Policymakers at the US Federal Reserve first started talking in earnest about the end of its third round of “quantitative easing” (QE3) in early April 2013.

Although it wasn’t until May 22 testimony before Congress’ Joint Economic Committee, however, that “taper” and “tapering” became Wall Street watchwords, the Chicago Board Options Exchange 10-Year Treasury Note Index (TNX), which is based on the yield to maturity of the most recently auctioned 10-year US Treasury Note, began to climb three weeks prior.

The TNX hit a 2013 low of 16.31 on May 2 but has since climbed as high as 29.79, on Sept. 5, and currently sits at 26.06. That’s still a historically low level, and it reflects the Fed’s decision to delay the taper during its September meeting. The potential hit to growth from a US government shutdown may push Q3 into 2014.

But the steep climb for the world’s key benchmark rate in the aftermath of mere hints of a rollback of the Fed’s USD80 billion per month program of mortgage-backed securities purchases triggered significant selloffs for traditional high-yield stocks such real estate investment trusts (REIT) and utilities.

One group, however, has been spared during this wide-ranging selloff of dividend-paying fare: high-yielding Canadian energy stocks, including five of the six we feature in the CE Portfolio Aggressive Holdings.

Since May 2 the S&P/Toronto Stock Exchange Capped REIT Index has posted a total return of negative 16.13 percent in US dollar terms, minus 13.42 percent in Canadian dollar terms. The MSCI US REIT Index is off by 9.03 percent. The Dow Jones Utility Average, meanwhile, is down 6.99 percent.

The S&P/TSX Energy Index, a proxy for “normal yield” exploration and production companies with an average dividend yield of 3.3 percent, posted a total return of 3.5 percent in US terms, 6.08 percent in Canadian terms.

During the same timeframe the S&P/TSX Composite Index is up 2.63 percent in US dollar terms, 5.19 percent in local terms. The S&P 500 Index is up 7.05 percent.

Our top five Canadian oil and gas producers–ARC Resources Ltd (TSX: ARX, OTC: AETUF), Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF), Enerplus Resources Corp (TSX: ERF, NYSE: ERF), Peyto Exploration and Development Corp (TSX: PEY, OTC: PEYUF) and Vermilion Energy Inc (TSX: VET, NYSE: VET)–have outperformed sector and broad-based indexes, with an average total return from May 2 through Oct. 2 of 8.1 percent in US dollar terms and 10.79 percent in Canadian dollar terms.

Even factoring in the laggard Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF), which is off 10.94 percent in US terms and 8.72 percent in Canadian terms, leaves the six-stock average total return of 4.93 percent in US terms, 7.54 percent in local terms, still far better than the yield-focused sector benchmarks but slightly behind the broader market indexes.

The top five CE E&Ps currently post an average yield of 5.1 percent, with Crescent Point leading the way at 7.2 percent and Peyto trailing the lot at 3.2 percent. Accounting for Lightstream’s 12.9 percent current yield the average for our six oil and gas Portfolio Holdings jumps to 6.4 percent.

Lightstream is an anomaly right now. We continue to hold it in the Portfolio–in fact it remains a “buy” recommendation–but, if the message hasn’t been clear over the past several issues, during which we added it to the Dividend Watch List, we consider it a “problem child” due to its complicated debt situation.

The market is no longer evaluating the company based on its payout or its production, actually, but rather on the widely held and likely accurate perception that management needs to loosen its grip on its long and tightly held conviction that the current dividend rate is an integral aspect of the Lightstream investment story.

In fact a dividend cut is probably the surest route to effective debt reduction that also preserves sufficient cash to invest in production growth. Selling assets in a way that generates proceeds substantial enough to result in balance-sheet improvement would also likely mean selling productive assets that contribute meaningfully to cash flow.

It’s shaping into a Hobson’s choice. My sense is Lightstream will only see meaningful movement in its share price–to the upside, that is–once management capitulates and cuts the dividend.

It’s still an attractive portfolio of light-oil assets. And there are opportunities for output growth. But the current dividend rate–at least as far as the market is concerned–is an impediment to achieving that growth.

