not.

There’s always the chance that things will indeed worsen. Consequently, it’s a good time to take note of what holdings if any would be most exposed to a full-scale credit freeze along the lines of 2008.

When credit is tight, the less a company relies on debt, the better. That, fortunately, has been a hallmark of corporate Canada, a fact that kept companies in the pink even in 2008. Some debt, however, is particularly deadly to profits and balance sheets, mainly debt that’s maturing imminently.

At this point there’s no evidence whatsoever of an unfolding credit contagion sweeping over from Europe to Canada, or to the US for that matter. For one thing, the Bank of Canada’s boost in its benchmark interest rate confirms what the numbers have been saying for some time, that the Canadian economy is surging. And first-quarter results from major Canadian banks indicate that their health and ability to make loans is improving from already solid levels.

More important, however, even if the situation does worsen markedly in coming months, we’re still protected with our Canadian Edge Portfolio holdings. First, our picks maintained their access to credit during the worst crunch in more than 80 years in late 2008 and early 2009. Second, they’ve used the favorable environment of the past year to strengthen balance sheets by outright paying off debt, refinancing pending maturities, adjusting credit agreements and cutting borrowing rates. As a result, they’re in even better shape to weather a credit crisis reprise than they were in 2008.

The companies at least risk to having to refinance during another credit crunch are those with no debt to refinance. But any company whose pending maturities are 25 percent or less of market capitalization in 2010 (number of shares times share price) will have plenty of flexibility to weather the worst of what the market can throw at them.

I’ve made this comparison in two ways for our picks. The first number shows debt maturities and expiring credit agreements in 2010 as a percentage of market cap. The second shows maturing debt for both 2010 and 2011. Companies that make their cash flows from fees for use of assets have an even greater level of protection from refinancing risk, owing to predictability of cash flows for lenders. Here’s how they stack up.

Note numbers are as of end of first quarter 2010. I’ll continue to track them in subsequent quarters.

Conservative Holdings

• AltaGas Income Trust–48%, 48% (credit agreement, not drawn)
• Artis REIT–0.5%, 0.5%
• Atlantic Power Corp–0%, 0%
• Bell Aliant Regional Communications–0%, 0%
• Bird Construction Income Fund–0%, 0%
• Brookfield Renewable Power–0%, 0%
• Canadian Apartment Properties REIT–0%, 0%
• Cineplex Galaxy Income Fund–0%, 0%
• CML Healthcare Income Fund–0%, 0%
• Colabor Group–0%, 12.3%
• Davis + Henderson Income Fund–0%, 29%
• IBI Income Fund–0%, 0%
• Innergex Renewable Energy–0%, 0%
• Just Energy Income Fund–0%, 16.8%
• Keyera Facilities Income–2.9%, 19.6%
• Macquarie Power & Infrastructure–0%, 12.1%
• Northern Property REIT–0%, 0%
• Pembina Pipeline Income Fund–6.9%, 6.9%
• RioCan REIT–0.6%, 4.9%
• TransForce–55.7%, 55.7% (credit not drawn)
• Yellow Pages Income Fund–0.0%, 2.8%

Aggressive Holdings

• Ag Growth International–0%, 0%
• ARC Energy Trust–0%, 14.8% (credit not drawn)
• Chemtrade Logistics Income Fund–0%, 69.3% (credit not drawn)
• Daylight Energy–4.6%, 31.2% (credit not drawn)
• Enerplus Resources Fund–33%, 33% (credit not drawn)
• Newalta–0%, 79.7% (credit not drawn)
• Paramount Energy Trust–7.9%, 7.9%
• Penn West Energy Trust–0.2%, 2.9%
• Peyto Energy Trust–0%, 35.4% (credit not drawn)
• Provident Energy Trust–0%, 57.2% (TBD with split)
• Trinidad Drilling–0%, 0%
• Vermilion Energy Trust–0%, 0%

The only significant maturities for our picks are credit agreements that will have to be rolled over but that are far from fully drawn. In a full-blown credit crunch, the rollover interest rate would likely be higher than it is now. But these credit lines represent relatively little real debt to be rolled over.

In late March AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) was able to issue CAD200 million in seven-year notes carrying an interest rate of just 5.49 percent. Today, those same notes trade with a yield-to-maturity of just 4.43 percent, a spread of a little more than 100 basis points above equivalent US Treasuries. The rate reflects favorable credit conditions for the company. In fact, its credit standing and borrowing rate have actually improved over the past two months, despite the Flash Crash and European debt worries.

