CE Portfolio Conservative Holding EnerCare Inc (TSX: ECI, OTC: CSUWF) has evolved into a veritable fee-for-service business generating very stable returns.

The core waterheater business is now complemented by a submetering business that’s overcome early challenges and is now adding customers at a healthy clip.

The more it grows, the more EnerCare’s cash flows grow, and the more likely we’ll see further dividend growth down the road that will push the share price higher.

Delivering on this promise for the fourth time in the last two years, management, along with second-quarter results, announced a 1.8 percent increase in its monthly dividend rate, to CAD0.058 per share (CAD0.696 annualized) from CAD0.057 (CAD0.684 annualized), effective with the September payment due in October.

Second-quarter revenue grew by 6 percent year over year to CAD71.6 million. For the first half of 2013 revenue was up by 8 percent to CAD145.9 million.

Rentals revenue was up marginally to CAD47.3 million for the second quarter and CAD94.4 million for the half-year, primarily due to a rental-rate increase implemented in January 2013, partially offset by a small reduction in installed assets.

Second-quarter submetering revenue grew by 18 percent to CAD24.3 million and by 24 percent to CAD51.2 million for the first six months of the year, primarily due to increased commodity charges and the number of billable units.

Rental attrition rate was 14,000 versus 20,000 a year ago, continuing a downward trend established over the last four quarters. The favorable decrease is the result of multi-pronged campaigns, as 6,000 units were added during the second quarter. Installed units now total 1.157 million.

Submetering contracted units are now up to 161,000, with 125,000 units installed and 76,000 units billing, as 3,000 units were converted into billing units during the second quarter. EnerCare has effectively doubled its baked-in revenue.

EnerCare plans to expand rental business organically by adding higher-margin products such as HVAC rentals, which generates rental income three to five times that of a waterheater.

The company is expanding its submetering business by introducing a thermal metering solution for new construction developments with the first installation already progressing. Interest in submetering deployment will keep expanding, as it’s driven by owners’ desire to cut their energy costs. That builds in a decent level of recession resistance.

In April the Ontario government introduced the Stronger Protection for Ontario Consumers Act, which deals with complaints about rental agreements for waterheaters entered into through door-to-door sales. Barring an election the act is expected to become law in January 2014.

Though EnerCare has suffered the negative influence of government intervention in the past–specifically Ontario regulators’ 2009 decision to suspend the company’s submetering expansion in the province until further study that led directly to the company’s only dividend cut in its history–management actually has a favorable view of the legislation, as it will inhibit the ability of less reputable competitors to chisel away at its hard-won market share.

Another former point of concern that now represents a potential positive is the replacement of New York-based hedge fund Octavian Advisors LP as EnerCare’s largest shareholder by Texas-based Augustus Advisors LLC.

In late July Augustus acquired from Octavian the management agreement related to investment funds that included 6,823,965 EnerCare common shares.

Augustus is part of TPG Special Situations Partners, an arm of private equity firm TPG.

In the spring of 2012 Octavian launched a proxy battle, demanding additional places on the board of directors with members committed to maximizing shareholder value in a manner similar to what the old UE Waterheater Income Fund.

This effort was turned back at EnerCare’s April 2012 annual meeting, but Octavian followed up later that summer with another request for additional board representation.

EnerCare CEO John Macdonald said, “We have spoken with TFP and we look forward to working with them in the future.” That’s not exactly an “all clear” sign. But there is no indication that Augustus plans a similar assault on management that to date remains committed to generating long-term dividends and gradual appreciation for shareholders.

EnerCare has generated a US-dollar total return of 9.3 percent in the 12 months since it was last featured as a Best Buy in the September 202 issue of CE, underperforming the S&P 500 Index’ 17.7 percent but outperforming the S&P/TSX Composite Index’ 0.5 percent.

The unfavorable comparison to the major US benchmark is all about the decline in the value of the Canadian dollar; for Canadian investors EnerCare has posted a total return of 17.5 percent.

We can’t, however, ignore the impact of currency changes. We can suggest that the loonie has reached compelling low, one that makes dividend-paying Canadian equities backed by high-quality, growing businesses all the more attractive.

Based on its most recent divided increase, EnerCare is now a buy under USD10.25 for long-term income and growth.

Aggressive Holding ARC Resources Ltd (TSX: ARX, OTC: AETUF) sold off from a five-year closing high of CAD28.70 on the TSX on May 31, 2013, to a six-month closing low of CAD25 on Aug. 27 due to the renewed deterioration of natural gas prices.

