It was evident as early as Jan. 8, 2007, that Canadian income trusts and the high-yield legacy they’ve established won’t be consigned to the ash heap. That day, Colabor Income Fund followed its business sense rather allow its future and that of its investors to be determined by tax policy, completing the acquisitions of Summit Food Service Distributors in a transaction found to violate the “undue growth” principles spelled out in the minority Conservative government’s Oct. 31, 2006, Tax Fairness Plan.

That we still have an impressive set of sound businesses spinning off generous dividends to investors is a victory of fundamental supply and demand. Investors want yield, and public companies have to compete for capital. Distributing a significant slice of cash flow attracts investors, and the practice has the added benefit of instilling discipline on management teams that might otherwise get a little too aggressive when it comes to looking beyond the confines of the business plan.

Canadian income trust Colabor Income Fund converted into Canadian corporation Colabor Group (TSX: GCL, OTC: COLFF) in 2009 without cutting the distribution it had maintained since the summer of 2005, and throughout the period it paid the so-called SIFT tax. During the four years of grace that will soon expire many more Canadian income trusts have executed cut-less conversions and become high-yielding corporations.

Unfortunately, along with the very encouraging course the process of conversion took, there is a persistent bureaucratic gnawing at investors’ portfolios. US investors who hold shares of corporations that converted from income trusts after Oct. 31, 2006 in IRA accounts are still being victimized by American brokerages, clearing houses such as the Depository Trust Corporation and the Canada Revenue Agency that conspire by inaction to allow 15 percent withholding from dividends paid in respect of these shares.

Despite “clarifying” language attached by both countries to an amendment to the US-Canada Income Tax Treaty and a letter interpreting the history of the legal issues from counsel to the Internal Revenue Service US and Canadian institutions continue to denying IRA investors what’s theirs.

But despite the best efforts of bureaucrats, public and private, in Canada and the US, the good news of these last four, long years is that Canadian income trusts will leave in their wake a new class of high-yielding securities.

The immediate purpose of the Tax Fairness Plan, introduced four years ago this Sunday, was to stop conversions of existing Canadian corporations into income trusts. Word on the Street was that a few heavyweights, including EnCana Corp (TSX: ECA, NYSE: ECA) and BCE (TSX: BCE, NYSE: BCE), were on the verge of making the switch, which, according to studies alluded to but never disclosed by the government, would add to the already significant “tax leakage” wrought by the sector. Encana and BCE each eventually underwent significant changes–the former split in two, while the latter became the object of a CAD30 billion going-private transaction that eventually fell apart during the global credit crunch.

The long-term goal of the Plan was to eliminate Canadian income trusts altogether. Minister Flaherty announced a four-year grace period before trusts that refrained from “undue growth” would continue to enjoy their tax-advantaged status. But 2011 was the meant to be the end. Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) will do its part to prevent that becoming literally true, while countless other companies, led by Colabor Group, which charted the course, will continue to dish out market-beating yields backed by solid underlying operations.

Chemtrade will maintain its present structure because the costs of conversion at this point don’t justify the potential impact on other parts of the business. Chemtrade is relatively small, so the legal fees associated with conversion, even in the streamlined manner fashioned by the federal government, are relatively huge. Nevertheless, Chemtrade has committed to remaining an income trust and maintaining its current payout rate beyond Jan. 1, 2011. The company also derives nearly 80 percent of revenue outside Canada, shielding much of its income from taxation.

Colabor Income Fund was in advance negotiations to buy Summit at the time of the Halloween Massacre. Management had no idea at the time whether consummating the move would make it immediately taxable at the entity level, largely because the government failed to articulate with any sort of precision what constituted “undue growth.” “Notwithstanding this uncertainty,” the company explained

management of Colabor believes the acquisition of Summit constitutes a strategic acquisition for Colabor and is consistent with the Fund’s objectives of generating sustainable, predictable and growing distributable cash. Further, the Summit acquisition positions Colabor to take advantage of opportunities in the sector while strengthening the financial and operational base of Colabor.

Colabor made the deal because it made sense from a long-term business perspective. At the end of 2007 Canada’s Finance Dept ruled the Summit acquisition an “undue expansion.” Colabor Income Fund was therefore subject to SIFT taxation in 2007. The company still has yet to cut its payout; it yields 9.9 percent, though paid on a quarterly rather than a monthly basis.

It’s impossible to say that Colabor set a trend that others followed. As one analyst wrote at the time of the Halloween Massacre, there will eventually be more than 250 different responses to the Tax Fairness Plan, one for each company impacted by it. But the record is full of companies that have converted without cutting or will convert on or about Jan. 1, 2011, without cutting.