There are a few question marks. Provident Energy Trust (TSX: PVE-U, NYSE: PVX), for example, is spinning out its oil and gas production operations and combining them with Midnight Oil and Gas (TSX: MOX, OTC: MDOEF). As I indicated in In Brief–the executive summary of this issue–my advice remains to buy and hold through the spinoff, at which time current unitholders will own a trust that’s a major natural gas liquids midstream company and 0.12225 shares per Provident unit of a new company combining the former energy production assets of Provident with Midnight.

Provident Energy Midstream will continue to trade under the same symbol and will pay the same monthly distribution of CAD0.06 per share, at least through the end of 2010, when it will convert from a trust to a corporation. What’s not stated is how much debt will go to the production company and how much with stay with Provident Energy. In any case, however, overall company debt is down to just CAD342 million after a 32 percent reduction over the past year. That’s only 17 percent of total market capitalization, far less than the percentage represented by the largely untapped credit line.

TransForce (TSX: TFI, OTC: TFIFF) does have CAD394 million of long-term debt that’s now current, or must be refinanced by March 2011. That’s only 42 percent of market capitalization, however. And management is making great strides cutting that down to size, meeting its goal of a CAD100 million reduction in 2009 and cutting it another CAD17.6 million in the seasonally weak first quarter, solid progress toward another CAD100 million cut this year.

Debt cuts mean free cash flow, which, in turn, is the best insurance against needing money when it’s not available. The ability to generate it is a big reason why TransForce rates a buy up to USD11, AltaGas up to USD20 and Provident Energy to USD9.

In view of our picks’ financial strength and solid earnings, I’m making only one change to the Portfolio this month, adding Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF) to the Conservative Holdings.

For more information on the company’s solid theater business and plans for a no-cut conversion to a corporation on January 1, 2011, see High Yield of the Month. Cineplex Galaxy Income Fund is a buy up to USD20.

The Numbers

Roughly half of the Canadian Edge Portfolio holdings had reported first-quarter 2010 numbers by the time we went to press with the May issue. Here’s my analysis of results from the other half.

We’ve already touched on these numbers to some extent in several Flash Alerts last month, as well as in the weekly Maple Leaf Memo. All of these bulletins can be found on the CE website.

Below, I take a deeper look at what the numbers say about our picks’ financial health and their prospects for the rest of 2010 and beyond.

Conservative Holdings

Artis REIT (TSX: AX-U, OTC: ARESF) posted another solid quarter despite the continued weakness of western Canada’s office and industrial property market, particularly in the energy patch.

First-quarter revenue surged 7.8 percent and property net operating income ticked up 8.8 percent as the REIT reported steady occupancy and rising rent growth. Per share totals fell on a 20 percent-plus increase in outstanding equity units over the past year. The payout ratio, however, remained well under control at 82 percent, even as the REIT made several key acquisitions and brought debt down to just 45.4 percent of book value, from 47.4 percent in December. It’s these strategic moves that hold the key for Artis’ future growth and financial health.

The REIT continues to diversify outside of Alberta, adding eight income-producing properties during the quarter and spending a total of CAD159 million. Meanwhile, a portfolio of almost entirely below-market rents ensures its Alberta cash flows will remain steady even as the office property market remains overbuilt. That should help cash flows rise going forward, wiping out the dilution from the equity offerings and driving down the payout ratio.

Immediate refinancing needs are slight, and market rates generally lower than that on existing debt, opening an opportunity to boost cash flows further when debt is paid off.

The big question for Artis and other Alberta property owners is when the current space glut will be soaked up, as 50 percent of the REIT’s net operating income is from office properties. According to management, that’s happening, but slowly, and its staggered lease maturities limit the exposure to releasing in any year.

But at a current yield of more than 9 percent and priced at just 1.2 times book value, it’s also clear investor expectations are low and will be easy to beat. That’s the formula for further gains at Artis REIT, still a buy up to USD12.

Atlantic Power Corp’s (TSX: ATP, OTC: ATLIF) first-quarter results were right in line with management’s projections. That’s always the most important consideration about any company with so many moving parts. And it’s doubly important for Atlantic, whose primary value is the sustainability of its monthly dividend.