But the company is poised to build wealth for investors over the long term, as evidenced by the fact that ARC boosted volume and funds from operations during a period when its capital program is focused on 2014.

ARC reported second-quarter production of 93,436 boe/d, consistent with 2012 levels. Second-quarter crude oil and liquids production of 36,644 barrels per day increased slightly. Higher 2013 liquids production is the result of ARC’s focus on opportunities that generate the highest rates of return and cash flows.

Commodity sales revenue was up 27 percent to CAD403.4 million due to higher realized crude oil and natural gas prices. Crude oil and liquids production contributed approximately 70 percent of second-quarter revenue due to the strength of crude prices relative to natural gas prices, despite accounting for 39 percent of production.

Funds from operations were CAD201.2 million, or CAD0.65 per share, up 21 percent year over year primarily due to higher crude oil and natural gas prices in 2013.

ARC’s execution of its 2013 budget remains on track to meet full-year 2013 production guidance of between 93,000 and 97,000 boe/d and sets the stage for average production in excess of 110,000 boe per day in 2014 with the completion of the Parkland/Tower gas processing and liquids handling facility.

ARC added 30 gross operated wells–20 oil and 10 liquids-rich gas–during the second quarter. Activity was concentrated in the Parkland & Tower area in northeast British Columbia’s Montney formation, where all 10 liquids-rich wells and six oil wells were drilled. This effort is focused on filling the upcoming 60 million cubic feet per day Parkland & Tower facility, which is scheduled for an early 2014 commissioning.

To bridge the gap to its forecast 2014 production ramp-up management has updated its hedging program to secure near-term cash flow. ARC has approximately 52 percent of its anticipated oil production (excluding natural gas liquids) and nearly 80 percent of expected natural gas volumes under fixed-price or collar contracts for the remainder of 2013.

And ARC continues to maintain a low debt-to-FFO ratio of approximately 1.0 times based on annualized second-quarter numbers, which even conservative investors will appreciate for what it says about management’s conservative approach.

ARC continues to build value for investors, evidenced by its long-term production improvements.

With a 4.5 percent dividend yield heading into a strong production ramp-up for 2014, investors can collect while ARC management builds value.

A management-forecast decline in third-quarter production could provide another buying opportunity, though the shares are currently trading below our recommended buy-under target, even after spiking off late August, early September near-term lows.

ARC Resources is a strong buy under USD26.

For more information on ARC Resources, go to How They Rate under Oil and Gas. EnerCare is tracked under Gas/Propane. Click on their US symbols to see all previous writeups in Canadian Edge and Maple Leaf Memo.

Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts. Click on their names to go directly to company websites.

ARC has a market capitalization of CAD8.3 billion. EnerCare is a smaller company, with a market cap of CAD553 million.

Both stocks have plenty of liquidity on both sides of the border, both in TSX and US-listed symbols.

ARC trades on the US over-the-counter market under the symbol AETUF. EnerCare also trades on the US OTC market, under CSUWF, a symbol that reflects its former name Consumers Waterheater Income Fund.

Both companies have good coverage on Bay Street and Wall Street. ARC has 17 analysts tracking it, with seven rating the stock a “buy,” 10 rating it a “hold” and zero rating it a “sell.”

The average 12-month target price, based on forecasts from 16 of the 17 analysts covering the stock, is CAD29.39. This implies upside from ARC’s Sept. 4, 2013, closing price of CAD25.70 of 19 percent, including 12 monthly dividend payments of CAD0.10 per, or CAD1.20 on an annualized basis.

EnerCare is covered by six analysts, four of whom rate the stock a “buy.” Two rate it a hold, while zero analysts rate it a “sell.” The average 12-month target price, based on forecasts from five of the six analysts covering the stock, is CAD10.75. Upside from here, based on EnerCare’s Sept. 4, 2013, closing price of CAD9.34 and including 12 monthly dividend payments at CAD0.057 per, or CAD0.684 annualized, is 22.4 percent.

As is the case with all stocks in the Canadian Edge coverage universe, you get the same ownership whether you buy in the US or Canada. These stocks are priced in and pay dividends in Canadian dollars. Appreciation in the loonie will raise dividends as well as the value of your shares.

Dividends paid by both companies are 100 percent qualified for US income tax purposes. Both stocks’ dividends are taxed at the now-permanent Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

Canadian investors enjoy favorable tax status for both companies. For US investors, dividends paid by both ARC and EnerCare into IRAs aren’t subject to 15 percent Canadian withholding tax, though they are withheld at a 15 percent rate if held outside of an IRA.

Dividend taxes withheld from US non-IRA accounts can be recovered as a credit by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation.