The Canadian oil sands are dirty, remote, expensive to produce and at the same time plentiful and in short supply. Whatever your feelings are on the topic the fact is the oil sands represent an increasingly critical component of the bridge that must be built to the often prophesied clean-energy future.

That’s one clear point to take away from a pair of reports out during the past couple weeks. Another is that the Canadian oil sands represent an opportunity for investors to build wealth through steady, reliable income and what could be–if recent research and forecasts prove even remotely accurate–significant capital upside.

By whatever measure, and even overweighting the most favorable studies, full life-cycle oil sands production results in more greenhouse gas emissions than conventional methods of developing crude. Oil sands concentrations in north central Canada require significant infrastructure investment to make their exploitation more economic. Even assuming completion of prospective pipelines such as Keystone XL, for example, the extraction process, done on a massive scale, is capital-heavy and energy-intensive.

But while it’s basically true and a comforting notion in the short term that the Canadian oil sands are in the same ballpark with Saudi Arabia’s massive fields in terms of crude reserves recent research, looking at the problem from different but parallel perspectives, suggests we still may not have enough oil to fuel the global economy until really viable alternatives arrive.

Two reports–a research paper from the Department of Civil and Environmental Engineering at the University of California, Davis, and the International Energy Agency’s (IEA) World Energy Outlook–could provide the starting points to reframe the energy security question as follows: How long until viable alternatives to oil emerge, and do we have enough to get there?

The Canadian Oil Sands: Big Drops in a Big Bucket

If you believe in markets and that they can accurately reflect expectations for the future, you’ll be fascinated by Future Sustainability Forecasting by Exchange Markets: Basic Theory and an Application by Nataliya Malyshkina and Deb Niemeier. If you’re interested in knowing how long it might take until a real alternative to oil emerges, it is essential reading.

And if you’re curious whether we have enough oil to get us to that point, you’ll want to know that in its most recent annual report the IEA concluded that production of conventional crude oil probably topped out for good in 2006, at about 70 million barrels a day, and that production from oil fields now in operation will drop sharply in coming decades. “The size of ultimately recoverable resources of both conventional and unconventional oil,” notes the IEA in its 2010 annual report, “is a major source of uncertainty for the long-term outlook for world oil production.” The IEA predicts that oil demand, prices and dependence on OPEC will rise through 2035, and that global oil supplies will be near their peak in 2035. Shrinking supplies and rising prices mean that oil sands output is not only economic. This dynamic makes the Canadian oil sands a defining characteristic for the Great White North and a major component of the bridge to the clean-energy future.

Malyshkina and Niemeier make no claim to a definitive conclusion, only that theirs is a tool for what is a critical debate. Their research is rooted in the theory that markets are strongly influenced by the laws of supply and demand, and, that over the long term “market forecasts are effective in pricing traded securities.” They apply a pricing model to publicly traded securities whose future cash flows depend on the appearance of both oil and oil-replacement technologies to find out what the market believes about when relevant innovations will emerge.

The market-based model pushes out into the 22nd century the emergence of a technology capable of replacing oil in the economy. The theoretical framework established by Malyshkina and Niemeier suggests that “the time horizon until the appearance of new technologies related to replacement of nonrenewable resources, for example, crude oil and oil products” such as gasoline and diesel is 131 years.

That’s a lot longer than previous studies, which have pegged the timeframe at basically a generation or two, 20 to 50 years. Estimating the time for the introduction and spread of new technologies into the economy is subject to a lot of complex variables, which accounts for the wide variation in conclusions produced by equally compelling research. But it is important to understand, particularly in light of the relative accuracy shown by applications of similar models in different competitive environments, what the 131-year time horizon means in the context of current oil reserves and consumption patterns.

The bottom line is this: Available data suggest the peak of oil production will occur anytime between now and 2035. But we need to make it last until 2141, which means there is the very real possibility that crude oil will be depleted before alternatives replace it. The Canadian oil sands could play a role in mitigating potential economic and social dislocation wrought conventional crude shortages.

Canadian Oil Sands and Continental Politics

Present politics reflects old paradigms. Looking at the energy security problem and the role of the Canadian oil sands in ensuring it for North American requires sacrificing utopian ideas in favor of solving a real problem. And at this stage the game gets complicated. A change to the timeline suggested by Malyshkina and Niemeier in the future sustainability forecasting study could result from policy choices; their model incorporates only that information available right now. It tells us what the market expects.

Crude oil and the problem of its life-cycle emissions will be no more, a lot sooner than pretty much everyone thinks and even including, perhaps, clear-eyed environmentalists, for reasons that can be boiled down to the fact that most economic development in human history has taken place during the last half-century. Our consumption of resources–particularly oil, the essential element for industrialization–has accelerated exponentially in that time and has been supercharged recently by emerging Asia. As things stand we’re likely to burn it all before the state makes it fade away.

At the same time, putting a price on carbon dioxide could be one mechanism that extends the life of what will remain, based on existing infrastructure and the types of  fuel consumed by the mass of the general vehicle fleet, to take one obvious example, a critical piece of the 21st century energy puzzle. A federal carbon solution, though clearly no threat to be legislated before 2013, might finally provide regulatory certainty–something at least a few major energy-industry CEOs would favor at this point. And it would, in the absence of wiping out all visible-hand mechanisms, at least offset the government-supported competitive advantage oil producers still have over renewable-focused companies.

One way to extend the life of known recoverable crude reserves is to make the price of a barrel of oil more expensive. That might spur capital flows to companies that could offer solutions on comparable economic terms, reducing the length of the bridge to the clean-energy future from both ends.

Republican victories in US Congressional elections should relieve at least some pressure to curtail American consumption of dirty oil sands crude. But at least some regulatory power still resides at the state level, and Democrats control governor’s seats in key, highly populated coastal jurisdictions. Nevertheless, the tone on the Canadian oil sands has shifted lately; it’s a gentler chorus that includes Secretary of State Hilary Clinton, who will give final word on the Keystone XL pipeline that will bring Canadian oil sands output to key refining hubs in the US Midwest and around Houston.

The market-expectations approach described by Malyshkina and Niemeier may help politicians better understand the importance of crafting energy legislation that takes account of long-term supply and demand and the potential for innovation to alter the present course of things. Until then, the Canadian oil sands will remain an important piece of the global energy puzzle and a great way to build wealth.

The Roundup

Third-quarter earnings season closed with a bang last week, as 17 Canadian Edge Portfolio Holdings reported results. Below, in one location for your weekend pleasure, are the highlights for each and every Aggressive and Conservative Holding. For next week we promise the compendium of How They Rate coverage universe earnings notes.

Aggressive Holdings

Ag Growth International (TSX: AFN, OTC: AGGZF) turned in expectations-beating third-quarter results and simultaneously announced an 18 percent increase in its dividend to an annual rate of CAD2.40 per share. Sales surged 21.7 percent and cash flow rose 11.7 percent over year-earlier levels. That pushed up earnings per share to CAD1.25, a 6.8 percent boost over what was a very strong third quarter 2009. That covers the new dividend rate by better than a 2-to-1 margin.

Demand for commercial grain handling equipment was robust in the US, with sales in US dollars rising 20 percent. That offset weakness in the Canadian harvest due to adverse weather. The company has made several investments in product and process capacity that should start to lift earnings again in 2011, including expansion outside of North America, particularly in Eastern Europe.

Strong earnings news and dividend growth pushed Ag Growth to a new all-time high this week, and it currently trades well above my target of USD40. That higher valuation hasn’t been lost on the Bay Street analysts who follow it, and we saw several downgrades this week. The upshot: I’m keeping my target where it is on Ag Growth International for now. Hold if you’ve got it. Otherwise, let’s be patient a little while longer.

ARC Energy Trust (TSX: AET-U, OTC: AETUF) reported robust third-quarter earnings, as the company rode a 43 percent boost in natural gas output to a 17 percent increase in cash flow per share. Those results were so favorable management announced both a cut-less conversion to a corporation on Jan. 1, as well a CAD625 million capital budget to spur another 24 percent jump in production by the end of 2011.

ARC has big plans for production and, as third-quarter earnings demonstrate clearly, it’s systematically executing them.