On the positive side, the conversion from income participating security–attaching debt to equity–to ordinary common stock has apparently been smooth. Cash flows at several projects were lower than last year. But the overall first-quarter payout ratio was nonetheless solid at 89 percent, and management affirmed cash flow is on track to finance the current distribution, even if no new projects are added.

That, in turn, is extremely unlikely, given the number of major deals management has done in its first six years of existence. In fact, the company may be nearing completion of at least one, as it’s increased its stake in the Rollcast Energy biomass venture to 60 percent. Rollcast has entered a construction agreement for its first 50 megawatt biomass project in Georgia, with project lending in its final stages.

Management says it has CAD70 to CAD80 million to use for acquisitions and expansion without accessing debt or equity markets. That augurs more growth ahead, even as the company awaits final approval of its New York Stock Exchange listing, which it still expects to see this month.

Full-year expectations are for a payout ratio of 100 percent, and a similar level in 2011, followed by strong growth in 2012 due to rising cash flow from an existing project and possibly a distribution from Rollcast.

As I’ve said, Atlantic’s success continues to depend on management’s ability to execute projects and control costs. That’s exactly what it continues to do. Atlantic Power Corp is a buy up to USD12 for those who don’t already own it.

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) continues to transition its business successfully to the public sector, as it waits out the slump in energy sector spending. On May 31 management announced a new CAD118 million contract with Defense Construction Canada to design and build a facility in St. John’s, Newfoundland. That should keep company backlog near the CAD1 billion mark–no mean feat in this environment.

Bird reported solid first-quarter results and an overall payout ratio of 44 percent, despite taking a 13.7 percent hit to revenue on lower activity in the formerly booming oil sands region. The main reason is the company was able to manage its costs very effectively as it’s replaced business. And with Canada’s growth picking up steam, the private sector should start to revive as well.

The company also announced Ontario court approval for its conversion from an income fund to a corporation on Jan. 1, 2011, after which it’s pledged to hold distributions steady. Bird Construction Income Fund has pulled back around USD30 following the Flash Crash, making it an ideal time for new investors to buy and lock it away up to USD33.

Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) reported few, if any, surprises, a very good thing for investors. Hydroelectric generation on a pro forma basis–taking into account the asset drop-down from parent Brookfield Asset Management (TSX: BAM/A, NYSE: BAM)–was 11 percent above normal. That offset lower-than-normal wind output, which didn’t affect cash revenue due to a long-term wind levelization agreement in its power sales contract.

These ultra-secure contracts are truly the hallmark of Brookfield Renewable–and why investors can expect continued distribution growth as it builds out a promising portfolio of renewable energy projects in coming years with power sales under guaranteed contracts. The first-quarter payout ratio was 62 percent, as income before non-cash items rose 82 percent. Per unit totals were off slightly due to more shares outstanding, the result of the Brookfield deal.

But with new projects on schedule and budget–including the Gosfield Wind park–the dilution will quickly fade even as the company continues to have no problems with financing. Suitable for even the most conservative investor, Brookfield Renewable Power Fund is a buy up to USD20.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) had an extremely steady quarter, just as it has no matter what the market conditions. The key was a boost in net operating income margin to 52.2 percent from 48.3 percent a year ago, reflecting cost controls and capital efficiency the REIT is well known for. The payout ratio came down to 93.3 percent from 111.3 percent as funds from operations per share rose by more than 20 percent.

The first quarter is traditionally a weak one for apartment REITs, as landlords often cover tenants’ heating bills. Average monthly rents were up 1.8 percent portfolio-wide, and occupancy rose to 97.8 percent from 97.3 percent a year ago. Results were better in all of the REIT’s markets except Alberta.

CAP REIT’s steady results are part and parcel of a conservative financial and property expansion strategy. But management has nonetheless been finding opportunity in this market, picking up a luxury property in Vancouver, British Columbia, that will begin boosting cash flow in the current quarter. The REIT acquired 14 suite and sites in the first quarter overall.

Refinancing needs are very modest, reflecting a consistent approach of staggering maturities. And the company continues to have success getting interest rates well below conventional mortgage rates, which also remain low.

Units have come well off last month’s short-lived low of CAD11.02 on May 6, which no doubt was at least partly due to a massive whipsaw of unwary stop-loss users. But units are still well off the mid-2007 highs as well, leaving a lot of room for upside in addition to the 7 percent plus yield. Buy Canadian Apartment Properties REIT anytime it trades below my target of USD15.