We continue to rate Lightstream a buy under USD10 for aggressive investors who aren’t relying on it to generate reliable income but rather can consider even a 50 percent lower rate adequate compensation for risks endured in hope of a share-price recovery.

The solid performance for our top five E&P recommendations versus other high-yield groups likely stems from the fact that they should all benefit from the stronger economic growth that will logically lead to higher interest rates.

In short, energy demand and therefore commodity prices are, in general, positively correlated to economic growth.

Vermilion Energy continues to post solid production growth and to benefit from its heavy exposure to Brent crude pricing. The stock has performed remarkably well during this recent period of rising rates, posting a 13.97 percent total return in US dollar terms, 16.81 percent in Canadian.

The stock actually bottomed for 2013 at CAD46.02 on the Toronto Stock Exchange (TSX) on April 17 but has been surging ever since, topping at CAD58.26 on Aug. 1. It closed at CAD57.23 on the TSX and CAD55.43 on the New York Stock Exchange on Oct. 3, above our buy-under target of USD52.

At these levels it’s priced to yield 4.2 percent. Wait for a pullback to buy Vermilion Energy, a solid play for long-term growth and income.

Enerplus, which has posted the strongest gains since May 2 at 21.74 percent in US dollar terms and 24.77 percent in Canadian dollar terms, is trading well above our current buy-under target of USD14. The stock is priced to yield 6.4 percent.

This is the continuation of a strong rally that started nearly 11 months ago after the share price fell more than 26 percent over 11 days in November 2012. That slide was caused by a third-quarter 2012 loss and production decline relative to the previous quarter.

The company has regained its footing, as management reported a 39.7 percent increase in second-quarter 2013 funds from operations and a 9.6 percent increase in production. Enerplus is a buy on a pullback to USD14.

Crescent Point is the highest-yielding of our top five at 7.2 percent. Its performance on the TSX is modest during our “rising rate” timeframe. If you go back to its April 17 closing low for 2013 of CAD35.01 through Oct. 2 Crescent Point has produced an impressive total return of 14.15 percent in US dollar terms and 14.82 percent in Canadian dollar terms, outperforming the S&P/TSX Composite, the S&P/TSX Energy Index and the S&P 500.

Crescent Point reported a 31 percent increase in second-quarter funds from operations, while production was up 21 percent sequentially. And management boosted full-year production and cash flow guidance. Crescent Point Energy is a strong buy all the way up to USD48.

Peyto surged in the immediate aftermath of Mr. Bernanke’s initial hints about “tapering” but sagged with sliding natural gas prices in the late summer.

The stock has recovered some of the ground it lost from its June 4, 2013, 12-month high, as commodity prices moved in its favor from mid-August into September. It’s “rising interest rate” return is 4.65 percent in US terms and 7.25 percent in local terms.

Peyto is the lowest-cost natural gas producer in Canada, with the ability to generate a profit and sustain its cash flow with prices well below where they are now. Yielding 3.2 percent as of this writing, Peyto is a strong buy under USD33.

The share price of natural-gas focused ARC Resources has followed a trajectory similar to Peyto’s since May 2, tracing ups and downs of commodity prices rather than reacting to interest-rate fears.

ARC is completing a heavy period of capital expenditure that should result in a significant uplift in 2014 production; at the same time it continues to post solid financial results.

The company, which will benefit from an easing of CAPEX next year as well as a jump in output, seems poised to raise its monthly dividend rate for the first time in the post-income trust/post-Great Recession era. ARC Resources, currently yielding 4.6 percent and one of our two Best Buy recommendations in the September 2013 issue, is a buy under USD26.

The Last Report

Student Transportation Inc (TSX: STB, NSDQ: STB), the final CE Portfolio Holding to post results during the recently concluded reporting cycle, posted solid fiscal 2013 fourth-quarter and full-year (both ended June 30, 2013) operating and financial numbers.

Recovery of USD5 million of revenue deferrals present at the end of the fiscal third quarter on March 31, 2013, drove an 18 percent year-over-year increase in fourth-quarter revenue and helped Student Transportation meet guidance with a 15 percent increase in full-year sales, which management targeted in July 2012.

