Trusts with good businesses like Versacold are now the cheapest high-yield investments in the world. And although some offers are too good to refuse—such as UE Waterheater’s (UWH.UN) 50 percent premium from Alinta—most deals pale in comparison to years of rising distributions and share prices.

As for Versacold, the world’s third-largest cold storage company has been growing explosively in its steady business. Further, 76 percent of its income is generated outside Canada, making its 8 percent-plus distribution all but immune from prospective trust taxation in 2011.

Acquirer Eimskep will be able to combine Versacold’s operations with its own and enjoy even faster growth. The takeout price of CD12.25 per unit in cash is far more than this trust ever traded for.

However, it’s still barely 60 percent of the company’s annual revenue. That makes it hard not to think we could have done better.

There are plenty of weak trusts where investors will want to grab any offer. Thunder Energy Trust (THY.UN, THYFF), for example, clearly won’t survive unless the CD4-per-share cash offer from a private-capital firm succeeds.

Such dire straits don’t apply to Versacold or to any of the trusts in the Canadian Edge Portfolios. My attitude to would-be suitors is pay up or don’t bother.

Highball Offers

All CE picks run solid, growing businesses. That’s why we own them. They’ve rallied during the past few months but are still very cheap compared to equivalent corporations. That combination makes them potential targets.

It would be difficult to block an offer for any of them where the board and management are already signed on. The good news is, because they’re backed by solid businesses, none of these trusts has a reason to sell in a hurry. Any would-be suitor is going to have to pay up.

The key risk to all these picks is always that their businesses lose their way. That’s why I religiously study earnings to make sure they’re still on track. Even the best-looking trust can occasionally stumble, leaving us with the uncomfortable decision of whether or not to cut it loose.

For the most part, the verdict of first quarter earnings on Canadian Edge recommendations was positive, demonstrating they remain good, growing businesses. In the Conservative Portfolio, last month’s addition, Macquarie Power & Infrastructure Income Fund (MPT.UN, MCQPF), boosted its distributable cash flow per share by 12 percent because its power plants ran at very strong rates and its senior housing unit enjoyed higher occupancy.

The trust has now mailed unitholders of Clean Power Income Fund (CLE.UN, CEANF) the official takeover circular. Clean Power holders now have until June 23, 2007, to tender their shares.

Per the May 30 Flash Alert, all US investors should now sell their shares of Clean. Macquarie P&I holders can expect the Clean properties to begin adding to cash flows in the third quarter. Management expects a full-year payout ratio between 90 and 95 percent, leaving room for a modest dividend increase.

Meanwhile, Power & Income is valued and distributions are paid on its operating cash flow, and it basically held debt and share issues to nil over the past 12 months as well. Cash on hand doubled in the first quarter.

Power & Income does face challenges this year, including completing the Clean Power deal and integrating what have been challenging assets to manage. The good news is Clean’s first quarter results look like its management has already done most of the heavy lifting.

Macquarie Power & Income shares’ current yield is well above 9 percent. It’s also well protected from 2011 taxes by what amount to tax pools to the extent that management has assured investors in its quarterly report of a minimal impact from corporate taxation. Buy Macquarie Power & Income Fund up to USD12 for growth and income.

Our other three power trusts also fared well. Algonquin Power Income Fund (APF.UN, AGQNF) turned in the highest payout ratio, largely because of seasonal impacts on its far-flung power and water portfolio. Facilities ran well, and overall results were in line with expectations.

Coupled with the trust’s solid finances and limited dilution from share issues, that should safeguard the 10 percent-plus distribution going forward. Algonquin Power Income Fund is a buy up to USD9.

Atlantic Power Income Fund (ATP.UN, ATPWF) enjoyed a 24 percent jump in project cash flow, largely because of the acquisition of the Path 15 power line in California. The trust’s other assets—which are managed as a portfolio of investments, rather than as an operating company—also performed generally well.

The result was a payout ratio of just 67 percent that seems to invite another increase later this year. Atlantic Power Income Fund has surged but is a buy up to USD12.

Boralex Power Income Fund (BPT.UN, BLXJF) is still undergoing a strategic review that could end in a takeover by its parent Boralex. The parent’s price-to-book value ratio is considerably above the trust’s 1.47, so it could afford to pay a generous premium and absorb the assets in an accretive way.

Meanwhile, the trust’s payout ratio fell to just 69 percent in the first quarter, as the wood residue plant sharply increased profitability and hydro flows were steady. Boralex Power Income Fund has again surged past my buy target but now rates a buy on a dip to USD10.