Innergex Renewable Energy (TSX: INE, OTC: INGXF) last month declared its initial dividend since combining with the former Innergex Power Income Fund. It’s still too early to tell how the combination of properties is going and whether it will be able to hit management targets for savings and synergies.

First-quarter earnings were flattish, as better hydrologic conditions at several facilities were offset by lower-than-expected wind conditions. More encouraging, however, the company did start up a small hydro project in British Columbia, received certification at two facilities to receive government clean energy subsidies, and won a power purchase contract at a BC project slated for startup in 2015.

It’s the nature of this business that projects take a long time to bring new cash flows. That means hefty capital spending needs, such as management cited as a reason for maintaining an equity dividend-paying model.

The good news is combining the income fund with the parent corporation substantially removed all near-term refinancing pressures, even as it ensured solid cash flows for development. Although the payoff for shareholders will come slowly, it’s also a high-percentage bet. And the yield of nearly 7 percent is rock solid as well.

Buy Innergex Renewable Energy up to USD10. Note I’ve reduced the buy target to reflect the merger and new dividend rate.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) saw strong results at all of its key operating areas. Gathering and processing profits rose 7 percent from last year’s levels. The natural gas liquids (NGL) business turned in 15 percent higher profit. Energy marketing was also solid, though less than last year. It added up to an overall payout ratio of 50 percent, backing up once again management’s pledge to convert to a corporation Jan. 1, 2011, without cutting its distribution.

The company has several key initiatives in place that should keep cash flow rising in coming years. One is expanding NGL delivery capability in Alberta. NGLs are in increasing demand throughout North America as a far cheaper alternative to oil. The company is also expanding organically its base of projects in the oil sands region, where oil and gas resembles a chemical business and fee-for-service processing assets are in rising demand.

Capital spending in 2010 is expected to be between CAD80 million and CAD100 million on growth projects to grow throughput and therefore fee-based cash flows. Fundamentally, Keyera’s prosperity depends on the use of its assets by oil and gas producers. The good news is the company proved its resiliency in the horrific energy patch conditions, and the viability of its assets even as production shifts from conventional to unconventional methods. That bodes well for the future as Canada’s energy patch revives.

The units have been up and down and currently trade above my buy target of USD24. My view is patient investors will see that price again. In the meantime, Keyera Facilities Income Fund is a high-quality pick suitable for investors of all stripes.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) is now shed of its investment of LeisureWorld at a solid profit. As a result, it’s now a pure play on power, with primarily cogeneration and wind assets.

The low carbon nature of these operations ensures demand in Canada, even as management scopes out new opportunities. Overall the payout ratio came in at 56 percent in the first quarter. That number is likely to rise in coming quarters with LeisureWorld no longer contributing. More important, however, that’s very much in line with the conservative strategy management laid out last year for sheltering cash flow and paying off debt in advance of a Jan. 1, 2011, conversion to a tax-paying corporation. The dividend at that point will remain the same as it is now.

Key challenges are inking a new contract for the Cardinal power plant over the next couple years and finding new opportunities to grow cash flow by adding assets. Management has issued guidance that it can maintain the current distribution rate through 2014 based on its current portfolio with an average payout ratio of 70 to 75 percent. A successful replacement of maturing debt yielding 6.75 percent with six-year debt yielding 6.5 percent demonstrates the company’s ability to raise money, as well as the opportunities in this environment to strengthen is already solid balance sheet.

I don’t expect rapid growth unless the company is able to add at least one more major project. But with the yield nearly 10 percent, there’s plenty of incentive to stick around and wait for that to happen. Still trading at barely half its early 2007 highs, Macquarie Power & Infrastructure Income Fund is a buy up to USD8.

Northern Property REIT’s (TSX: NPR-U, OTC: NPRUF) investment in a unique and profitable property venture will force it to change its structure by 2011 to a “stapled share,” combining debt and equity to save on taxes and preserve the REIT’s dividend. That will have the beneficial effect for US investors of sheltering a portion of the payout from 15 percent withholding in IRAs. Meanwhile, it will not interfere with Northern’s ability to grow its business further in a low risk way.

The REIT posted solid first-quarter results, with the headline payout ratio number coming in identical to the fourth quarter at 73 percent. Not surprisingly, results in the energy patch were weaker than a year ago, reflecting the slowdown in activity there and an oversupply of commercial space for all uses. Nonetheless, there were some promising signs, including a drop in Northern’s Alberta vacancy rate to 15.2 percent from 16.9 percent in the fourth quarter of 2009.