The list includes agriculture stalwart Ag Growth International (TSX: AFN, OTC: AGGZF), Atlantic Power Corp (TSX: ATP, OTC: ATLIF) and its ever-growing portfolio of clean-energy projects, Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) and its CAD1 billion project backlog, Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF), the dominant movie theater operator in Canada, and recently converted Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF), which is just about the safest, most predictable way to play the Canadian oil sands.

Canadian income trusts are dead. Long live high-yielding Canadian corporations.

The Roundup

As reported in Tuesday’s Flash Alert, Atlantic Power Corp (TSX: ATP, NYSE: AT) has put some of the low-cost capital it raised this month to work, as the company announced two acquisitions during the past week, including its first biomass projects. For details on the transactions see the Oct. 27, 2010, Flash Alert. The company will report third-quarter earnings Nov. 10.

Atlantic Power Corp is now a buy up to USD13.50.

Here are reporting dates for the Canadian Edge Portfolio Conservative Holdings:

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–Oct. 28 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 9 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 10 (confirmed)
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–Nov. 3 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–Nov. 9
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–Nov. 9 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Nov. 8 (confirmed)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–Nov. 11 (confirmed)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–Nov. 11
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–Nov. 2 (confirmed)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–Nov. 10 (confirmed)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–Nov. 12
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–Nov. 5
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–Nov. 2 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–Nov. 3 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Nov. 10 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–Nov. 3 (confirmed)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Oct. 28 (confirmed)
• TransForce (TSX: TFI, OTC: TFIFF)–Oct. 29 (confirmed)

Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF), added to the Aggressive Holdings in October, reported third-quarter distributable cash flow of CAD0.78 per unit, which covered the CAD0.69 per unit distributed to unitholders by a 1.13-to-1 margin. Details on Canfor Pulp’s quarterly results are available here.

Canfor Pulp Income Fund, an October High Yield of the Month selection, is now a buy up to USD16.

Here are reporting dates for the rest of the Canadian Edge Portfolio Aggressive Holdings:

• Ag Growth International (TSX: AFN, OTC: AGGZF)–Nov. 10 (confirmed)
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–Nov. 1 (confirmed)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 10 (confirmed)
• Daylight Energy (TSX: DAY, OTC: DAYYF)–Nov. 4
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–Nov. 12 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 5
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)–Nov. 5
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–Nov. 5
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Nov. 9
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–Nov. 11
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–Nov. 10
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–Nov. 4
• Vermilion Energy (TSX: VET, OTC: VEMTF)–Nov. 5
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–Nov. 3 (confirmed)

How They Rate

It’s a relatively quiet time ahead of third-quarter reporting season, but there are interesting items of note in the Oil and Gas, including a significant restatement of long-term strategic aims and short-term goals for a major natural gas producer and conversion plans for three more companies, one cut-less.

Oil and Gas

Baytex Energy Trust (TSX: BTE-U, NYSE: BTE) pulled out of a joint venture with Petrobank Energy and Resources (TSX: PBG, OTC: PBEGF) to develop heavy oil assets in Saskatchewan using the toe-to-heel air injection (THAI) process. THAI facilitates production of underground petroleum by pushing heated air into a vertical well, while an intersecting horizontal well siphons off the resulting heated and softened oil. Petrobank wanted to pursue a more aggressive development path than was comfortable for Baytex, which wanted to confirm results from test wells before committing full resources.

Petrobank will give Baytex CAD18 million and a gross overriding royalty of an undisclosed percentage on the project when production starts in exchange for Baytex’s 50 percent interest in the lands and wells comprising Phase I at Kerrobert, Saskatchewan, comprising 1,300 net acres of land as well as Baytex’s interest in the two-well THAI pilot project.

Baytex Energy Trust, which recently affirmed a plan to maintain its current distribution rate when it converts to a corporation on Dec. 31, 2010, is a buy up to USD34.

Syncrude, the operating entity in which Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) owns a 39.6 percent interest, reported that “at least” 230 more ducks had to be euthanized after they landed on a tailings pond. Just a few days ago Syncrude paid a CAD3 million fine for a similar incident in 2008 when more than 1,600 birds died. The latest incident is sure to draw even more scrutiny to the oil sands at a crucial time, as the US State Dept is still considering whether to approve construction of Keystone XL, a pipeline with the potential to double the amount of oil sands crude shipped to the US for refining.

Canadian Oil Sands recently trimmed its full-year production forecast following an unexpected shutdown of one of its coking facilities. Management has also been quite up front about the fact that a distribution cut is coming, soon. The latest news is unlikely to result in a significant financial hit to the company, but it will hurt the oil sands industry in the short term.

The upshot is Canadian Oil Sands Trust is coming back within my USD26 buy target, though Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) remains the best bet on the oil sands for conservative investors.