That increased scale is slowly and surely bringing the company’s costs lower, and management expects a much bigger impact as fast-growing shale gas becomes a larger percentage of output.

Current numbers don’t look bad, either, with the third-quarter payout ratio falling to just 48 percent. Remarkably, ARC achieved that while selling its natural gas (60 percent of output) at an average realized price of just USD3.79 per thousand cubic foot. One reason: Much of its gas is rich in liquids.

ARC boosted its third quarter natural gas liquids (NGL) output by 26 percent in the quarter, while simultaneously realizing a 26 boost in realized selling prices. NGLs are substitutes for oil in many processes and products. Consequently, they tend to follow oil prices, though at a discount. As a result companies like ARC can actually in a pinch produce ordinary gas at a loss if it’s rich enough in liquids.

That’s not the case with ARC. But it is another arrow in the company’s considerable quiver. And it’s another good reason to buy ARC Energy Trust anytime it trades below my buy target of USD22.

Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF), after the operator of pulp mills and marketer of pulp products announced very strong third-quarter earnings. The operating partnership–of which the income fund owns 49.8 percent and from which comes all of its cash flow–posted CAD0.78 per unit of distributable cash flow. That covered the CAD0.69 per unit distribution by a comfortable 1.13-to-1 margin, and covers the current rate of CAD0.75 as well.

Third-quarter results were roughly as strong as those of the second quarter, as higher prices for pulp and paper products offset lower volumes and higher production costs. Both were affected by the scheduled maintenance outage at a major facility, which extended into the fourth quarter, but will have only about a third the impact on volume in the next batch of results.

Encouragingly, management reports global softwood pulp markets remain “balanced,” despite the impact of reduced Chinese demand and some additional supply in North American bleached softwood capacity. That augurs for solid results the rest of the year, which, in turn, means a robust level of distributions.

As I noted with the initial recommendation of Canfor Pulp, no one should expect the current distribution rate of CAD0.25 per quarter to hold up, particularly after the trust converts to a corporation on Jan. 1, 2011. Management has vowed to continue an aggressive payout rate, which is clearly in the interest of the operating partnership’s 50.2 percent owner Canfor Corp (TSX: CFP, OTC: CFPZF). But it’s also been clear that the distributions will closely track cash flow as they always have and that higher taxes will reduce cash flow.

In addition, profits depend on two factors affecting the business that have proven quite volatile over the years, mainly the cost of wood waste needed to process and the price of finished pulp products on global markets. Canfor Pulp has been in the sweet spot of both this year, particularly as higher cost competitors have had to shut in capacity. But as competitors come back up, there will be simultaneously more finished product on the market and less availability of wood waste. That, in turn, will crimp distributable cash flow as well.

The good news is even with slower business conditions and higher taxes Canfor Pulp is still capable of paying out a huge dividend. Debt isn’t a concern, and the company is also the sector’s lowest-cost producer, giving it flexibility not matched by rivals. So while we won’t know just what its post-conversion distribution will be until 2011, it’s certain to be substantial. And the current yield of over 18 percent prices in quite a cut in any case. Canfor Pulp Income Fund is a buy up to USD16.

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) has reconfirmed its plan to remain a trust or specified investment flow-through (SIFT) in 2011 rather than convert to a corporation. That’s partly because of the expense of conversion and partly because management believes “it will not be subject to any SIFT tax.” That’s a positive shift from previous estimates of a tax rate of “less than 10 percent.”

Despite the outage at the Beaumont, Texas, plant cash flow from operating activities again covered the distribution, enabling the company to avoid dipping into cash reserves. Higher demand for sulphuric acid, Chemtrade’s most important product by volume, was a major plus.

The most positive development in recent weeks is the completion of repairs to the Beaumont plant and the restart of the facility. Management estimates the shut-in of the plant depressed distributable cash flow by CAD5 million, or CAD0.16 per unit. About half of that should be added back to the bottom line in the fourth quarter, in addition to proceeds from business interruption insurance. So will cash flow from selling the output of the Vale smelter, which has been running at normal rates since mid-August.

Facilities that process volatile chemicals are always at risk to outages. The good news is Chemtrade has once again weathered a rough patch in its business thanks to a very conservative financial strategy. Net debt remains a very low 0.8 times annualized cash flow, with no significant maturities until August 2011. The stock has hit a new post-2008 crash high and is somewhat above my previous buy target. I don’t look for dividend growth in the near future. But in view of these results, I’m raising my buy target for Chemtrade Logistics Income Fund to USD13.

Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) has shot up considerably in the two days since I added it to the Portfolio’s Aggressive Holdings. But the company’s robust third-quarter numbers demonstrate it’s a solid buy all the way up to my target of USD6.50.

Cash flow rose 38 percent, as waterheater rental attrition rates dropped 25 percent from last year. Distributable cash flow rose 23.9 percent, and the payout ratio fell to just 57.7 percent for the quarter. The results were due in large part to successful customer retention programs combined with cost controls and higher rents.

Encouragingly, sub-metering revenue stabilized after several down quarters, with revenue rising 13 percent and even profit ticking up slightly, even as the company benefitted from recent cost-cutting measures. Sub-metering results should improve markedly in future quarters, thanks to the Enbridge acquisition and the new operating rules set by the province of Ontario.

Stronger performance at the waterheater rental operation combined with expected growth of sub-metering operations promise solid cash flow growth going forward and comfortable dividend coverage after Consumers’ converts to a corporation Jan. 1. At that time it will change its name to EnerCare Inc in a tax-neutral transaction, on a one-share-for-one-unit basis. The new company will absorb an estimated CAD6 million to CAD8.5 million in taxes, which it expects to be able to absorb easily while maintaining its current distribution rate.

The upshot: These results are still more evidence Consumers’ has put its troubles of recent years well behind it. Buy Consumers’ Waterheater Income Fund up to USD6.50, where the stock still yields about 10 percent.

Daylight Energy (TSX: DAY, OTC: DAYYF) posted a 79 percent increase in its third-quarter output of oil and gas. That spurred a 35 percent jump in funds from operations for the company, which converted to a corporation earlier this year. Management’s chief target: production of light oil and natural gas liquids, which soared 162 percent from year earlier levels.

Daylight is squarely focused on boosting output and reserves, boosting the latter by 40 percent in the first nine months of 2010. But its strategy differs from ARC Energy Trust’s (TSX: AET-U, OTC: AETUF) and Peyto Energy Trust’s (TSX: PEY-U, OTC: PEYUF) in one major way: It’s focused on increasing light oil and gas liquids production, rather than gas itself.

That strategy has proven no less profitable in the near term. And it provides a nice cushion as well in case gas should remain at depressed levels longer than anticipated.

The company’s strategy in its early years was to take stakes in properties that majors were developing, in order to capitalize on the acquired geologic knowledge and experience without forking out capital as well. Now it’s squarely in the second stage of its development: focusing on a few choice areas and ramping up output.

Going forward, that should continue to lift reserves, output and cash flow, which covered the distribution by better than 2-to-1 in the third quarter. And assuming it succeeds, management should begin to lift distributions as well sometime next year, provided oil prices remain steady to up-trending.

Daylight has fallen back since its conversion, presumably because investors were unhappy with the dividend. That’s placed it squarely on the bargain counter. Daylight Energy is a buy up to USD11 for those who don’t already own it.

Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF) posted production and cash flow in line with management guidance, even as it continued to add light oil and shale gas assets at a torrid pace.

Total oil and gas output averaged 82,869 barrels of oil equivalent per day (boe/d), as the company spent CAD128 million on new development during the quarter. The payout ratio for the first nine months of the year was 52 percent of distributable cash flow, or 108 percent for dividends plus capital spending. The three-month payout ratio was 47 percent, or 110 percent including cash spent on development. Debt-to-annualized cash flow remained among the lowest in the industry at 0.9. Operating costs were basically flat with year-earlier tallies. Realized selling prices were USD3.67 per thousand cubic foot for natural gas (57 percent of overall output) and USD66.97 per barrel for oil.

Looking ahead, management expects Enerplus’ overall output to be roughly flat in the fourth quarter with third quarter levels, after taking into account the sale of several “non-core” properties to finance growth in the Bakken (light oil) and Marcellus (shale gas). The company is still on track with its plans to convert to a corporation Jan. 1, pending a Dec. 9 vote by unitholders.