Margins for fiscal 2013 improved versus fiscal 2012, and management was able to channel the benefits of increased cash flow to reduce senior and total debt covenant ratios. Fuel costs were down, as were selling, general and administrative and interest expenses as a percent of revenue.

Management reported a full-year payout ratio of 79 percent, down from 80 percent a year ago and below an 82 percent-to-85 percent target range, and forecast a further decline in this key metric in fiscal 2014.

Fourth-quarter revenue was USD122.3 million, up 18.3 percent versus the fourth quarter of fiscal 2012, and adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) of USD30.4 million, a 30.5 percent year-over-year increase.

Fiscal 2013 revenue grew by 14.8 percent to USD423.7 million, setting up a 15.8 percent increase in adjusted EBITDA to USD81.2 million.

During the fiscal year management executed a new five-year credit agreement that included a CAD15 million increase in its borrowing base to CAD155 million and an extension in the maturity to February 2018. The cost to borrow was also renegotiated down by 50 basis points.

Management has hedged against rising interest rates, with approximately 85 percent of the company’s total debt effectively fixed at relatively low rates for the next four to six years.

Student Transportation has been able to fund its recent growth using low-cost debt rather than tapping equity markets, and the company is well-positioned to continue to build out its fleet of clean-burning, alternative-fuel buses. Doing so, management expects, will also reduce operating costs by lowering fuel expenses.

The key variables for Student Transportation remain fuel, insurance and maintenance costs, over which management has very little control. The company does have a non-operating interest in US oil and gas assets that provide a hedge against rising fuel prices, and some of its contracts include provisions for automatic price increases based on increases for fuel, insurance and maintenance expenses.

Labor costs are also subject to normal terms of competition; management notes that finding qualified drivers for its buses is an ongoing challenge. There is also continuing pressure to maintain and upgrade its bus fleet, a capital expenditure that places significant demand on cash flow.

Management has to date posted an impressive record of retaining clients whose contracts expire. Student Transportation had 82 contracts up for renewal for fiscal 2013; the approximate percentages of fiscal 2013 revenue up for renewal (including annual contract renewals in New Jersey) for fiscal 2014 and 2015 are 28 percent and 34 percent, respectively.

Management noted that Student Transportation currently has “booked revenue” for fiscal 2014 that represents an 11 percent year-over-year increase over fiscal 2013.

Subsequent to the end of fiscal 2013 management announced the closing of two school bus companies that add to the regional density of its operations in Pennsylvania and New Jersey. Combined annual revenues for the two companies total just under USD10 million and will add 170 vehicles to the company’s current fleet.

These acquisitions of “long time, well-respected fixtures in their communities” are relatively small but are immediately accretive.

Student Transportation secured a new five-year contract with the major customer in the Pennsylvania acquisition, and the company has an existing facility nearby that makes this a great opportunity for expansion.

The New Jersey acquisition fits in well with several current operations; opportunities to trim costs are significant here as well. Student Transportation used its existing credit facility to finance the transactions.

Revenue-boosting acquisitions coupled with cost-cutting efforts should continue to drive cash flow growth. Student Transportation remains a buy under USD7.

Conservative Update

Bird Construction Inc’s (TSX: BDT, OTC: BIRDF) share price has bounced off a 21-month closing low of CAD11.20 established Aug. 29, 2013, in the aftermath of a second-quarter revenue and earnings miss. Bird closed at CAD12.60 on Oct. 3.

The stock is still well off its 2013 high of CAD15.08, set Jan. 21 and just shy of its all-time high, but recent movement is encouraging. More important are developments that demonstrate Bird’s ability to win construction contracts in a competitive marketplace.

Last month management announced it had been awarded new contracts totaling approximately CAD175 million involving civil and building construction for industrial and institutional clients across Canada. The work is expected to commence this fall, with expected completion dates extending into 2015. The contracts will be added to the company’s third-quarter backlog.

That’s on top of contract awards in excess of CAD100 million announced in July 2013.