As CEO James Britton noted in the REIT’s first-quarter conference call, “The improvement in vacancy has been slow…but we believe markets are likely to bounce back fairly quickly once the tide is turned.” Britton forecast a “quite positive” outlook for Northern’s portfolio.

We may already be seeing the recovery in action, as residential vacancy in Alberta fell to 7.3 percent in the first quarter of 2009, down from 10 percent in the third quarter of 2009. That’s a remarkable turnaround already and demonstrates how quickly things can turn in Canada’s energy patch. And the REIT’s properties in other provinces continue to generate steady returns, including where it serves government entities such as in Yellowknife in the Nunavut territory.

There’s still a chance the government of Canada will address the effect on REITs from the 2007 Tax Fairness Act. The bottom line with Northern, however, is it looks prepared either way, even as its core business continues to strengthen. Also trading slightly above my target, Northern Property REIT is a safe buy up to USD22.

Aggressive Holdings

All of the Aggressive Holdings are exposed in some way to commodity prices. That hurt them during the recession and credit crunch of recent years. But each has emerged stronger for its trials with an extremely strong balance sheet and secure market niche, demonstrated best by solid first quarter numbers.

Ag Growth International (TSX: AG-U, OTC: AGGZF) enjoyed a 12.7 percent increase in cash flow for its first quarter of 2010, traditionally a seasonally weak one due to the buying pattern of its agricultural customers.

Importantly, however, harvests for corn and soybeans are anticipated to come in again at or near record levels, triggering robust demand for the company’s grain handling equipment. And Ag Growth has plenty of production capacity in place with which to ramp up demand. The stronger Canadian dollar does have the impact of depressing US dollar revenue, but the effect is offset on earnings by lower expenses and use of foreign exchange contracts.

Management’s outlook for 2010 “remains positive,” according to CEO Rob Stenson, with “order backlogs for portable equipment consistent with 2009 and the backorders for commercial equipment, both domestically and internationally, are significantly higher than the prior year.” He also looks for US farmers to increase corn and soybean acreage, based on current US Dept of Agriculture reports. Among reasons for more planting: robust demand for US grains in Asia and government-mandated use of ethanol, which continues to power corn production.

Those are some pretty positive fundamentals for a company that’s already converted to a corporation without cutting its dividend. Buy Ag Growth International up to USD36 if you haven’t yet.

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) has suffered a fire at its Beaumont, Texas, chemical plant. That’s likely to eat into cash flows until the plant is restarted, just as it did a year ago. Cash flow, however, was still able to cover the distribution then, even as market conditions were much worse. And with the facility secure and repairs underway–and global markets for sulfuric acid and related products much stronger–it’s in an even stronger position to do so this time around.

First-quarter numbers were strong, with cash flow available for distribution rising 58.1 percent, fueled by cost controls. The end of the Vale Inco strike should help out on that front for the rest of the year, even as the company sees steady improvement in product pricing. Vale Inco has been the company’s largest supplier of by-product acid, which is essential to its refined products.

A revival of the fortunes of the pulp chemicals business is one reason for improved sales and prices and the company has been able to ink major contracts in Canada as well as China.

The payout ratio came in at 61 percent in the first quarter, leaving plenty of cash to fund growth, meet debt requirements and build reserves. Net debt-to-cash flow is about 1-to-1, a very conservative level, while near-term debt doesn’t mature until August 2011. That means relatively little refinancing risk despite a high ratio in the table.

This is still a volatile business that ChemTrade has managed by operating in a very conservative way. Consequently, it’s best held by aggressive investors are in well-diversified portfolios.

Most of the way back to all-time highs–and virtually unaffected by trust taxation in 2011–Chemtrade Logistics Income Fund is a buy up to USD12 for those who don’t yet own it.

Newalta (TSX: NAL, OTC: NWLTF) stuck to its business plan despite being on the razor’s edge of the economic and energy patch slump of recent years. That made for some tough times and at one point stretched the patience of the creditors of the environmental cleanup services and recycled products provider. But the company continued to build its now nationwide business in a conservative way.

First-quarter earnings are the best confirmation yet of the success of that strategy in weathering tough times and positioning the company for strong growth. Cash flow adjusted for one time items surged 145 percent, with 61 percent of the increase due to stronger activity by customers and 39 percent due to higher prices for recycled products.