As stated previously, the monthly dividend rate of CAD0.18 will remain the same after conversion, and the company does not expect to incur cash taxes for the next three to five years. That leaves substantial cash reserves to continue what management has called its “transitioning of the asset base,” even if natural gas prices remain depressed. The company now has 210,000 net acres of undeveloped land in North Dakota and southern Saskatchewan that’s tapped into the Bakken light oil play. It also has 70,000 net acres of “concentrated land” and 130,000 acres of non-operated land in the Marcellus shale of West Virginia and Maryland. Those are some of the largest positions of any company and could wind up making Enerplus a takeover target as well.

In the meantime, even flat energy prices should produce total returns of at least 10 to 15 percent a year, with a return to the 50s a high probability on a natural gas recovery. Enerplus Resource Fund units are a buy anytime they trade under USD28 for those who don’t already own them.

Newalta Corp (TSX: NAL, OTC: NWLTF) came in with a 19 percent jump in revenue, a 21 percent increase in net margin and a 12 percent boost in cash flow, largely because of management’s strategy of focusing environmental cleanup and recycling operations where the action is, both in the energy patch and elsewhere in industrial Canada. And CAD56 million in “growth capital expenditures” assures it will be there in 2011 as well.

Newalta specializes in clean-up of energy production and industrial sites and recycling waste. Third-quarter results were a continuation of the positive developments in previous periods, as revenue rose 21 percent and net earnings surged 77 percent.

Oil production is a filthy business that produces a lot of waste, particularly when it’s mined from tar sands. Newalta has positioned itself neatly to take advantage of the need for cleanup and disposal. The Onsite Division’s revenue surged 16 percent, while net margin rose 24 percent demonstrating management’s ability to translate sales into profits.

As its long-suffering investors know, things haven’t exactly been easy for Newalta the past few years, as its major customers pulled in their horns. Throughout, however, management kept at its plan of disciplined expansion through asset acquisitions and construction. Now that’s starting to pay off in higher profits, with much more to come.

The stock is now more than four times its Mar. 27, 2009, low, where it was left for dead after converting to a corporation in the heat of the bear market. But it’s still less than a third its levels of late 2006, before it had to prove its durability and was arguably a far less valuable company as well. The yield’s not much. But I look for great things ahead. Buy Newalta Corp up to USD10 if you haven’t yet.

Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) announced generally solid third-quarter results, despite a 15 percent decline in cash flow. More noteworthy, however, was what was missing from the report: a definitive post-conversion dividend policy.

That will come in a separate release on Nov. 30. In the meantime, management’s only statement remains that the new dividend will be between 75 and 110 percent of the trust’s current annualized distribution rate of CAD1.26 per unit.

In a worst-case, that means a yield for Parkland upward of 8 percent based on the current price. In a best-case, the yield would be nearly 12 percent. My view, based on third-quarter results, is the final dividend will probably wind up somewhere in the middle, though closer to the lower end of the range.

Headline distributable cash per share produced a third-quarter payout ratio of 150 percent and a 104 percent year-to-date tally. That was in part due to weaker refining margins. But it was also a product of Parkland’s new business mix following the acquisition and absorption of Bluewave Energy, which has shifted the seasonality of revenue to the fourth quarter.

Third-quarter fuel sales volumes were 27 percent ahead of year-ago levels on the acquisitions. That’s before the closing of the company’s agreement with Shell Oil on Sept. 30, which has increased Parkland’s direct sales of lubricants by 92 percent, adding Shell, Pennzoil and Quaker State products. The Shell Oil deal is immediately accretive to cash flows and strengthens the company’s position as Canada’s leading fuel marketer.

Third-quarter costs, however, shifted even more. Operating and direct costs rose 52 percent, while marketing, general and administrative expenses surged 56 percent from year-earlier levels. That’s the result of greater infrastructure acquired with Bluewave, which will begin producing greater revenue in coming quarters. And the lower margins pinched cash flow.

Looking ahead, Parkland figures to be a much more profitable company, and with room to grow as more major refining companies farm out the distribution part of their business in more remote regions. The payout ratio should begin to improve in the fourth quarter, thanks to the greater revenue from the Shell Oil deal as well as a shift in the cost-revenue balance in the fourth quarter of the year.

Management’s stated goal is to pay out based on annualized distributable cash flow, which takes the seasonality of fuel distribution and marketing into account. The Fuel Marketing portion of the business is likely to remain the most important segment, which depends heavily on volumes. Margins are also affected by local competition in areas served, as well as refiners’ margins.

The more the company is able to expand its reach and volumes, the less vulnerable it should be to factors beyond its control such as refining margins and regional competition. One of the bright spots of third-quarter numbers was an upward revision on synergies from the Bluewave deal. And management’s Enterprise Resource Planning System has improved efficiencies and cut costs elsewhere in the organization.

To be sure, we’ve yet to see Parkland put it all together, a task made more difficult by continued economic weakness. That may induce management to take a more conservative line when it sets the first post-conversion dividend for the company in two weeks.

Even if the dividend is set low, however, Parkland will still boast a high yield and robust business plan, making it a solid bet for annualized total returns of 15 to 20 percent, particularly after Monday’s selloff. Buy Parkland Income Fund up to USD14 if you haven’t already.

More than a few yield-focused investors abandoned Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) when the company cut its distribution in advance of a Jan. 1 conversion to a corporation.

Anyone interested in growth, however, will find little to dislike in its CAD1 billion to CAD1.2 billion capital spending plans for 2011, which is strongly focused on the company’s extensive reserves of increasingly valuable light oil.

Penn West Energy Trust has also chosen a liquids-based strategy for ramping up output in coming years, specifically for its light oil properties. Third-quarter results were steady, with production coming in at 164,087 barrels of oil equivalent per day and costs generally on target. The real benefit, however, will start to show up next year as the fruits of this year’s CAD1 billion in capital spending unfold.

Remarkably, the company is ramping up output of light oil at the same time it’s reducing debt, slashing CAD787 million in the first nine months of 2010. That’s a benefit of the now very conservative payout policy, under which distributable cash flow covers the CAD0.09 per month payout rate by better than 2-to-1.

The lower yield will deter some from owning Penn West. So will the fact that the shares have now moved up well above my buy target of USD22 to a new 52-week high.

The company, however, still trades at a steep discount to the likely value of its reserves in the ground.

That, in my view, means there’s still a lot of gas in the tank, even if the stock may be temporarily ahead of itself. I’m sticking with Penn West Energy Trust, a buy up to USD22 for those who don’t own it.

Perpetual Energy (TSX: PMT, OTC: PMGYF) is cutting its distribution again, this time to a monthly rate of CAD0.03 per share. The already-converted corporation announced the move along with third-quarter earnings that clearly show the strain of the plunge in natural gas futures prices since summer.

As I wrote in the November Canadian Edge Feature Article, these lower futures prices have prevented the company from locking in selling prices for output that support current levels of cash flow. In its Oct. 13 press release Perpetual stated it had locked in about half of its projected November-December output at a selling price of USD7.54 per gigajoule, a measure roughly equivalent to a thousand cubic feet or million British thermal units. But it had locked in only 39 percent at USD4.39 for January through March 2011 and just 25 percent at USD5.21 for April through October 2011.

The upshot: Despite the past couple weeks’ spike in gas prices back above USD4, that’s not enough cash flow locked in to maintain the current distribution. As a result Perpetual will reduce the payout by 40 percent, from the current monthly level of CAD0.05 to CAD0.03, effective with the Dec. 15 payment.

The key question anytime a company cuts its dividend is whether there’s hope of recovery, or if shareholders are just better off unloading. My view is conservative investors are better off in my other oil and gas producer selections. The company’s high debt levels, small size and near complete reliance on natural gas output make it a far more aggressive bet on gas than, for example, Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF).

Even after the distribution cut Perpetual’s shares still yield near 8 percent. Some readers have asked me if the company is viable. That’s still very much my belief.

In fact, I continue to find management to be among the industry’s best in terms of sharing information for depth, clarity and timeliness. For example, it’s consistently provided details about hedging positions and supportable levels of dividends and debt at various levels of natural gas prices.