Bird’s backlog as of June 30, 2013, was CAD1.064 billion, down 0.8 percent from CAD1.073 billion as of Dec. 31, 2012. The company affirmed its monthly dividend rate of CAD0.0633 per share for September, October and November. Bird remains a buy under USD14.50.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF), the unit price of which continues to struggle along with other REITs, is trading near a two-year low. But management continues to add assets that should help support and grow cash flow for the long term.

Last month CAP REIT completed its acquisition of a portfolio of 338 apartment suites and 33,800 square feet of commercial and retail space in four properties in Dublin, Ireland, for approximately EUR42.7 million (approximately CAD59 million).

The REIT paid for the portfolio using cash from a new EUR45 million credit facility for a term of five years at a rate of 3.2 percent.

These are high-quality apartments built between 2006 and 2008 and set in mature and growing residential neighborhoods in and around Dublin–close to major employers, parks, transit systems and other cultural centers.

Occupancy is 93 percent, which gives CAP REIT an opportunity to grow revenue. Management expects the deal to be “highly accretive” to cash flow from the outset.

Management also noted the CAP REIT will evaluate additional opportunities in Dublin to capitalize on the region’s strong market fundamentals, with demand significantly exceeding supply, solid occupancies and rising average monthly rents. Canadian Apartment Properties REIT is a buy for long-term growth and income under USD25.

Cineplex Inc (TSX: CGX, OTC: CPXGF) is getting more and more positive attention from Bay Street analysts, as a capable and proven management team continues to execute on strategic initiatives that generate sustainable growth, both for earnings and dividends.

Last month Cineplex earned two ratings upgrades–one to “hold” from “underweight,” one to “sector outperform” from “sector perform,”–while another analyst initiated coverage with a “buy” rating.

Cineplex continues to expand its core business–witness the June 2013 acquisition of 26 theaters from Empire Company Ltd (TSX: EMP/A, OTC: EMLAF)–but is also creating new ways to generate cash flow from sources beyond the typical cinema model, including events such as live simulcasts from the Metropolitan Opera, on-screen advertising, on-site gaming and a robust Internet presence.

All these efforts will support cash flow growth even if there’s a hiccup in the Hollywood hit parade. Cineplex is a buy on dips to USD32.25.

Dundee REIT (TSX: D-U, OTC: DRETF) is going where no other Canadian real estate investment trust (REIT) has gone before: This week it became the first of its kind to issue floating-rate debt.

Dundee sold CAD125 million of three-year senior unsecured debt at a 170 basis point spread to the three-month Canadian Dealer Offered Rate (CDOR). The REIT plans to use proceeds to repay existing debt and for general corporate purposes.

As of June 30, 2013, Dundee had CAD3.354 billion of debt, of which 87 percent was in the form of mortgages.

This presents a new method for REITs, which have ongoing capital needs, to raise funds. It also could avail them access to a different group of investors.

For Dundee the key attraction was the ability to issue debt unattached to a particular group of properties. The offering wouldn’t affect the status of Dundee’s secured credit facility, and more of its assets will be unencumbered, preserving financial flexibility.

It will also pay a slightly lower rate compared with its secured facility, which is set at the bankers’ acceptance rate plus 175 basis points.

The offering is a positive sign that, despite the market’s treatment of REIT unit prices in recent months, underlying fundamentals command some respect.

Dundee, after all, was able to get unsecured financing for a three-year term with a rate about equal to what it would pay on a secured line. Dundee REIT remains a buy under USD39.

Aggressive Update

Ag Growth International Inc (TSX: AFN, OTC: AGGZF), one of August’s Best Buys, has surged in the aftermath of another positive crop report from the US Dept of Agriculture that suggests corn yields will be at record levels for 2013-14 and that farmers will thus have greater grain-handling requirements.

Ag Growth is up 8.47 percent since Aug. 9, 2013, compared to 1.78 percent for the S&P/TSX Composite and a negative total return of 0.43 percent for the S&P 500.

On Sept. 12, 2013, the Dept of Agriculture boosted its harvest forecast despite a late-summer stretch of hot, dry weather in key growing areas.

