Second-quarter numbers have basically been all in for Canadian Edge Portfolio companies since mid-August. And as I reported in a series of Flash Alerts over the past month, our holdings’ underlying businesses are still on very solid ground and poised for strong total returns over the next 12 months.

I focus further on the generally favorable particulars below. Numbers, however, have convinced me to make two changes to the Portfolio this month.

First, I’m swapping in High Yield of the Month Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF) to the Aggressive Holdings in place of long-time, slumping holding Trinidad Drilling (TSX: TDG, OTC: TDGCF). Second, I’m moving August High Yield of the Month Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) to the Aggressive Holdings, to better reflect the greater cyclicality of its business.

The Phoenix-for-Trinidad trade is basically about moving from a good company to a better one. Both energy services providers’ stocks are well off the highs reached in mid-2008, when oil prices were roughly twice current levels and natural gas was fourfold higher. And their recovery potential is highly leveraged to energy prices, which directly affect demand for their services and the rents/fees they can charge.

As second-quarter numbers clearly show, both Phoenix and Trinidad are benefitting from what appears to be an accelerating recovery in North American onshore oil and gas drilling, particularly in shale rich areas. And given the escalating regulatory risks and potential new costs of offshore development, that trend should continue. Both companies have weathered a five-year depression in their industry, and their stocks promise considerable upside, even if energy prices don’t take off from here.

I’m turning to Phoenix now for three reasons. First, it yields more, 5.14 percent versus 3.8 percent. That distribution is now set to hold past the trust’s conversion to a corporation on Jan. 1, 2011. Second, it’s a more direct play on shale gas development than Trinidad and therefore a greater potential beneficiary. In fact, it’s now ramping up capital spending to keep up with demand in North America, as well as several other countries where returns are even more compelling.

Finally, selling Trinidad and buying Phoenix gives investors who’ve stuck to it as long as we have the opportunity to take a tax loss. And at the same time, they’ll keep a play in what will no doubt be the top-performing trust sector the next time energy prices head higher. I will continue to follow Trinidad in How They Rate under Energy Services for those who don’t make the move.

I’m as convinced as ever that Yellow Pages has the potential for at least a double over the next 12 to 18 months. And I believe management has the company where it needs to be to pay a monthly dividend of CAD0.0542 starting in January 2011, as it has previously stated. The plan to convert to a corporation on Nov. 1 appears to be on track, as is management’s plans to maintain the dividend at CAD0.0667 for the months of November and December.

Second-quarter distributable cash flow (DCF) of CAD0.35 unit covered the current payout rate by a 1.75-to-1 margin. Projected 2011 cash earnings per share of CAD0.95 to CAD1 will produce a payout ratio of 65 to 68 percent, based on the new CAD0.0542 monthly rate. Profit margins are still rising and despite a generally weak environment for advertising, Yellow’s growth on the web is still offsetting the long-term erosion of its print directory business. Internet offerings already account for more than a quarter of revenue, and growth is set to accelerate to 25 percent the rest of the year.

Those are some pretty convincing numbers as to Yellow’s long-term case. On the other hand, however, Internet based directory advertising is proving to be a much more economically sensitive business than print directories ever were. That’s a hard fact Yellow has faced the past couple years in large part due to the ups and downs of the automobile and real estate print/web advertising business acquired with the Trader publications.

The good news for Yellow is Trader appears to be stabilizing, with second-quarter revenue and margins steady and cash flow actually rising 20.8 percent from 2009 levels. Meanwhile, the acquisition of Canpages this year has vastly improved the online sales force, technical capabilities and offerings company-wide.

All these are very good signs if the Canadian economy continues to perform and avoids the so-called double-dip recession so many fear. On the other hand, if we do get another downturn, it will be very hard for management to meet its projections for the rest of 2010 or 2011. And in a worst-case, that could force it to consider yet another dividend reduction.

That certainly appears to be the fear of many investors as well as analysts. Of the nine who cover the stock, eight rate it a “hold” and one a “sell” with no buys. Interestingly, insiders have been quite bullish all year, picking up huge blocks of units at higher prices than currently prevail.

In my view, the bet on Yellow boils down to this: If management is right and the dividend holds through the conversion and into 2011, the share price is going back to double-digits. That’s in addition to the 12 percent-plus yield it will pay, based on its current price. If the dividend is cut by even another 50 percent, that will still leave a yield of around 6 percent, which appears to be what’s priced in now.