Where the case for Perpetual has fallen down this year–and if you want to fault my bullishness–has been precisely on price levels for natural gas, specifically in the futures market. But there’s plenty of reason to continue betting on a turnaround, at least for investors who can tolerate the risk and stand the waiting.

First, as the previous quarter’s numbers make clear, the company isn’t under any real financial stress, despite very low gas prices. Coincident with the dividend cut and earnings release, for example, is an announcement that management is ramping up its capital budget. Development capital for 2010, for example, has been increased from CAD81 million to CAD112 million. Some of that was spent in the third quarter, and management now expects to dish out CAD35 million in the fourth along with another CAD48 million in the first quarter of 2011–taking full advantage of the winter freeze.

This new spending will be heavily directed at developing reserves that are rich in natural gas liquids, which are better priced than dry gas because they can be substituted for higher-priced oil. The company also plans to explore what it calls “high potential bitumen opportunities,” which it could try to develop on its own or sell to a company with deeper pockets.

This new development is something of a departure from the prior 100 percent natural gas strategy. But it’s very much in line with the flexibility Perpetual has demonstrated historically to leverage the value of its lands and expertise, which still rank among the most formidable in the sector. And the result should be a continuation of the third-quarter trend of rising production, reversing flat to falling output of recent years. Encouragingly, operating costs per unit of output fell 11 percent from year-earlier levels, 14 percent excluding gas storage costs.

The key question is when realized selling prices will recover. The company reported an 18 percent decline in the quarter from 2009 but still netted CAD6.18 per thousand cubic feet, a level roughly 50 percent above spot market prices. That was still enough to sustain a payout ratio of just 47.3 percent and pay off another CD38.6 million in net bank debt, a 13 percent reduction from 2009 levels.

The netback–or realized price less costs–came in a CAD3.31 per thousand cubic foot from CAD4.25. That implies a breakeven price of CAD2.87 for Perpetual, based on the CAD6.18 average selling price in the third quarter. And with that average realized selling price likely to drop a couple bucks in the next quarter or two, management took the proactive move of cutting the cash payout before it couldn’t afford to dish it out.

Output gains are the key to my recommendations’ ability to weather this weak environment for natural gas pricing. Unlike larger producers, these companies’ decisions aren’t going to affect the supply-demand balance meaningfully in the overall market. Meanwhile, higher production from shale drives down operating costs, making them more profitable at lower prices.

Perpetual’s announced moves should accomplish that, and management has proven highly adept in the past at execution. That ensures higher cash flows, dividends and the share price when gas prices move higher from what most industry observers consider “unsustainably low levels.”

That is the basis for continuing to hold Perpetual, even after its sixth dividend cut since mid-2006. But the game here is natural gas prices, of which Perpetual is a leveraged way to play gas that also pays a dividend.

I’m keeping Perpetual Energy in the Portfolio, but it’s only for very aggressive investors who can patiently wait for gas demand in North America to recover and new uses–such as electric power and truck transport–to ramp up. If your goal is yield, focus on the other producers highlighted in the November Feature–or better on the Conservative Holdings. And if you don’t want to bet on gas, there’s no reason to own Perpetual.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) grew third-quarter output per unit by 25 percent, as it continued to develop its Deep Basin tight gas shale plays. Debt-adjusted production per unit surged 36 percent, while production costs per unit were slashed by 17 percent. The current cost of USD2.04 per barrel of oil equivalent is by far the lowest in the industry and is likely to go lower still as low-cost output continues to rise. Management also spent 123 percent more money during the quarter on new development.

The output gains pushed overall funds from operations per unit up a robust 21, despite a 10 percent drop in realized selling prices for natural gas. That reduced Peyto’s payout ratio to 77 percent, including the impact of a 6 percent boost in outstanding shares to fund growth. Interest expense was trimmed 15 percent, reflecting both low borrowing rates and management’s general aversion to taking on hefty levels of debt.

Peyto’s distribution will come down by half beginning with the January payment, as part of the company’s conversion to a corporation. That’s in part a response to low natural gas prices but also to raise capital to fund growth plans.

It’s almost certainly going to take a revival in gas prices to push distributions higher again. But these numbers are a good reason to keep holding Peyto units, as a low-risk way to play such a recovery in gas. Peyto Energy Trust is also a buy anytime it trades at USD16 or lower, for those who don’t already own it.

Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF) nearly quadrupled its distributable cash flow on a 121 percent jump in revenue. Its secret: exclusive focus on horizontal drilling employed in drilling shale oil and gas, which is where all energy patch activity is now.

Phoenix Technology, unlike Precision Drilling (TSX: PD, NYSE: PDS) or Trinidad Drilling (TSX: TDG, OTC: TDGCF), the company is a specialist in the unconventional drilling that’s unlocked the secret to North American shale gas.

As a result, it has none of the baggage of servicing conventional production and in fact has been able to take its expertise profitably to foreign shores as well.

Third-quarter earnings were a study in outperformance. The company enjoyed the highest quarterly revenue in its history, surpassing even the crazy days of mid-2008, when oil and gas prices were at much higher levels. Management was able to take advantage of record activity levels in all of its operating areas, posting a 113 percent jump in consolidated operating days.

Distributable cash flow more than tripled, driving the quarterly payout ratio to just 28 percent. And the company ramped up capital spending to a record CAD47.2 million to manage an anticipated 36 percent rise in concurrent job capacity. Growth in Russia and Columbia continues apace as well.

Importantly, growth is coming without sacrificing margins. In fact, cash flow as a percentage of revenue rose to 21.1 percent in the third quarter versus 17 percent a year ago.

That pretty much says it all about the company’s competitive advantage, and it’s why I continue to rate Phoenix Technology Income Fund a buy up to my target of USD10.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) generated relatively flat third-quarter margins, largely due to a softening in natural gas liquids (NGL) markets that depressed both volumes and prices. Encouragingly, year-to-date margin is still a solid 5 percent above 2009 levels, as the company focuses operations and cuts costs.

Adjusted cash flow–which excludes restructuring costs and the buyout of financial derivatives–rose 107 percent from year-earlier levels. The year-to-date payout ratio based on distributable cash flow came in at 110 percent, roughly equal to the 109 percent ratio for the third quarter alone. The company was also successful refinancing debt coming due next year yielding 6.5 percent with new notes paying out just 5.75 percent and coming due in 2017.

As previously announced, Provident will cut its monthly payout from the current rate of CAD0.06 to 4.5 cents, starting with the January payment. That will cover the anticipated impact of corporate taxes and help continue to fund asset growth.

Capital expenditures were 23 percent higher in the quarter versus year-earlier levels, and management expects more spending on growth in 2011, including upgrades to a storage facility in Ontario. The company is also looking at partnering on several prospective projects in the Marcellus Shale in the US as well as Alberta.

My expectation is the company’s NGL infrastructure business will continue to grow going forward. The new dividend rate represents a yield of around 7 percent based on Provident’s current unit price. That should add up to annual returns of 10 to 15 percent even under conservative assumptions. And as one of the largest NGL franchises in North America, Provident Energy Trust is a potential takeover target as well. The buy target remains USD8.

Vermilion Energy (TSX: VET, OTC: VEMTF) also remains on track for big production gains in coming years, though its increased output will be largely from outside North America. The company successfully completed its conversion to a corporation without cutting its distribution on Sept. 1. As a result, it spent part of the quarter as a trust and part organized as a corporation.

That made little impact on profitability, however, thanks to nearly 80 percent of earnings coming from outside Canada, where the tax did not apply. Funds from operations per share were again solid at CAD1.07, covering the CAD0.19 monthly distribution by a strong 1.9-to-1 margin. That strength of coverage strongly suggests a return to dividend growth once new projects come on stream and capital spending winds down. These include a major light oil project from its Cardium land position in Canada, a completed project to rev up output at the Wandoo field in Australia, the LIAS shale oil play in France and, above all, the Corrib project off the Irish coast.

Overall, Vermilion expects to exit 2011 with production volumes exceeding 37,500 barrels of oil equivalent per day, up from 31,298 in the third quarter of 2010. That supports an overall plan for 5 to 10 percent average annual growth from existing projects. In 2012 we should start to see the fruits of the company’s 9 percent stake in Corrib, which management has said could boost output as much as 20 to 30 percent.