EnCana Corp (TSX: ECA, NYSE: ECA), coincident with its third-quarter earnings report, cut full-year 2010 production guidance and its capital spending budget because of “unsustainably low” natural gas prices. EnCana boosted production in the third quarter, but an oversupplied market hurt the bottom line and led the company to scale back an ambitious growth plan.

EnCana earned USD569 million (USD0.77 a share) in the third quarter, compared with USD25 million (USD0.03 a share) a year earlier, before its spinoff of its oil production and refining businesses into Cenovus Energy (TSX: CVE, NYSE: CVE). Excluding the effect of hedges, operating earnings came in at USD98 million (USD0.13 a share). Cash flow totaled USD1.1 billion (USD1.54 a share), beating analyst estimates. Third-quarter natural gas production was up 17 percent from a year earlier to 3.2 billion cubic feet a day. Total production rose 15 percent to 3.3 billion cubic feet of gas equivalent a day.

After accounting for hedges EnCana’s realized natural gas price declined by 29 percent to USD5.27 per million British thermal units (MMBtu) from a year earlier, even as the market price for natural gas rose 23 percent from a year earlier to USD4.39 per MMBtu.

CEO Randy Eresman said during the EnCana’s third-quarter conference call that prices would have to rise to between USD6 per MMbtu and USD7 per MMbtu for the North American market to be “balanced.” The company has about a third of its production hedged at an average price above USD6 per MMbtu for 2011 and 2012, down from about two-thirds of its production hedged in 2010.

Management reduced its 2010 production estimate to 3.315 billion cubic feet of gas equivalent a day (Bcfe/d) from its previous view of 3.365 Bcfe/d and lowered its planned capital spending to USD4.8 billion from USD5 billion. It also lowered the top end of its projected cash-flow guidance for the year, now projecting cash flow of USD5.95 to USD6.20 a share rather than USD5.95 to USD6.50. EnCana is a buy up to USD40.

NAL Oil & Gas Trust’s (TSX: NAE-U, OTC: NOIGF) board of directors last week approved the conversion of the trust into NAL Energy Corp. Unitholders will vote Dec. 16 on the one-for-one, tax deferred exchange.

Following conversion NAL will pay a monthly dividend of CAD0.07 per share, a 22 percent reduction from the current CAD0.09 per unit rate. From a Canadian taxable shareholder perspective the new dividend will be approximately equivalent on an after-tax basis to the current distribution. Based on NAL’s Oct. 26 closing price the implied new yield is 6.6 percent.  NAL Oil & Gas Trust is a buy up to USD15.

Pengrowth Energy Trust (TSX: PGF-U, NYSE: PGH) will become Pengrowth Corp on Dec. 31, 2010, assuming receipt of all regulatory approvals and ratification by unitholders. Pengrowth Corp will pay the same CAD0.07 per month that Pengrowth Energy Trust pays. Pengrowth Energy Trust is a buy up to USD10, though it’s trading well above that target in the wake of its cut-less conversion announcement.

Progress Energy Resources Corp (TSX: PRQ, OTC: PRQNF) reported production of 42,335 barrels of oil equivalent per day (boe/d), good for a 12 percent increase on a per share basis above year-earlier totals. The company generated cash flow of CAD44.9 million (CAD0.21 per share), a 75 percent increase from the third quarter of 2009. The company invested CAD108 million to drill a total of 25 wells (20.2 net), reporting a100 percent success rate. Progress completed four horizontal wells in the prolific Montney Shale formation with an average test rate of 7.1 million cubic feet per day (MMcf/d).

Progress’s average realized gas price for the third quarter, including hedging, was CAD4.06 per thousand cubic feet, while operating costs averaged CAD6.11 per barrel of oil equivalent. Progress has hedges on approximately 10 percent of its natural gas production for the remainder of 2010 at an average AECO price of CAD5.85 per mcf.

As at Sept. 30 Progress had approximately CAD430 million available under its CAD650 million revolving credit facility, while debt-to-total capitalization was 17 percent. Progress Energy Resources Corp is a hold.

Zargon Energy Trust’s (TSX: ZAR-U, OTC: ZARFF) board of directors unanimously approved a plan to convert to a corporation on Dec. 31, 2010, and set an initial dividend rate of CAD0.14 per share per month. Zargon had paid CAD0.18 per unit for 52 consecutive months as of October.

Unitholders will exchange their trust units on a one-for-one basis for common shares. The converted company will be known as Zargon Oil & Gas Ltd. Based on the Oct. 26 closing price of CAD20.69 the implied yield for new Zargon is 8.1 percent.

Zargon Energy Trust, which has held to its previous guidance to pay a post-conversion dividend equal to 35 percent of distributable income, is a buy up to USD20.