The only way we really lose here is if management elects to eliminate the dividend altogether as the major US print directory companies have done. That’s in no way indicated by the numbers and as I’ve pointed out before, Yellow Pages is a far different company than either Idearc (OTC: IDARQ) or RH Donnelly (OTC: RHDCQ) in the US, as it holds a monopoly on print directories, dominates the Canadian web-based directory business and is far less burdened by debt.

Nonetheless, there’s no denying this is a cyclical business that, however unlikely, could be hurt by a renewed economic slump. For this reason, Yellow Pages belongs in my Aggressive Holdings, not the Conservative Holdings.

And I never advise anyone to load up on a single stock, no matter how good it looks or how far it falls. For me, doubling down is the gateway to emotional decision-making, which can be an unforgivable sin in this fear-driven market. In other words, don’t go crazy with Yellow if you already have a position.

Beyond the Numbers

Last month I reported second-quarter results for the following Conservative Holdings:

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)
• Colabor Group (TSX: GCL, OTC: COLFF)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)
• 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)
• TransForce (TSX: TFI, OTC: TFIFF)
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF).

I reviewed the following Aggressive Holdings:

• ARC Energy Trust (TSX: AET-U, OTC: AETUF)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)
• Newalta (TSX: NAL, OTC: NWLTF)
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE).

The biggest news from this group last month was at Colabor Group (TSX: GCL, OTC: COLFF), which announced it would buy RTD Distributions, a Quebec-based distribution company with roughly CAD112 million of annual revenue. This marks a return to acquisition-led growth at Colabor and further boosts its scale in eastern Quebec and Atlantic Canada, principally New Brunswick.

The undisclosed buy price will be covered with the company’s existing sources of liquidity, i.e. cash on hand and credit lines, without accessing capital markets. Management expects the purchase to be immediately accretive to earnings when it closes Sept. 13. Like Colabor, RTD specializes in the distribution of food and non-food products serving grocery stores, convenience stores, hotels, restaurants and institutional customers. Assets include a 120,000 square foot distribution center and a fleet of more than 50 trucks.

The deal is both an affirmation of Colabor’s great strengths as a recession proof business and its great growth potential, attributes still not fully valued by investors given the stock’s 8.45 percent yield and price of just 21 percent of annual sales. The stock recently did hit a new all-time high in US dollar terms. But provided management continues to uncover blockbuster growth opportunities, it’s going a lot higher, particularly when investors finally figure out that it’s already converted to a corporation and has no 2011 risk. Buy Colabor Group if you haven’t yet up to USD12.

ARC Energy Trust (TSX: AET-U, OTC: AETUF), RioCan REIT (TSX: REI, OTC: RIOCF) and TransForce (TSX: TFI, OTC: TFIFF) also made acquisitions last month. ARC’s move was completing the takeover of Storm Resources, adding nearly 10,000 barrels of oil equivalent per day (boe/d) production and beefing up its holdings in three key areas of development. That should start to boost cash flow almost immediately and it strongly improves the company’s long-term prospects as a secure producer as well. Buy ARC Energy Trust up to USD22 if you don’t own it.

RioCan REIT successfully raised CAD149.4 million in an equity offering that it was able to boost by 20 percent to 7.2 million units. And with the unit price already back above the CAD20.75 offer price, there’s plenty of opportunity to do more for management’s stated purposes to “enhance liquidity for property acquisitions and to fund development.”

Late last month RioCan announced a move in the former category, inking contracts on two retail shopping centers anchored by Wal-Mart (NYSE: WMT) stores in Ontario and Quebec. Wal-Mart is 53 percent of the occupied space under an average lease of 17.1 years. A close is expected in the third quarter of 2010, providing some of the most secure cash flow in the business. RioCan REIT is a buy up to USD22.

TransForce has now completed the purchase of Enquest Energy Services, dramatically expanding its presence in the US energy services transport market, while adding approximately USD50 million of annual revenue. Management expect the deal to position the company to “gain from the expected recovery of the US energy services industry,” broadening its geographic exposure to Arkansas, Colorado, Montana, North Dakota, Pennsylvania and Wyoming.

This is the kind of deal that has kept TransForce’s franchise growing in what have been extremely tough times for the business. And it’s further positioned the company for an assault on its old highs–nearly twice the current share price–as North America’s economic recovery builds. TransForce is a buy up to USD11.