One of Vermilion’s key strengths over the years has been management’s clear aversion to taking on debt. That remains the case, with annualized cash flow covering total obligations by nearly a 2-to-1 margin. That means unmatched flexibility to pursue a wide range of wealth building prospects, as well as supporting a strong dividend. Buy Vermilion Energy on dips to USD38 if you haven’t yet.

Yellow Media (TSX: YLO, OTC: YLWPF), formerly Yellow Pages Income Fund, which completed its conversion to a corporation on Nov. 2.

The company will maintain its current monthly distribution rate of 6.67 cents Canadian per share for the remainder of the year, at which time it will reduce the payout to a new rate of 5.42 cents.

Despite the scheduled reduction, the new rate is clearly attractive, representing a percentage yield of well over 10 percent based on Yellow’s current share price.

The key question in my mind has been whether that rate will hold after conversion, or whether it will have to reduce yet again in the face of tough competitive and market conditions and the company’s need for capital.

The good news: While Yellow does still face challenges, particularly if the North American economy weakens, third-quarter numbers are nonetheless very supportive of its aims. First, distributable cash flow of CAD0.35 once again covered the distribution by a comfortable 1.75-to-1 margin. Moreover, it was flat with the prior quarter, indicating profitability has stabilized.

Also encouraging, overall revenue grew by 5 percent. That was fueled by 15 percent growth in organic (excluding acquisitions) online revenue for Directories and Vertical Media. Online revenue is now 27 percent of Yellow’s overall mix and is the clear future of the company. These numbers indicate its growth is now more than offsetting the steady erosion of the print directory business–and its impact will only grow in coming quarters. That’s a very good sign for Yellow’s future ability to sustain cash flows and distributions.

In the last couple months Yellow has launched several new offerings, including digital media advertising services, to leverage its dominant position in Canada’s web-based business directories. Another interesting initiative concerns the company’s RedFlagDeals.com site–Canada’s No. 1 online shopping community–a Deal of the Day targeted at consumers shopping for local goods and services. The company has also created a public application interface, enabling developers working on online and mobile platforms to develop applications streaming local search content from the company’s data base.

Finally, the company’s Vertical Media Business, which became a severe cash drain on the company the past couple years, saw its revenue and cash flow grow 29 and 27 percent, respectively, from year-earlier levels. That’s a sharp reversal from previous quarters and is the result of management’s cost cutting and shifting of resources to its Dealer.com service and away from still slumping real estate and generalist publications.

Not all of Yellow’s initiatives will prove successful. Meanwhile weakness in Canadian advertising and the steadily eroding print directory business–despite a near-national monopoly–are still a drag on growth. The company, however, still appears to be doing more than enough to beat the market’s very low bar for success, mainly maintaining its distribution.

That plus progress on the digital front continues to make Yellow Media, formerly Yellow Pages Income Fund, an attractive holding. It’s a buy for those who don’t already own it up to USD8.

Conservative Holdings

AltaGas Ltd (TSX: ALA, OTC: ATGFF) continues to successfully build its portfolio of gas and power assets.

On Nov. 4 the company announced a deal with EnCana Corp (TSX: ECA, NYSE: ECA) to construct and operate a gas processing facility and related gathering network in Alberta.

The CAD235 million project is expected to enter service in late 2012, when it will be supplied by EnCana’s wells and capable of processing 120 thousand cubic feet per day of gas. Facilities will also be equipped to capture natural gas liquids.

In the meantime, the company completed several cash-generating projects during the third quarter, including a 13 megawatt gas-fired cogeneration power plant in Alberta, a gas processing plant serving the Montney Shale area, a coalbed methane processing facility in Alberta and a gas distribution pipeline in Nova Scotia. All will begin adding to earnings in the fourth quarter.

The third quarter was AltaGas’ first as a converted corporation. On the plus side, cash flow from operations rose 61 percent and covered the distribution by better than 2-to-1. On the minus side, weak power prices had an impact on the company’s unhedged output. But that was offset by the growing portion of the business based on renewable energy, where revenue is pegged to capacity and locked-in under long-term contracts.

With some CAD2 billion in new projects under development, AltaGas’ clear focus now is right where management said it would be after conversion: on taking advantage of low capital costs, renewable energy mandates and a lack of infrastructure serving shale gas areas to further build its base of fee-generating assets.

That’s very manageable given the company’s strong financial position. But it does mean that shareholder returns will flow from the growth of the business as much as from yield. That being said, 10 to 15 percent annual returns look like a lock. AltaGas Ltd is a solid buy for growth and income up to USD22.

Artis REIT (TSX: AX-U, OTC: ARESF) will bring its asset management in house over the next year. That should provide another spur to the REIT’s growth, even as its portfolio gains strength from improving property market conditions in western Canada.

Third-quarter revenue surged 17.1 percent sequentially and is up 51 percent over the past year. Occupancy rates rose to 97.8 percent from 96.6 percent at the beginning of the year, as the REIT expanded its base of income-producing properties to CAD1.84 billion, up from CAD1.19 billion at the end of 2009.

Funds from operations (FFO) and distributable cash flow rose 9.5 and 7.2 percent, respectively, from second-quarter levels. Dilution from equity issues pushed down per-unit totals and pushed up the payout ratio to 96.4 percent of FFO and 100 percent of distributable income. That increase, however, should reverse in coming quarters, as dollars raised are invested.

The massive investment of the past year has also diversified Artis geographically as never before, reducing exposure to the still slack Calgary market and enabling the REIT to capitalize on strength in other regions. The company has also taken a stake in several US properties, with the goal of eventually collecting 15 percent of overall rents from that market.

Artis’ units have backed off from recent highs, following the release of numbers. Now yielding closer to 9 percent again, it’s a good time for those without a stake to pick up some units. My buy target for Artis REIT remains USD14.

Atlantic Power Corp (TSX: ATP, NYSE: AT) increased cash flow 15 percent in the third quarter, as management affirmed a target of CAD75 million to CAD80 million in cash distributions from projects in 2010. The company has again extended the date to which current dividends can hold even if there are no acquisitions or organic growth to 2016. That’s in part thanks to the addition of the company’s 27.6 percent stake in the Idaho Wind project, the purchase of a Michigan biomass plant and progress on a biomass plant in Georgia constructed by the Rollcast Energy unit.

Cash available for distribution rose 14.6 percent in the quarter, bringing the payout ratio down to just 65 percent. That keeps the company on track for a full-year 2010 payout ratio of roughly 100 percent, as it invests recently raised debt and equity financing in growing the business. That will come down as cash flows from the biomass plants and Idaho Wind start to roll in next year, providing still more funds for growth.

Meanwhile, management continues to remove risks to cash flow, inking new natural gas swaps to fuel its Orlando plant when the current fuel contract expires. These will also boost cash flow, because they were executed at a lower cost. Atlantic’s capital spending plans and expectations for a high payout ratio into 2012 likely rule out a dividend increase in the near future. The stock still yields right around 8 percent at its current price. But I’m not raising my buy target for Atlantic Power Corp above USD13.50 at this time.

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) reported third-quarter earnings very much in line with those of prior periods. Overall revenue slipped 3.7 percent on the continued decline in the traditional local and long distance phone business, while distributable cash flow was off 6.8 percent on robust capital spending.

Distributable cash flow, however, once again covered dividend outlays by better than a 2-to-1 margin. Meanwhile, the rate of traditional business decline continues to slow, with cable telephony no longer expanding rapidly throughout the company’s rural Canada territory. Actual line losses to competitors again fell in both residential and business markets, allowing the company to largely offset them with a 4.6 percent drop in operating expenses. Operating margins rose to 51.9 percent of revenue from 51.4 percent a year ago.

Like its rural phone counterparts in the US, Bell Aliant’s future lies with building out its broadband network. The company’s fiber-to-the-home coverage is now available in cities throughout Atlantic Canada and is on track to pass 140,000 homes and businesses by the end of the year. Internet revenue overall–including DSL-based services–rose 6 percent year over year, while Internet television subscribers rose 5.1 percent. Residential high-speed revenue per customer surged 5.1 percent to a record.