Midstream energy bets AltaGas Income Trust (ALA.UN, ATGFF), Keyera Facilities Income Fund (KEY.UN, KEYUF) and Pembina Pipeline Income Fund (PIF.UN, PMBIF) also posted strong results. Their assets’ throughput remained high despite the slowdown in Canadian natural gas drilling. That’s largely because the trio is focused on faster-growing areas of the energy patch that have actually slowed little, and they depend on fee income that’s barely affected by commodity prices.

AltaGas turned in another solid quarter for cash flow, driving its payout ratio down to 78.1 percent. The trust continues to expand its fee-generating asset base, with 20 percent growth planned in the next 24 months, mostly from a string of internal projects.

That means higher distributions down the road. Yielding nearly 8 percent—and also protected by tax pools—AltaGas Income Trust has a bright future and is a buy up to USD26.

Keyera’s distributable cash flow surged 43 percent in the quarter, lowering its payout ratio to just 59.5 percent and allowing management to up the distribution by another 5 percent. Processing and natural gas liquids divisions turned in double-digit profit gains for the trust, which has CD375 million in tax pools for total coverage of 11 quarters of cash flow. Buy Keyera Facilities Income Fund up to its new target of USD19.

Pembina’s operating income rose 13 percent, mostly because of a big increase in throughput at its energy processing facilities. The trust progressed on its oil sands infrastructure expansion, with the Cheecham Lateral Pipeline commencing operations during the quarter.

That should keep cash flow and distributions rising for years to come. Buy Pembina Pipeline Income Fund anytime it trades under USD16.

Rich Properties

The first quarter was also good for Canadian real estate investment trusts (REITs), including favorites Northern Property REIT (NPR.UN, NPRUF) and RioCan REIT (REI.UN, RIOCF). Northern’s occupancy rate rose to 96.2, while RioCan’s surged to 97.1 percent, even as both REITs added properties to spur further growth. That’s a familiar pattern that should continue to boost both of these REITs, which are also enjoying rising rents in most markets.

Unlike many other REITs, the pair is well diversified beyond the energy patch, which should serve them well when the resource markets are volatile. And both also qualify to continue tax-exempt status under Flaherty’s rules for 2011. Buy Northern Property REIT up to USD24 and RioCan REIT up to USD25.

TimberWest Forest Corp (TWF.UN, TWTUF) is gearing up to capitalize on Canada’s red-hot property market, hiring a seasoned property industry veteran to maximize the value of its Vancouver Island holdings. As for timber, management continues to squeeze costs to weather the slowdown in the US housing market and an 18 percent drop in sales to Asia over the past year.

The fact that the first quarter payout ratio was just 76.9 percent—despite the lack of real estate income—is a testament to how solid this trust is. I’m raising my buy target to USD16 for those who don’t already own TimberWest Forest Corp.

Bell Aliant’s (BA.UN, BLIAF) rural phone systems generated a solid 3.6 percent revenue gain and 4.3 percent increase in distributable cash flow, as growth in broadband revenue more than offset the continued erosion of the traditional local phone business. Bell’s is the same basic business model that rural telecoms enjoy in the US, generating mounds of cash to pay outsized distributions. And because that model is little understood by investors, Bell sells cheaply to boot at just 95 percent of book value.

More-flexible regulation promises to spur Bell’s growth in coming quarters by making it easier to keep customers and acquire them from rivals. And cash flow should get a further boost from the debt reduction and share buybacks management made with proceeds from recent asset sales. Taken together, that should spell higher distributions and share price gains for Bell in coming years.

There’s some near-term risk to shares from the potential private-capital buyout of Bell Aliant’s former parent BCE. As part of last year’s spinoff of its rural telephone assets, BCE kept 44 percent of the trust, as well as majority owner rights.

A new private-capital owner of BCE will want to maximize the value of this investment in one of three ways: 1) It could elect to sell its ownership stake, either on the market or to another entity that would then take it private; 2) it could try to privatize Bell itself by purchasing the rest of the outstanding units; or 3) it could keep its stake in Bell and try to lever the trust up to increase equity returns.

The third scenario is probably the least likely. For one thing, the trust’s other major shareholders have already signaled their opposition. That’s because such a course could threaten Bell’s generous distribution stream.

In addition, rural phone properties are able to gain value by using their cash flows to reduce attached debt, which then increases cash flow. And levering up Bell would also threaten the tax shield, both before and after 2011.

The second scenario—BCE’s buyer keeps its Bell shares and tries to buy the rest—is possible but would reduce the buyer’s potential rate of return. That makes the first scenario the most likely.

Predicting what course of action BCE’s buyer will take is completely speculative. The good news is either way we’re going to realize strong returns with Bell Aliant.

Although I’d prefer it remain independent, I’m not averse to a deal if the price is right. Bell Aliant remains a buy for those who don’t own it up to its new target of USD30.