Daylight Energy (TSX: DAY, OTC: DAYYF), meanwhile, is attempting addition by subtraction, announcing the sale of what it deems “non-core properties” in Alberta, British Columbia and Saskatchewan with total production of 5,300 boe/d and a 67 percent gas weighting. The properties currently account for only 12 percent of the oil and gas producer’s output but 74 percent of property and 55 percent of its gross wells. The as yet unknown proceeds will be first deployed to slash debt and later to fund growth in the company’s core operating areas in the Pembina, Elmworth and West Central trends.

My main reason for adding Daylight to the Aggressive Holdings some years ago–and sticking with it through recent years’ ups and downs–was management’s unique growth strategy. Rather than put all their resources in one area, the company purchased properties in several places simultaneously, each with a different geology that was being developed by a major player with deep pockets. The idea was to learn from the larger company’s experience and deploy cash later into the most promising and economically feasible properties.

This divestiture combined with Daylight’s recent production gains are proof positive that this approach has worked. That fact certainly hasn’t been lost on the analyst community, as 12 of the 16 covering the company rate it a buy, with four holds. Nor is it lost on insiders, who have been prolific buyers this year, with most volume going off at higher prices. But it has to date been largely ignored by the market, very likely the hangover of the 37.5 percent cut in the dividend when the company converted to a corporation in May. That spells an opportunity to pick up shares of this high-growth producer with a solid yield. Buy Daylight Energy up to my target of USD11.

Just a few months ago Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) secured funding from sovereign wealth fund China Investment Corp (CIC) to develop its Peace River oil sands reserves. CIC is now a 5 percent owner of Penn West, and the company is on track to bring this project on line the next few years. Last month management took on another partner, Mitsubishi Corp (Japan: 8058, OTC: MSBHY), which will put up development funds for another project the company had not been counting on for output: the Cordova Embayment shale gas reserve in northeastern British Columbia. Penn West will operate the assets, while Mitsubishi will put up CAD250 million for a stake in the assets and CAD600 million of the first CAD800 million development costs.

This is a fabulous deal for Penn West, as it unlocks production in assets it was apparently not planning to develop on its own, and it requires little financial risk or outlay. It’s done little to impress investors, however, who are still far more fixated on what the company’s dividend will be after corporate conversion Jan. 1, 2011 than anything about its assets or earning power.

This deal and the CIC venture do nothing but enhance the company’s ability to pay a generous dividend after it converts to a corporation. And the company is more deeply undervalued than ever relative to its proven reserves and production potential, which should ensure a higher share price once it does convert to a corporation and commit to a dividend.

The reality with Penn West, however, is that investors are going to stay focused on the dividend until it makes its move. And if management cuts too much, there’s going to be a selloff.

My view is Penn West shares are going back to mid-20s for a start following conversion, even assuming flat energy prices, no matter what they do on the dividend. They’ll just get there a lot faster if management surprises on the upside rather than the downside. The surest way to do that would be to preserve the entire dividend as so many other producers have done. But again, this is at management’s discretion and I’m content to hold on either way. Penn West Energy Trust is a value up to my buy target of USD22.

One of Penn West’s competitors that has elected to hold its dividend level after conversion is Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF). The company presented its story to analysts at the Enercom Oil & Gas Conference in late August, mostly affirming what it had with its second-quarter conference call.

Two points worth re-emphasizing, however. One is the company’s ramping up of capital spending from CAD425 million to CAD485 million for 2010, with much of it going for development of assets from the Fort Berthold acquisition. That’s a pretty good sign this deal is paying off and that acquisition-led growth is still a successful strategy for the company.

Second, management actually reduced its credit agreement from CAD1.4 billion to CAD1 billion and pulled its debt-to-cash flow ratio down to just 0.9-to-1. That’s a good indication of the cash flow it expects to generate, and why it expects to be able to simultaneously continue the most aggressive development program in its history, maintain its current generous dividend rate and absorb any new taxes. Another plus: CAD3 billion of tax pools that CEO Gordon Kerr states “will shelter us out into the 2013-2015 timeframe…at which time we would look at paying tax somewhere in the order of 10 to 15 percent.”

Bay Street opinion is split on Enerplus, with five buys, eight holds and two sells. That seems largely due to differing opinions on the future of oil and gas prices, which are critical for any energy producer. But the picture is otherwise of an extraordinarily steady company. If Penn West makes you nervous, buy Enerplus Resources Fund instead up to USD25.