By mid-2011 management expects growth of the new fiber network to scale up and light a fire under demand growth for its bundle of voice, Internet and television service. The company’s ultimate goal of 600,000 homes passed by the end of 2012 will be achieved with a minimum of new financial burden, giving it a major competitive advantage over cable rivals.

The company will reduce its monthly distribution from a current rate of 24.17 cents Canadian to a new rate of 47.5 cents a quarter. That will absorb an expected high 20s tax rate as well provide funds for growth, while still leaving a 7 percent plus yield. The result is a nice combination easily capable of producing 10 percent plus returns for years to come. Buy Bell Aliant Regional Communications Income Fund up to USD27.

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) held construction levels steady with year-earlier levels and at the same time boosted its backlog to CAD1.163 billion. Both are exceptional achievements, given the continued slump in private sector business and the builder’s reliance on public contracts. Overall revenue grew 2 percent in the third quarter. The need to bid on contracts against tougher competition did have an impact on profit margins and hence net income, which slipped from CAD1.02 to CAD0.61. That was still enough to cover dividends comfortably, however, with a payout ratio of 73.7 percent.

Looking ahead, margins are likely to remain under pressure in 2011, as the volume of work in the industrial sector and Alberta oil sands remains weak. The latter, for example, aren’t expected to deliver a meaningful recovery until 2012. The good news is this is about as bad as things are likely to get, and the company is still covering its payout solidly. The company has no long-term debt and was able to increase its working capital to CAD142.5 million by the end of September, up from CD122.2 million at the beginning of the year–a solid indication of financial strength.

Apparently, some investors were disappointed in the result, as the stock had an extremely volatile day on Tuesday when they were announced, plunging from over CAD38 to a low of CAD29 before settling in the CAD33 to CAD34 per unit range. That’s given would-be buyers of Bird Construction Income Fund another chance to get into a stock that had been trading well above my buy target of USD35. Note the monthly dividend will become quarterly when the trust converts to a corporation on Dec. 31, at the same annual rate of CAD1.80 per share.

Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) simultaneously announced two pieces of good news this week. First, it entered an agreement to buy a 166 megawatt (MW) wind power project in what was essentially an asset drop-down from another unit of parent Brookfield Asset Management (TSX: BAM/A, NYSE: BAM).

The unit is under construction and is near the already operating Gosfield Wind Farm. All output will be sold under a 20-year contract to the Ontario Power Authority when the unit commences operations, expected for late 2011. That will bring Brookfield’s wind capacity to over 400 MW.

Though wind generation is variable, cash flow is generally steady, as it’s based on capacity payments. In contrast, hydro power–which comprises the bulk of company generation–does vary with water flows. Below-average inflows in Ontario and Quebec more than offset better generation in New England and British Columbia, resulting in overall generation of just 881 gigawatt hours (GWh) versus a long-term average for company facilities of 1,540 GWh.

The result was a 33 percent drop in third-quarter revenue and a steep plunge in income before non-cash items–the account from which dividends are paid–to just CAD0.03 per unit. The payout ratio based on the first nine months of 2010 is now 121 percent. Fortunately, there’s no pressure on the dividend, even with corporate conversion still likely sometime in 2011.

The company has deep cash reserves, the ability to adjust sustaining capital expenditures to cash flows and even insurance when water flows are less than 90 percent of long-term average. As a result, it’s easily able to absorb the effect of volatile water flows, even as it continues to build out its valuable asset base. In addition, water flows thus far in the fourth quarter are moving closer to normal, even in eastern Canada. That suggests a more under control payout ratio in the near future.

Management has delayed Brookfield’s planned conversion to a corporation to consider its options. There will be no impact on unitholders, however, as the fund won’t be taxable in 2011. Management does expect to pay on a quarterly rather than a monthly basis starting in the second quarter, but at the same annual rate. That’s a yield of more than 6 percent, with the likelihood of 10 to 15 percent annual returns to mid-decade and beyond based on projects in progress. Buy Brookfield Renewable Power Fund up to USD20.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) turned in another steady quarter, as a 5.3 percent boost in normalized FFO pushed the payout ratio down to just 74.5 percent. Operating revenue rose 4.9 percent on a 2.6 percent increase in average monthly rents and a rise in occupancy from 98.4 to 98.7 percent. Net operating income (NOI) rose 6.8 percent with margin rising to 58.7 percent, indicating rising profitability at existing properties.

The company also refinanced CAD60 million of mortgage debt on its properties at an average interest rate of 3.03 percent and locked in low prices for 85 percent of its winter natural gas needs, required to provide heating for tenants at its properties. And the REIT added properties in British Columbia and sold others in Ontario, further enhancing geographic diversification while boosting overall portfolio quality.

Average rents rose in every region except for Alberta, where the market is still hurt by overbuilding of past years. Revenue from suite turnovers rose 1 percent, versus a decrease of that size last year. Operating expenses as a percentage of revenue were cut to 41.3 percent, from 42.3 percent a year earlier, and debt service coverage ratios improved as well.

Despite the strong coverage numbers, management continues to show little inclination to raise the dividend. Rather, available cash is more likely to be used to make acquisitions or pay off more debt. Consequently, I’m not inclined to raise my buy target for CAP REIT above the current USDS17 at this time. But the REIT and its safe yield of 6.4 percent–paid monthly–are a buy anytime it trades below that.

Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF) third-quarter revenue picked up 4.5 percent on a 0.7 percent increase in attendance over year-earlier levels and by improved concession sales. Cash flow margins rose to 20.5 percent of revenue from 18.3 percent a year ago, while distributable cash flow per unit surged 13.9 percent to 76.3 cents Canadian for the quarter. That took the payout ratio down to just 41 percent for the quarter, from an already low 47 percent a year earlier.

The company continued its project of making its theatres digital and 3-D ready, as well as enhancing its other offerings to boost revenue per customer. Ultimately, strong results depend on the quality of the movie lineup. The good news is, although summer fare was less than spectacular it was strong enough to provide strong cash flow and dividend coverage. Meanwhile, the long-awaited next installment of the Harry Potter series promises a strong finish to the year.

The trust still plans a no-cut conversion to a corporation in early 2011. These numbers back up those plans fully, as well as point the way to solid long-term growth. Buy Cineplex Galaxy Income Fund on dips to my target of USD20.

CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) saw an 8.9 percent shortfall in revenue, which it only partly offset with an 8.4 percent cut in operating expenses. The result was a 10.1 percent drop in cash flow and an equal drop in distributable cash flow. The good news is even at that level, the payout ratio came in at just 93.2 percent for the quarter and 93.4 percent for the year.

Canadian operations benefitted from the rollout of Radiology Information services at 12 sites, as well as a revenue increase under the Ontario Ministry of Health funding agreement. US operations, meanwhile, improved margins though revenue remained challenged by weak conditions.

The company still plans to convert to a corporation, reducing dividends to a monthly rate of 6.29 cents Canadian starting in January. These numbers strongly support the new rate. A return to growth, however, is going to improvement in the US. The good news is sequential results show rising margins and stabilized sales south of the border, a good sign we’ve seen the worst for these operations if not for year-over-year comparisons. It’s also a good indication that management’s aggressive moves earlier this year to turn things around are paying off. That’s a good sign for CML’s future. CML Healthcare Income Fund is still a buy up to my target of USD12.

Colabor Group (TSX: GCL, OTC: COLFF) has announced its fiscal third-quarter earnings. Highlights included a slightly higher payout ratio of 89 percent of cash flow for the period, due mostly to the loss of a major contract in the restaurant sector at the beginning of Feb. 2010. The company continues to work to mitigate the loss of revenue but still faces generally tough conditions in its industry.

On the bright side, the company continued to successfully execute its growth through acquisitions strategy and reduced debt to just CAD9.2 million drawn on a bank credit agreement of CAD20.5 million. Debt is now just 0.4 times full year cash flow, and the company has been vigilant cutting operating costs as well.

The results triggered some selling in the stock today. At this point, however, there’s no real cause for concern, as the balance sheet stronger than ever and management states “cash flows from operating activities and the funds from operating credits are sufficient to support planned capital expenditures, working capital requirements (and) quarterly dividends of 26.91 cents Canadian per share.”