As an ice manufacturer and distributor, Arctic Glacier Income Fund (AG.UN, AGUNF) always bleeds cash in the first quarter when it reaps only 10 percent of its revenue versus 25 percent of fixed costs. This year, thanks to rapid expansion in the US, the shortfall shrank and the trust looks set for even better results the rest of the year.

With 80 percent of income generated outside Canada and in possession of numerous tax pools, Arctic’s distribution of nearly 8 percent won’t be touched by 2011 taxation. Arctic Glacier Income Fund is now a buy up to my new target of USD14.

Yellow Pages Income Fund’s (YLO.UN, YLWPF) unique Web site visits reached 9.9 million in April as it continues to transition its traditional print directory business to the Internet. Consolidated earnings surged 42 percent as cash flow margins from the directory business skyrocketed to a record 59 percent of sales.

Distributable cash flow per share rose 10.7 percent, another successful step in management’s plan to literally outgrow the impact of 2011 taxation on its ability to pay distributions. Yellow Pages Income Fund is a buy up to USD15.

Energized For Gains

For most oil and gas producer and service trusts, the first quarter entailed some tough comparisons with year-earlier tallies. The main reason was the drop in oil and especially gas prices, but higher drilling costs and taxes also took their toll.

So did an overall increase in the industry’s cost of capital, brought on by lower energy prices and the Canadian government’s decision to begin taxing trusts as corporations beginning in 2011. Particularly hard hit was Precision Drilling. 

Only two Aggressive Portfolio holdings managed to eke out gains in cash flow per share. Provident Energy’s (PVE.UN, NYSE: PVX) increase was due to a 92 percent gain in cash flow from its midstream gas liquids assets, which offset the impact of lower selling prices on its production operations. Those results enabled the trust to complete the accretive acquisition of Capitol Energy Resources, which will fuel future growth. Buy Provident Energy up to USD14.

Trinidad Energy Services Trust’s (TDG.UN, TDGNF) distributable cash flow per share inched ahead 2.4 percent because additions to its fleet of deep drilling rigs under long-term contracts offset dramatically weaker industry conditions. The trust also benefited from recent expansion into US markets, which remain robust compared to their Canadian counterparts.

With a payout ratio of just 39 percent, the 8 percent-plus distribution looks safe. Trinidad Energy Services Trust is a buy up to USD18.

ARC Energy Trust (AET.UN, AETUF), Enerplus Resources (ERF.UN, NYSE: ERF), Penn West Energy Trust (PWT.UN, NYSE: PWE), Peyto Energy Trust (PES.UN, PEYUF) and Vermilion Energy Trust (VET.UN, VETMF) all suffered drops in per-share cash flow versus last year. Each, however, posted strong production and held down costs, debt and dilution from new share issues. As a result, even in what was an exceedingly difficult quarter, all five generated enough cash flow to cover their distributions by healthy margins.

The second quarter may bring more difficult comparisons, in part because of poor drilling conditions in April throughout much of Canada. But with energy prices firming, the quintet’s cash flows should start to see a marked upturn by the second half of the year. All five have appreciated strongly on that expectation but rate buys at the prices listed in the Aggressive Portfolio table below.

That also applies to Newalta Income Fund (NAL.UN, NALUF), which suffered a 39 percent decline in first quarter funds from operations per share, pushing its payout ratio to 86.6 percent of distributable cash flow. The culprit was the dramatic slowdown in drilling activity, offset by cost controls and the trust’s recent expansion into non-energy operations in eastern Canada.

I don’t expect a distribution increase until energy patch activity revives. But yielding nearly 9 percent, Newalta Income Fund remains a buy up to USD30.

In part because of the drop off in Canadian production, I’m increasingly bullish on natural gas prices for the second half of the year. That’s one reason I’ve added an aggressive gas play to the Portfolio this month: Advantage Energy Income Fund (AVN.UN, NYSE: AAV).

Paramount Energy Trust (PMT.UN, PMGYF) is my other high-stakes gas pick. The trust dramatically improved its long-term position last month, inking a deal to acquire properties producing 47 million cubic feet of gas a day from Dominion Resources.

The deal increases Paramount’s reserves by 63 percent and ups proved reserve life to five-plus years. It’s massively accretive, boosting proven reserves by 44 percent and reducing the trust’s projected second half 2007 payout ratio to just 52 percent, based on hedged positions and relatively modest commodity price forecasts.

None of this changes the fundamental fact that Paramount’s cash flow and distribution are wholly at the mercy of volatile natural gas prices. But I fully expect that to be a much bigger benefit going forward than it’s been a liability over the past year.

No one should own the trust who isn’t willing to ride out volatility, both in the share price and distribution. Paramount Energy Trust is a buy for aggressive investors only up to USD13.