More Numbers

I reviewed the following companies’ second-quarter numbers in three Flash Alerts appearing on August 10 (A Fistful of Good Numbers), August 13 (Steady As They Go) and August 23 (Last But Not Least). You can read my analysis by clicking on “Alerts” in the top navigation bar on the website. If you didn’t receive them via e-mail, please contact our customer service department.

I tracked the following Conservative Holdings:

• Artis REIT (TSX: AX-U, OTC: ARESF)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF).

I also analyzed numbers released by the following Aggressive Holdings:

• Ag Growth International (TSX: AFN, OTC: AGGZF)
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)
• Perpetual Energy (TSX: PMT, OTC: PMGYF)
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF).

Going in alphabetical order, Ag Growth International’s (TSX: AFN, OTC: AGGZF) second-quarter sales rose 8.3 percent over last year’s tally. Cash flow and earnings were basically flat, after factoring out items relating to the company’s conversion to a corporation. And distribution coverage was again solid at nearly 3-to-1.

The performance is particularly impressive in that it was despite several challenges, such as poor crop conditions in western Canada following a period of excessive moisture during the seeding period. Earnings outside Canada, particularly in the US, were hit by current swings. Ag Growth was able to overcome all that thanks to the exploding demand for its portable grain handling equipment which shows no signs of letting up in the US and elsewhere. The sales backorder for commercial equipment is “significantly higher” than last year. And it should continue to benefit from the April acquisition of a Finland-based manufacturer of grain drying systems.

One point of sadness regarding the company, CEO Rob Stenson has been diagnosed with cancer and is undergoing treatment. Stenson intends to stay on the job and in any case has put a deep management team in place to keep the company on track. We wish him well. With little debt, robust capital spending plans and what amounts to virtually a government-mandated market for its equipment–owing to corn demand to produce ethanol–Ag Growth has a lot of upside left, despite hitting a new all-time high this month. Buy Ag Growth International up to my new target of USD38 if you haven’t yet.

Artis REIT (TSX: AX-U, OTC: ARESF) looks set to profit richly from the rebounding Canadian oil patch, even as it sailed through the region’s recent depression. In addition to posting extremely strong second-quarter earnings, the owner of commercial property in western Canada launched a successful equity offering earning CAD92.6 million and immediately put half the low cost capital to work with CAD52.5 million in high-percentage projects.

Highlights of earnings included a 28.4 percent revenue gain, a 30.3 percent increase in property net operating income (NOI) and funds from operations (FFO) growth of 18.4 percent. Occupancy rose to 97.1 percent from 96.2 percent at the end of the first quarter. Debt was cut to 46.9 percent of book value, versus 47.4 percent at the beginning of 2010. And the payout ratio was again a modest 87.1 percent, despite the dilution from funds raised but not yet deployed in acquisitions. Renewal rents are up 6.7 percent, and no single tenant now accounts for more than 4.4 percent of overall revenue.

There’s a lot of upside left in this one, which still yields 8.5 percent despite hitting a new 52-week high this week. Buy Artis REIT up to USD12 if you haven’t yet.

Atlantic Power Corp (TSX: ATP, NYSE: AT) turned in a payout ratio of just 88 percent on solid plant performance. More important, the company extended its “worst-case” for being able to maintain the current dividend rate into 2016.

US investors aren’t used to seeing dividend safety expressed this way. But for a cash-generating entity focused on distributions, this method presents the best possible picture for what to expect. The extension had much to do with the acquisition of a 27.6 percent stake in Idaho Wind Partners, a 183 megawatt (MW) project that will sell all of its output to Idaho Power when completed later this year.

The investment is expected to add CAD4.5 million to CAD5.5 million a year to cash flow every year and reduces Atlantic’s expected 2011 payout ratio to the 80 to 90 percent range, from around 100 percent anticipated this year. The company also announced progress on its Rollcast biomass venture, which I believe could extend the worst-case date further by early next year. Now trading on the New York Stock Exchange under the symbol AT, Atlantic Power Corp is a buy up to USD13.

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) further boosted its order backlog last month, winning a CAD82 million contract to develop a water treatment facility for a municipality in Fort McMurray, Alberta. The project will add to earnings but more importantly may signal a revival of activity in the oil sands area, which had dropped off sharply since the 2008 crash.