Business likely won’t be robust until growth picks up in the Canadian restaurant and foodservices business, where actual growth shrank by 4.7 percent for the 12 months ended Sept. 30, 2009, according to the Canadian Restaurant and Foodservices Association (CFRA). Encouragingly, CFRA states growth turned positive by 0.7 percent in the last 12 months. But the company’s customers are still playing it conservative, particularly given forecasts for slower growth ahead.

Looking ahead, Colabor expects to be able to offset this weakness and realize growth through cost cutting and timely acquisitions. And the RTD purchase completed Sept. 21 will add CAD112 million in annual sales, providing numerous opportunities for synergies. That augurs continued good health despite the tough conditions. I still rate Colabor Group a buy up to USD12.

Davis + Henderson Income Fund’s (TSX: DHF-UY, OTC: DHIFF) third-quarter revenue surged 16.3 percent, reflecting the continued growth of new services via a series of acquisitions over the past year.

Cash flow and net income were both hurt by a restructuring charge of CAD2.2 million, the result of integration initiatives that will produce annualized savings of CAD3 million to CAD4 million by the end of 2012.

Both, however, were still in positive territory and continued to comfortably cover the current dividend rate of 15.3 cents Canadian per month. That dividend rate will drop to a quarterly rate of CAD0.30 a share when the company converts to a corporation on Jan. 1, 2011. But it will continue to produce a healthy yield of 6 percent, even as management continues to lay the groundwork for future growth.

Davis + Henderson’s long-standing goal has been to grow revenue 3 to 5 percent a year, largely by taking its existing business digital. Consistent double-digit growth in recent quarters is clear proof it’s succeeding in transforming its operations as well as adding new ones via acquisitions. The core business is still checking account services, which account for 46 percent of revenue. But the company has also found growth in lending technology and services for mortgage origination.

The company’s hidden strength is its customer base, the healthy institutions that dominate Canada’s banking system. As Canada’s banks grow, so will Davis + Henderson’s opportunities, and that should lead to substantially more revenue and cash flow growth in coming years. That, in turn, should ensure management’s goal of “delivering stable and modestly growing cash distributions” going forward, which will push the company’s share price higher.

The result is another low-risk package offering 10 percent plus annual returns. Buy Davis + Henderson Income Fund up to my new target of USD20.

IBI Income Fund (TSX: IBG-U, OTC: IBIBF) results continued to improve in the third quarter, as the company continued to add public sector business and absorb recent acquisitions.

Revenue surged 10 percent sequentially from second-quarter levels and is up 12.6 percent from fourth quarter 2009. Cash flow, meanwhile, is up 12.9 percent sequentially and 31 percent from the fourth quarter. Cash flow margins rose for the third consecutive quarter to 14.8 percent of revenue, from their fourth quarter 2009 nadir of 12.7 percent. Distributable cash is up 66.7 percent from fourth-quarter levels.

Public sector work again accounted for more than two-thirds of total revenue, with the company adding business in the UK, Australia, South Africa and the Persian Gulf with its acquisition of Nightingale Architects in the second quarter. The improved margins are particularly encouraging, demonstrating the company’s growing ability to take the best business around the world even in a suboptimal economic environment. The company is currently on the hunt for acquisitions in Canada, China and India.

IBI has now set its post-corporate conversion policy. The new dividend will be paid monthly at an annual rate of CAD1.10 per unit, a 31 percent reduction from the current rate and in line with the corporation’s expected tax rate. That reflects a continued aggressive dividend payout policy, which management is likely to increase as business grows, and equates to a 7.1 percent yield based on IBI’s current share price.

The reduction is pretty much in line with my expectations and what management had been saying, though I had hoped for a bit higher given the company’s large volume of business outside Canada. In any case, IBI remains a solid company and a strong bet for annual total returns of 10 to 15 percent for years to come. My buy target for IBI Income Fund remains USD15.

Innergex Renewable Energy (TSX: INE, OTC: INGXF) posted a 66.4 percent jump in third-quarter cash flow, fueled by a 59.5 percent jump in megawatt hours (MWh) of electricity produced. That was largely the result of the merger of the Innergex Power Income Fund with its parent earlier this year, which created a high-yielding, fast-growing bet on renewable energy.

The issue of new shares to complete the merger offset those results. But the payout ratio based on adjusted cash flows from operating activities still came in at just 63 percent. The company also obtained an investment grade BBB- rating from S&P and a BBB rating from Dominion Bond Rating Service. It also reported solid progress with several major construction projects, including road construction for two major hydro facilities. These projects will power Innergex’s business growth going forward.

The company has 17 operating facilities with a net capacity interest of 326 MW but also 203 MW in seven projects under development/construction for which output has already been contracted to buyers. And it has another 2,000 MW in opportunities it continues to move forward.

As for existing projects, these ran at 97 percent for hydro during the quarter and 10 percent for wind, or about 99 percent of long-term averages despite erratic water flows in much of Canada. Those rates actually improved in the month of October, auguring better fourth quarter results. All in all, there were no real surprises and the company continued to execute its low risk growth model. Innergex Renewable Energy remains a solid buy up to my target of USD10.

Keyera Facilities Income Fund’s (TSX: KEY-U, OTC: KEYUF) third-quarter bottom line was distributable cash flow of 75 cents per unit for a payout ratio of 60 percent. More important, however, were the successful growth initiatives it undertook, particularly the venture with Inter Pipeline Fund (TSX: IPL-U, OTC: IPPLF) to build a major diluent transportation, storage and rail services system for Husky Energy’s (TSX: HSE, OTC: HUSKF) Sunrise oil sands project.

The Husky deal positions Keyera as a player in oil sands growth for the first time and promises to be strongly accretive to cash flow when it starts up in 2014. Meanwhile, the company continues to benefit from strong activity around its natural gas plants, thanks to producers’ focus on areas rich in natural gas liquids (NGL).

Keyera has focused for several years on improving its NGL processing ability. And its Rimbley plant and Edmonton/Fort Saskatchewan energy hub assets are uniquely position to profit. Other facilities are also in prime position to cash in on demand for processing of solution gas extracted by producers developing Cardium light oil plays in west Alberta. And the company’s Simonette gas plant in the Deep Basin is benefitting from the introduction of horizontal drilling techniques to the region, ramping up NGL output.

Being in the right place in Canada’s energy industry at the right time is, of course, habit for Keyera. And it’s why the company will be able to convert to a corporation Jan. 1 without cutting its distribution or sacrificing its increasingly compelling opportunities for growth.

Speaking on the company’s third-quarter conference call this week, CEO Jim Bertram tied future distribution growth to the company’s ability to build distributable cash flow by building and buying assets. That’s the same formula Keyera followed to great success as a trust. With its position in the best areas of Canada’s energy patch, it’s set up for more of that as a corporation.

If there is a problem with Keyera now, it’s the share price, which has now run well past a buy target I’ve already raised several times.

The current yield is extremely solid, but until it starts to grow again, I’m inclined to leave my target for Keyera Facilities Income Fund at USD28. All those in the company should stick with it.

Macquarie Power & Infrastructure Income Fund’s (TSX: MPT-U, OTC: MCQPF) third-quarter distributable cash flow again lagged its dividend, resulting in a payout ratio of 156 percent.

That high number reflects the time needed to deploy cash from the sale of the trust’s interest in Leisureworld rather than any real dividend-threatening weakness.

Strong performance at the existing portfolio, for example, drove a solid 5.7 percent increase in Macquarie’s revenue for the quarter. Meanwhile, cash flow and funds from operations ticked up 5 and 2.9 percent, respectively, as management continued to enjoy success controlling costs.

Other bright spots included improved production at the Erie Shores Wind Farm and Whitecourt biomass facility, though it was offset somewhat by low water flows at the Wawatay hydro plant in Ontario.

Over the next five years, management expects the current monthly distribution of 5.5 cents Canadian to represent a payout ratio of 70 to 75 percent, based on its current portfolio. That includes the taxes that will be absorbed when Macquarie converts to a corporation on Jan. 1, 2011. The 5.5 cents monthly rate represents the level set a year ago by management when it initially announced its conversion plans, and so will hold after conversion.

Ultimately, Macquarie’s health will depend on deploying the Leisureworld sales proceeds into cash generating assets. The purchase of the 20 megawatt Amherstburg Solar Park project this past summer is one step in that direction.

The company will contribute CAD33 million of equity to the project upon the startup of commercial operations, anticipated to be June 2011. Builder SunPower will complete the project at fixed price and service the facility under a 20-year contract and is liable for performance as well.

Output, meanwhile, has been presold under a 20-year contract to the Ontario Power Authority at a guaranteed price of CAD420 per megawatt hour. The bottom line: a project with locked-in revenue and no real operating risk for Macquarie, with more to come.

Macquarie’s unit price has come a long way back from its late 2008 low of USD3.54. That’s in large part due to recognition by investors that the company’s 8 percent plus yield is increasingly secure. But there’s still room for 10 percent plus annual returns for buyers of Macquarie Power & Infrastructure Income Fund up to my target of USD8.

Northern Property REIT (TSX: NPR-U, OTC: NPRUF) turned in another solid third quarter, with distributable income per unit rising 8.9 percent on a 9.1 jump in revenue. The payout ratio was again very low at 63.1 percent, supporting the 3.4 percent dividend boost effective in September.

Management reported that overall vacancy levels have now returned to pre-recession levels, as “robust” conditions in the Far North, Newfoundland and northern British Columbia offset continuing weakness in Alberta, though that province too saw improvement. Same-door growth–which excludes the impact of acquisitions and divestitures–ticked up 3.6 percent.

Real estate investment trusts are generally exempt from 2011 trust taxation rules. Northern’s investment in its ExecuSuite properties, however, has forced it to make some restructuring moves in advance of Jan. 1. The company will hold a special meeting on Nov. 25 to ask unitholders to approve the creation of a new taxable corporation, NorSerCo, which will hold all of Northern’s assets that don’t qualify for the REIT exemption, mainly ExecuSuite properties. Northern will retain ownership but will get its cash indirectly through NorSerCo.

The only change for unitholders is the REIT units will become NPR/NorSerCo staple shares, combining a portion of debt with equity into a single security. Cash distributions will remain the same, and the move is not a taxable event. In fact, there’s potential upside for US investors regarding taxation. The debt interest portion of the dividend will no longer be withheld the 15 percent, either inside or outside IRA accounts, while the equity portion should escape withholding inside IRAs like other corporations. Northern Property REIT is a buy up to USD26.

Pembina Pipeline Corp’s (TSX: PPL, OTC: PBNPF) third-quarter distributable cash flow was again strong enough to cover its distribution and ambitious plans for capital spending. Solid performance at fee-generating energy infrastructure businesses offset the negative impact of tighter margins at the energy marketing arm, the purpose of which is to leverage infrastructure operations.

Pembina completed its conversion to a corporation in early October without reducing its distribution. Sustaining and growing that payout going forward depends heavily on completing a series of major infrastructure on time and in line with budgets. Fortunately, in the words of CEO Bob Michaleski, “all our growth projects” are on track to do just that.

Right-of-way clearing for the Mitsue oil sands pipeline project is now complete, with grading and stringing now more than half complete. Meanwhile, preparations have been laid for the construction of the Nipisi Pipeline to begin in earnest after the winter freeze. That puts both projects firmly on track to meet Pembina’s scheduled startup date of mid-2011.

The projects together have a projected final cost of CAD440 million and will generate approximately CAD45 million a year in operating income. Income could increase substantially if current negotiations are successful for long-term capacity contracts that would support doubling the capacity of both pipelines. Pembina has also recently initiated construction of an enhanced natural gas liquids extraction facility at its Cutbank Complex. The company has already secured an anchor customer for the plant and is on track to contract out all capacity by the expected mid-2011 startup date.

All of these are low-risk projects that will generate steady cash flow for Pembina. Importantly, they also add scale and reach that will enable the company to initiate further low-risk assets, enhancing profitability and ultimately driving more dividend growth.

The stock has surged of late and may be due for a rest–at least that’s what a number of Bay Street analysts now project. That should not be a concern for the company’s long-term investors, however, who continue to enjoy a 7.5 percent yield paid monthly that should translate into annual returns of at least 10 to 15 percent to mid-decade on the company’s current plans alone. Pembina Pipeline Corp is a buy for those who don’t already own it up to USD22.

RioCan REIT (TSX: REI-U, OTC: RIUOCF), the owner of high-quality shopping malls across Canada, has used the last two years to dramatically boost its portfolio growth potential.

Canada’s biggest REIT, RioCan had no problem raising capital even in the darkest days of the credit crunch. And management used that to full advantage, filling its cash coffers to overflow with the goal of deploying the money into acquisitions of quality properties from distressed owners.

Unfortunately, bargain acquisition opportunities took longer to materialize than expected. And RioCan suffered several quarters of depressed profits, as dilution from equity issues and interest paid on new debt far offset what it could from cash in the bank.

Management’s patience, however, is now paying off in spades. For the second consecutive quarter, the REIT posted explosive growth (20 percent) in per unit funds from operations (FFO), fueled by net operating income (NOI) growth of CAD21.8 million due in large part to successful acquisitions of shopping mall properties across Canada, as well as in the US through the partnership with Cedar Shopping Centers (NYSE: CDR).

RioCan also reported same-store NOI growth of 2.2 percent, reflecting higher rents, lower bad debt and fewer vacancies. That rate is expected to accelerate to 3.5 percent in the fourth quarter, even as several greenfield, or new, construction projects come on line. RioCan completed 16 separate acquisitions in North America last quarter. The company has another 197 million prospective deals on which it has “completed due diligence” and has “waived conditions.” And it expects to complete CAD1 billion total purchases by year-end.

Mortgage financings in the third quarter were for an average term of 6.1 years at an average rate of 4.9 percent. And management is currently securing rates at or below 4.75 percent versus paper coming due in the next six months at an average rate of 5.8 percent. That will further boost the balance sheet and widen profit spreads on new deals. Debt-to-adjusted book value is 51 percent, or less than 50 percent factoring in current property values.

RioCan’s secret during every downturn is quality. High-quality tenants like Wal-Mart Stores (NYSE: WMT) operating under long-term leases anchor all of its properties. That ensures superior occupancy rates (97.1 percent in the third quarter) as well as strong rent growth even in lean times. Renewal retention is better than 90 percent in 2010, with an average rent increase of 10.8 percent. Unbudgeted vacancies fell nearly in half over the past year, a testament to the REIT’s ability to pick prime spots as well as customers.

RioCan is attractive not just for its unmatched portfolio of high-quality properties and access to low-cost capital to buy more, or even for its yield and growth potential. Those are all certainly part of the story. But what holds it altogether is superb management, which has been able to navigate every hurdle to the company’s prosperity. That’s the real reason to buy RioCan REIT up to USD23 if you haven’t already.

TransForce (TSX: TFI, OTC: TFIFF) continues to find ways to grow despite still-soft conditions in Canada’s fragmented transport and logistics industry. Overall revenue surged 11 percent, 10 percent excluding the automatic pass-through of fuel cost changes to customers.

That triggered a 20 percent boost in cash flow, further enhanced by a boost in margins from 13.7 to 14.9 percent. Finally, adjusted net earnings–the account from which dividends are paid–soared 71.4 percent, producing a very secure payout ratio of 41.7 percent. And the company slashed its debt to 55 percent of capitalization, down from 57 percent at the beginning of the year.

The company’s Package & Courier and Specialized Services segments were again standouts, with sales adding 21 and 39 percent to revenue over last year’s levels. That offset a flat performance at the company’s traditional Truckload and Less-Than-Truckload operations.

Looking ahead, the company remains well-positioned both to grow its business and to weather what continue to be tough industry conditions. In comments delivered with third-quarter earnings, CEO Alain Bedard stated the company would “seize opportunities for strategic acquisitions.”

That’s right in line with what TransForce has been able to do consistently well in the past, and it should have plenty of opportunity to do so going forward, given its own financial strength and the weakness of rivals. A major three-year contract to provide overnight courier services for the Ontario government will start contributing earnings next year and opens the door to still another business opportunity.