Capital spending on growth projects isn’t near the lofty levels of the past decade, when Newalta rode the boom in the natural resources sector. But it does continue even as the company cuts costs and improves its balance sheet.

A refocus on shale gas and oil sands producers and away from conventional production is a major reason for the improvement in activity. And further gains look almost sure as the Montney, Marcellus and Fayetteville shale plays continue to grow, and the demise of  BP’s (NYSE: BP) offshore project steers more capital onshore.

A full-scale energy production rebound is probably needed to take Newalta back to its old highs in the USD30 range, last held in early 2007. But having weathered the worst, this company shows every sign of taking aggressive, patient investors back there eventually. In the meantime, Newalta is a buy up to USD10.

Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) is the most leveraged to natural gas prices of all energy producers under How They Rate coverage. And that’s the primary reason I’ve stuck with it through the ups and downs of the last several years.

On the surface the company appears to be doing well, with the payout ratio in the first quarter coming in at just 23 percent. Equally encouraging is the detailed guidance management has provided on production levels, payout ratios and debt under different scenarios for average spot natural gas prices at the AECO hub. The key to that, of course, is aggressive hedging management systematically applies, which ensures a payout ratio of 2010 of just 47 percent even in a worst case for natural gas prices.

The company is also able to garner revenue simply by collecting checks from the Canadian government for shutting in production deemed to threaten oil sands growth. Realized natural gas prices were an explosive CAD9.78 per thousand cubic feet in the first quarter, as the company monetized some contracts. And Paramount was able to complete a major acquisition for a producer trust its size as well, a good sign for meeting full-year output targets. The flip side of aggressive hedging is an inability to take advantage immediately when prices do rise. That doesn’t appear to be anything resembling a problem right now, however.

Meanwhile, Paramount has locked in its cash flow to such an extent that management has promised to convert to a corporation in 2011 without cutting its distribution. That’s a bold statement, and there’s plenty that good go wrong to force a retraction, particularly if natural gas prices remain this weak over the next two to three years or more. That’s unlikely, and the 12 percent yield is more than enough compensation for the risk of a cut. Paramount Energy Trust is a buy up to USD6 only for those who understand the risks and are willing to take them.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF), like Paramount, is heavily dependent on the production of natural gas. But whereas the latter is higher cost and has a relatively short reserve life, Peyto is exceptionally low cost (CAD3.22 per barrel of oil equivalent in the first quarter) and long life, with some 20 years-plus of proven reserves.

This enables the company to take greater risk on the price side without sacrificing the ability to fund growth in reserves and production when market conditions warrant.

First-quarter production grew 9 percent from last year’s levels, or 22 percent in per unit debt adjusted terms–among the best for any producer in the world, especially in politically stable lands. Funds from operations per share slipped 7 percent, taking the payout ratio up to 71 percent. But that was entirely due to the issuance of more shares (9 percent increase) to finance growth and mainly the 17 percent year-over-year drop in realized natural gas prices. Meanwhile, the company continued to expand its horizontal drilling efforts throughout its operating regions, further driving down costs and pushing up reserves.

Despite these aggressive expansion efforts, Peyto’s net debt was cut to CAD396 million in April from CAD467 million at the end of the first quarter. And with successful equity issuance driving a 25 percent expansion of capital spending, debt is likely to stay low as production rises in 2010.

All Peyto needs for a real profit explosion is higher natural gas prices. In the meantime, however, it will continue to exploit its rich reserves and production portfolio. The biggest uncertainty surrounding the company is what it will do with dividends in 2011. And while management has stated it will be a dividend paying corporation, it’s also stated it wants to balance the cash payout with using funds to increase the potential appreciation from rising reserves and output.

The key is likely to be natural gas prices, as a higher level would allow for both a generous dividend and growth. If gas stays in the USD4 to USD5 per million British thermal units range, I expect to see a cut similar to what Daylight Energy (TSX: DAY-U, OTC: DAYYF) did last month (see Dividend Watch List). The good news is Daylight Energy’s move didn’t hurt the stock much despite the Flash Crash, and it remains a buy up to USD11.

If you can live with that, Peyto Energy Trust is a superb play on the eventual recovery of natural gas up to USD15.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX), as noted above, is splitting its business in two, with shareholders getting a pure play on natural gas liquids with a high yield as well as a small producer with prospects for growth.

I plan to advise selling the oil and gas company when the deal is done. But the midstream company–which will continue to pay Provident’s monthly dividend CAD0.06 per unit for the rest of 2010–is another story.