Bird’s second-quarter earnings per share were hurt again by weakness in the private sector, which it once more offset by robust public sector work. Backlog, which is the best indicator of future revenue, is back to more than CAD1 billion and looks set to rise further in the second half of 2010. That’s pretty good backing for management’s pledge to convert to a corporation at the end of its fiscal year (Dec. 31, 2010), with the only change in dividends being a switch to an equivalent quarterly payout of CAD0.45. Buy Bird Construction Income Fund up to USD35.

Brookfield Renewable Power Fund’s (TSX: BRC-U, OTC: BRPFF) second-quarter results were hurt by sharply lower water flows to its hydroelectric plants than a year ago. But the resulting rise in the payout ratio to 183 percent in the seasonally weak second quarter shouldn’t alarm anyone. Rather, it’s a part of doing business for this company, which has more than adequate cash reserves to ride out such conditions. And six-month income did cover the dividend by a solid 1.08-to-1 margin.

More important, the company’s wind fleet ran well and it brought the Gosfield Wind project ready for startup this autumn. Unlike hydro power contracts, wind plant revenues are immune from shifting conditions, as contracts are entered on capacity basis, ensuring developers and owners always get paid, in this case by the provincial government. As a result, construction of Gosfield and other projects will further leaven out cash flow from quarter to quarter in coming years.

Corporate conversion is still slated for later this year, with the company already boosting its distribution once since making its announcement as part of a transforming merger last year. Brookfield Renewable Power Fund is a buy anytime it trades below USD20.

Canadian Apartment Properties REIT’s (TSX: CAR-U, OTC: CDPYF) second-quarter highlights included 8.3 percent growth in FFO per unit, the account from which distributions are paid. Net operating margin, the best measure of REITs’ profitability, surged to 59.4 percent from 57.1 percent a year ago.

The payout ratio quarter, meanwhile, dropped to just 73.8 percent. Occupancy hit 98 percent, rent growth rose 2.6 percent and operating expenses as a percentage of revenue fell to just 40.6 percent in the second quarter from 44 percent a year ago. The weighted average interest rate realized by the REIT’s refinancing activity last quarter is just 3.58 percent, significantly below the 4.89 percent for maturing mortgages.

All that adds up to an exceptionally solid REIT that’s growing in Ontario, Quebec, Halifax and British Columbia and looks set to capitalize on an Alberta rebound as well. Canadian Apartment Properties REIT is a buy up to USD16.

Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF) posted weaker second-quarter results due to an -8.2 percent drop in attendance on a weak summer movies season. Despite a 12.6 percent drop in DCF per share, however, the payout ratio was still just 57.4 percent, showcasing conservative financial policies that will hold dividends at current levels when Cineplex converts to a corporation. That’s still set for Jan. 1, 2011, subject to a unitholder vote slated for the fourth quarter.

Cineplex Galaxy’s’ results depend on Hollywood and other movie-making centers to churn out popular content. But it has found a number of ways to boost profits even when the fare is weak, including a 6.6 percent boost in concession revenue per patron over last year’s level, the fund’s best ever. Cineplex Media revenue rose 18.6 percent on increased “full motion” advertising. And the company’s technological advances continue, including post-theater distribution. Buy Cineplex Galaxy Income Fund up to USD20 for safe growth and income if you haven’t yet.

Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF) continues to translate recent acquisitions and product expansion into higher revenue (up 78.4 percent in the second quarter) and cash flow (up 32.7 percent).  Adjusted net income per unit surged 5.1 percent, as a 27.4 percent jump was affected by equity issues to finance growth. The payout ratio was again a very well-covered 71.2 percent.

Results like these make management’s decision earlier this year to cut its distribution in January 2011–to an annualized rate of CAD1.20 from the current CAD1.84 per unit–seem conservative to the extreme. But they also make the company a prime candidate for a return to dividend growth, once it puts the conversion to a corporation behind it. The stock has surged above my target of USD17. That’s a price we should see again, however. Be patient.

Innergex Renewable Energy (TSX: INE, OTC: INGXF), like other power trusts was also hurt by lower water flows, though its overall production rates surged 49.2 percent due to the merger with its parent company. Second-quarter cash flow rose 38.2 percent, and the payout ratio was a comfortable 69.8 percent for the first half of the year.

With management still cautioning that it expects a much higher payout ratio going forward–as it completes an ambitious hydro and wind construction program–I would caution investors against reading too much into these otherwise impressive results. Rather, I expect to see higher payout ratio numbers and no dividend growth for at least the next couple years. There is, however, little real financial or dividend risk. And there’s a big payoff coming as the promised generation comes on stream.

With its debt rating affirmed this month at BBB- stable by S&P, Innergex Renewable Energy continues to rate a low-risk buy up to USD10.

Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) saw its payout ratio surge to 173 percent in its fiscal first quarter 2011. That was entirely the result of record warm weather and one-time costs for investing in growth during a period that’s a seasonally weak one for sales.

Moreover, management affirmed its full fiscal-year target of having distributable cash cover the payout with a margin to spare, pointing among other things to the success of geographic diversification efforts. Thanks to the purchase of Hudson Energy, the US business is now larger than the Canadian operation, a major factor enabling the company to convert to a corporation without cutting its distribution, slated for January 2011. And the growth of the JustGreen offering is also producing improved margins.

With customer growth of 84 percent the past 12 months and a 30 percent increase in capital spending over last year, Just Energy is well on track to keep growing rapidly in coming years. And despite recently hitting a new 52-week high, the units still yield nearly 9 percent, a level that will hold when the company converts to a corporation at the end of calendar 2010. Buy Just Energy Income Fund up to USD14.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) also experienced a second-quarter cash flow shortfall, the result of undeployed cash from the recent sale of its minority interest in the Leisureworld retirement communities operation. Some of that money will start generating a return when the company’s CAD130 million solar power project starts producing and selling energy under a lucrative long-term contract to the Ontario power authority, beginning in mid-2011.

Management still looks for operating cash flow “to be higher in 2010 than in 2009” and is sticking to its forecast of a payout ratio of 70 to 75 percent over the next five years. It’s also begun issuing long-term dividend projections similar to Atlantic Power’s, stating “based on the Fund’s current portfolio the new distribution policy of 66 cents per unit annually is expected to be sustainable through 2014.” And like Atlantic, that date will be extended into the future as the company adds more projects that are accretive to cash flow. Buy Macquarie Power & Infrastructure Income Fund up to USD8 if you haven’t yet.

Parkland Income Fund’s (TSX: PKI-U, OTC: PKIUF) second-quarter earnings were strong, with fuel sales volumes and margins rising 28 percent and spurring cash flow growth of 19 percent thanks to the Bluewave acquisition. Management expects to exceed its full-year target of CAD2 million in cost savings from this deal.

DCF exceeded the distribution by 14 percent in the quarter and 11 percent for the six months ended June 2010. That margin is expected to improve going forward, in part due to an ongoing rebound in commercial fuel sales volumes rebound, in large part thanks to an ongoing recovery in the forestry business.

Parkland’s cash flows are affected by energy prices in one major way: A substantial share of profit is derived from refiners’ margins. These remain on the low side, as energy prices have remained relatively high and demand for refined products soft. Margins for diesel, for example, are still low due to excess capacity. Strength in areas like forestry, however, promises to trigger an improvement in coming quarters for the fuel, as well as other refined petroleum products. That will affect the post-conversion dividend but it should be generous in any case, based on management’s pledge to hold between 75 and 110 percent of the current level (CAD1.26 per unit annually). Last month’s Portfolio addition Parkland Income Fund is a bargain up to USD13.

Perpetual Energy (TSX: PMT, OTC: PMGYF), formerly known as Paramount Energy Trust, remains by far my most aggressive recommendation. Production is 95 percent natural gas, official reserve life is among the industry’s lowest, and its debt-to-annualized cash flow is consistently among the industry’s highest in the neighborhood of 2.7-to-1.

Why own it? For one thing, the company has converted to a corporation, so there’s no additional risk to the dividend on that score. Second, the company’s hedging program is easily its industry’s most aggressive and has guaranteed the security of the company’s distribution at least through 2010. The company further supplements cash flow with government payments for not producing from reserves located near bitumen deposits. Third, management is cutting costs, which goes a long way to offsetting the last 12 months’ 39 percent decline in realized selling prices for natural gas.

Sooner or later, Perpetual is going to need higher gas prices to sustain dividends. But for the time being, it looks set to maintain a 12 percent plus yield. Very aggressive investors who don’t already own Perpetual Energy can buy up to USD6.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) is also greatly affected by changing natural gas prices, with 84 percent of its output coming from the fuel. But that’s where the similarities to Perpetual and in fact to any other competitor end abruptly.