The agency, whose October crop report may not be forthcoming because of the federal government shutdown, raised its corn production estimate 0.6 percent to a record 13.843 billion bushels, beating the consensus estimate by nearly 2 percent. Ag Growth is a solid buy under USD40.

DBRS has released its report on Atlantic Power Corp (TSX: ATP, NYSE: AT), wherein it explains its downgrade of the company’s credit rating to B (high) from BB. The trend for Atlantic’s rating is negative.

DBRS cited factors that we too have identified in our recent updates on the company, specifically a difficult market for merchant power companies and constrained liquidity that will impede its ability to add assets on favorable terms.

The wholesale electricity market remains weak, and the outlook for a recovery is cloudy. In such an environment Atlantic will face difficulties similar to what it encountered in Florida in late 2012 that led to asset sales, particularly the renewal of the contract for the Selkirk project that expires in August 2014 and the Tunis project contract maturing in December 2014.

Management has already undertaken a program of cost reductions that includes the consolidation of corporate functions and the elimination of redundancies. It’s also focused on optimizing performance at its ongoing projects, as it puts off growth initiatives in favor of balance-sheet strengthening for the foreseeable future.

Atlantic has already eviscerated its dividend. It remains to be seen whether more asset sales are part of the recovery plan. But the key remains a recovery in the wholesale power market.

As we’ve noted in recent months, we don’t have a “special situations” segment in the Portfolio. If we did it would be a perfect place for this stock: a turnaround story with a long-term horizon for which you get compensated at a dividend yield of 8.5 percent at current levels.

If I were kicking the tires on Atlantic I might take a speculative position. But that’s not the position we’re in; we’re already long-term investors who’ve appreciated views from nice peaks but are now in a deep valley.

At this point we know what the downside is.

On the positive side, management is making meaningful progress on debt reduction, having paid down USD172 million in long-term obligations. Cutting administrative costs and optimizing performance at existing projects makes for a leaner, more efficient operation as well.

These are positives that, if nothing else, make the portfolio attractive for a potential bidder, noting that Atlantic is trading at a price-to-book value of just 0.82.

Atlantic Power remains a hold.

Earnings: The Next Round

Here are estimated and confirmed dates for the next set of operating and financial numbers from Canadian Edge Portfolio Holdings. Except where noted, Holdings will be reporting results for the third quarter of 2013.

We’ll begin reviewing reports in the November issue of CE. Should a company post numbers that fundamentally change our investment thesis and require immediate action we’ll issue a Flash Alert.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Nov. 1 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 7 (confirmed)
• Bank of Nova Scotia (TSX: BNS, NYSE: BNS)–Dec. 6 (FY 2013 Q4, confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Nov. 12 (estimate)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–Nov. 8 (estimate)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–Nov. 8 (estimate)
• Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–Nov. 5 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Nov. 8 (estimate)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Nov. 6 (estimate)
• Dundee REIT (TSX: D-U, OTC: DRETF)–Nov. 6 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Nov. 5 (estimate)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Nov. 5 (confirmed)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Nov. 6 (estimate)
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–Nov. 7 (estimate)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Nov. 6 (estimate)
• RioCan REIT (TSX: REI, OTC: RIOCF)–Nov. 7 (confirmed)
• Shaw Communications Inc (TSX: SJR/B, NYSE: SJR)–Oct. 24 (FY 2013 Q4, confirmed)
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Nov. 8 (FY 2014 Q1, estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Oct. 24 (estimate)

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–Oct. 30 (estimate)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Nov. 13 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Nov. 7 (estimate)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 7 (confirmed)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 12 (estimate)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–Nov. 7 (confirmed)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–Nov. 8 (estimate)
• Extendicare Inc (TSX: EXE, OTC: EXETF)–Nov. 7 (estimate)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 7 (estimate)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Nov. 13 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Nov. 8 (estimate)
• Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF)–Nov. 7 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Nov. 7 (estimate)
• Vermilion Energy Inc (TSX: VET, NYSE: VET)–Nov. 7 (confirmed)
• Wajax Corp (TSX: WJX, OTC: WJXFF)–Nov. 6 (estimate)