For one thing, there are few NGL pure plays, and it’s likely to attract takeover interest. But this business is also growing and thriving as oil prices remain high and natural gas low, giving NGLs a huge competitive advantage in a wide range of industrial processes. Provident differs from a pure infrastructure play like Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) in that elements of its business are very sensitive to commodity price swings. For this reason, it best belongs in our Aggressive Holdings after the spinoff, though I’ll be moving it to the Energy Infrastructure group in How They Rate.

What are the chances of Provident holding its distribution after converting to a corporation, presumably Jan. 1, 2011? We’re going to know a lot more when we see the first set of post-spinoff financials, which likely won’t happen until the third quarter. But we do have a pretty good indication from first-quarter numbers that the dividend-paying potential is substantial, particularly since the midstream operations have been pretty much paying the dividend for the past several quarters.

At any rate, few seem to be giving Provident much credit here, with the yield approaching 10 percent. There are still a lot of unknowns. But I rate Provident Energy Trust a buy up to USD9 for those who don’t already own it. For those who do, vote for the spinoff and plan to hold on until it’s completed. I’ll have advice for how to sell the oil and gas producer portion in a future issue.

Trinidad Drilling (TSX: TDG, OTC: TDGCF), like all energy services companies, hasn’t been able to catch a break for several years, particularly since energy prices crashed in 2008. The company, however, has kept its business solid by sticking to long-term contracts and unconventional drilling on land, as well as a conservative financial strategy. As a result, it’s in good shape to weather what’s left of the industry slope and to take advantage of the rebound.

First-quarter results were some of the best we’ve seen in a while. Revenue was still down 11.2 percent from year-ago levels but up 14.8 percent sequentially from the fourth quarter of 2009. That was largely thanks to a boost in the drilling utilization rate to 67 percent in Canada, up from 52.3 percent in the fourth quarter of 2009 and just 31.4 percent a year ago. Activity levels in the US and International drilling fleets were flat with the fourth quarter at 63 percent, and slightly lower than last year’s 64 percent.

Cash flow mirrored revenue, rising 11.6 percent sequentially but falling 18.7 percent from year-earlier levels. With BP’s misadventures in the Gulf, onshore drilling such as Trinidad specializes in should continue to grow in demand. That, plus reviving US demand for energy, looks likely to keep utilization rates on firmer footing for the rest of 2010 and beyond. Unfortunately, that’s likely to be offset at least in the near term by falling day-rates for rigs, which continue to be depressed by the supply of idle rigs and the expiration of contracts at higher prices.

This is a necessary stage in the cycle for this exceptionally volatile industry, but it will likely keep Trinidad’s profits tempered this year. The good news is this is one company with plenty of strength outlast the continued weakness. And as market history shows, full recovery is going to be both sudden and explosive.

In retrospect, it would have been great to sell Trinidad in mid-2008, when the converted corporation surged to the mid-teens, three times its current price. But now back at just 75 percent of book value, this is no time to cut and run. Rather, it’s an ideal time for patient speculators to establish positions in what’s still a solid though exceptionally volatile business. Trinidad Drilling remains a value all the way up to USD8.

What to Watch

As noted in this month’s Feature Article, most of the trust universe has now either converted from trust to corporation or else has announced conversions and subsequent dividend policies. That applies to the Canadian Edge Portfolio holdings, virtually all of which have now put 2011 concerns behind them.

The exceptions are the list of the trusts shown below. Note that Daylight Energy is no longer on the list after converting last month. The rest have either converted, don’t have to convert, or have yet to convert but have otherwise announced plans for post-conversion dividends.

• ARC Energy Trust (TSX: AET-U, OTC: AETUF)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)

Here’s the list of 16 Portfolio companies that have never once cut dividend. Of this list, CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) and IBI Income Fund (TSX: IBG-U, OTC: IBIBF) have yet to declare post-conversion dividend policies. The rest have put 2011 risk behind them and are safe enough for even the most conservative investor. See the Portfolio tables for current yields and prices.

• Ag Growth International (TSX: AFN, OTC: AGGZF)
• Artis REIT (TSX: AX-U, OTC: ARESF)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)
• Brookfield Renewable Power Fund (TSX: BRC
• Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)
• CML Healthcare Income (TSX: CLC-U, OTC: CMHIF)
• Colabor Group (TSX: GCL, OTC: COLFF)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)