For starters, the company owns and operates a base of some of the lowest-cost and longest-lived reserves on the planet, with a reserve life based on proven reserves of more than 20 years and operating costs barely USD2 per barrel of oil equivalent, a fifth the industry average.

Second-quarter output rose 23 percent over last year’s levels, for a 29 percent increase in debt-adjusted production per unit. That lifted funds from operations by 15 percent, despite a -21.5 percent drop in realized natural gas prices. Peyto also set the stage for higher production in coming months, as it increased capital spending more than sevenfold from last year’s tally to CAD37.4 million. The company continued development of its Cardium, Notikewin and Wilrich Deep Basin tight gas plays.

The second-quarter payout ratio was roughly flat with last year at 83 percent, while the first half payout was also the same at 77 percent. Management has stated its intent to maintain its current distribution rate until the end of 2010, when it intends to convert to a corporation. The new rate is likely to be set on or before Dec. 8, when unitholders will vote on the conversion. I expect a cut of some sort given the low level of natural gas prices. But that’s pretty much priced in with the yield at nearly 10 percent. My buy target for Peyto Energy Trust remains USD15.

Provident Energy Trust’s (TSX: PVE-U, NYSE: PVX) next big hurdle will be setting a dividend rate for its conversion to a corporation at the end of this year. The good news for investors is that at a yield of 11 percent expectations are very low and will be easy to beat. Meanwhile, the company’s midstream energy business looks very solid based on second quarter results.

First-half gross operating margins were up 9 percent from year-earlier levels. That was despite a weak Michigan economy, which hit sales volumes for natural gas liquids. The company also saw a dip in demand for propane in the US Midwest, butane and western Canada and lower condensate margins as well. That was partly offset by better profits at the commercial services division.

The payout ratio based on cash flow and factoring out one-time items was 120 percent in the second quarter and 110 percent in the first half 2010. That includes the one-time impact of shutting down the hedge positions, indicating the payout will drop in the second half of the year. With tax pools sheltering all income until 2013, that should ensure a pretty sizeable dividend for post-conversion Provident.

Provident Energy Trust is a buy up to USD8 for those who don’t already own it. Hold Pace Oil & Gas (TSX: PCE, OTC: MDOEF) until we see a price in the USD10 range.

Vermilion Energy (TSX: VET-U, OTC: VETMF) completed its conversion to a corporation on Sept. 1 and will commence trading on the Toronto Stock Exchange under the symbol VET on Tuesday Sept. 7. Conversion was completed with no change to the distribution, a further reflection of this trust’s extremely strong production profile, unique geographic diversification and very low debt.

Production rose 5 percent from the first quarter, FFO per share rose 14.4 percent sequentially and distribution coverage was nearly 2-to-1. Results topped Bay Street expectations by a wide margin, and net debt was virtually non-existent at just 0.51 times annualized cash flow, the lowest ratio in the business.

The company continues to develop major projects in the Netherlands, France and the Cardium light oil trend in Canada and is on track to boost output 25 to 30 percent from the startup of the Corrib Field off the Irish coast in 2012. Still well off its mid-2008 high of nearly USD45–a level it should easily revisit as the global economy continues to recover–Vermilion Energy Trust is a buy up to USD33 for those who don’t already own it.

What to Watch

As long as corporate borrowing rates are at their lowest levels in more than 40 years, there’s little or no chance of a reprise of the 2008 credit crunch. In fact, conditions could scarcely be more opposite now of what they were then.

Even if another crunch did occur, however, CE Portfolio holdings could scarcely be better prepared to weather it. That’s again what I found from reviewing Portfolio companies’ debt maturities and expiring credit agreements in 2010 and 2011. Figures shown are debt due before the end of 2011 as a percentage of market capitalization, along with the percentage that has fallen or risen over the past month.

Conservative Holdings

• AltaGas Ltd–0.0%, -100% (debt due, change)
• Artis REIT–0.3%, same
• Atlantic Power Corp–0%, same
• Bell Aliant Regional Communications Income Fund–0%, same
• Bird Construction Income Fund–0%, same
• Brookfield Renewable Power Fund–0%, same
• Canadian Apartment Properties REIT–0%, same
• Cineplex Galaxy Income Fund–0%, same
• CML Healthcare Income Fund–0%, same
• Colabor Group–9.7%, same
• Davis + Henderson Income Fund–0%, same
• IBI Income Fund–0%, same
• Innergex Renewable Energy–0%, same
• Just Energy Income Fund–1.9%, -8.6%
• Keyera Facilities Income Fund–0.1%, -96.6%
• Macquarie Power & Infrastructure Income Fund–11.5%, same
• Northern Property REIT–0%, same
• Pembina Pipeline Income Fund–1.0%, -10%
• RioCan REIT–3.9%, same
• TransForce–0%, same

Aggressive Holdings

• Ag Growth International–0%, same
• ARC Energy Trust–0%, same
• Chemtrade Logistics Income Fund–22.9%, same
• Daylight Energy–0%, same
• Enerplus Resources Fund–0%, same
• Newalta–0%, same
• Parkland Income–0%, same
• Penn West Energy Trust–2.8%, same
• Perpetual Energy–0%, same
• Peyto Energy Trust–0%, same
• Phoenix Technology Income Fund–0%, same
• Provident Energy Trust–8.1%, same
• Vermilion Energy Trust–0%, same
• Yellow Pages Income Fund–3.2%, same

None of these companies have significant refinancing risk. And the majority of what is outstanding isn’t due until late in 2011. That’s plenty of time for all of these high-cash-generating companies to refinance or even pay off what’s owed with cash.

The count now stands at six for Canadian Edge Portfolio members that haven’t set post-corporate conversion dividends. CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) is the latest to declare its intentions, trimming its current payout of CAD0.08927 per unit to CAD0.0629. The September High Yield of the Month will continue to pay out at its current rate until Jan. 1, 2011, at which time it will convert to a corporation.

CML’s cut of roughly 29.5 percent was better than Bay Street had expected, as were its second-quarter earnings. As a result, the shares have posted a double-digit total return since the announcement. Challenges remain, particularly improving the profitability of the company’s US medical diagnostic operations. But the trust again looks on track for growth and will still yield around 7 percent at the new dividend rate, based on current prices. Accordingly, I’m reiterating my buy target of USD12 for CML Healthcare Income Fund.

As for the rest, Parkland is still the only company talking about specific numbers, sticking to a target of between 75 and 110 percent of the current monthly level of CAD0.105. The second-quarter earnings announcement added little to that. Nor did the conference call, other than a statement from CEO Michael Chorlton that the board “expects to make the final 2011 dividend decision after the end of the third quarter of 2010 based on our business outlook.”

That may depend a great deal on energy prices as they affect profit margins on finished products. But even at the low end of that range, Parkland will still yield around 9 percent, so investors have little lose. Parkland Income Fund, an August High Yield of the Month, is still a buy up to USD13.

As I’ve stated before, post-conversion dividends at energy producers ARC Energy, Penn West and Peyto will depend on energy prices, just as they do now. Of the three, ARC’s statements to date have been the most dividend-friendly, Penn West’s the most ambiguous.

The key, though, is these are valuable companies no matter what management does. If management preserves all or most of their dividends, we’ll get our returns faster. But even if they cut more than expected, whatever selloff results will be reversed in the coming months as value hunters come on board. We’ll just have to be a little more patient for the pay off.

That also goes for Provident Energy Trust, now a pure midstream company after the spinoff of Pace Energy. As second-quarter earnings attest, profits follow “frac” spreads between refined products and raw commodities. Management, however, seems to have the inclination to preserve more of the dividend than less. Meanwhile, the stock is cheap and a buy up to USD8. My advice remains to keep holding onto Pace, which looks deeply undervalued purely because income investors have sold out.

Finally, IBI Income Fund (TSX: IBG-U, OTC: IBIBF) has received court approval for its conversion to a corporation but has yet to set a dividend level. I look for more details with the trust’s third-quarter conference call in November. But in any case, management looks set to maintain the current dividend level at least until conversion on Jan. 1, 2011.

Management’s outlook is increasingly positive, which should mean a higher post-conversion dividend than the market expects, with IBI yielding more than 12 percent.

All of these trusts are going to be strong corporations after they convert. That’s the key to what we’re ultimately going to make by buying and holding them. For non-Portfolio companies tracked in How They Rate that have yet to announce post-conversion dividends, see Dividend Watch List.

• ARC Energy Trust (TSX: AET-U, OTC: AETUF)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)
• Provident Energy Trust (TSX: PVE-U, NYS: PVX)

Here’s the list of 16 CE Portfolio companies that have never once cut dividends. Of this list, IBI and Parkland (see above) have yet to declare definitive 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 table 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)
• 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)
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)