Zero. That was the number of distribution cuts in the Canadian Edge universe for June. With energy prices still strengthening and most poorly run trusts already blowing up, I don’t anticipate many reductions in the next few months either. In fact, we should see a lot more dividend increases—11 trusts bumped up their payouts in the past two months—as managements get a better sense of where their trusts stand in relation to prospective taxation in 2011 and volatile energy prices.

There are, however, a few trusts that continue to merit concern on the subject of dividend safety. Primary Energy Recycling’s (PRI.UN, PYGYF) reduced distribution looks safe for the time being. The company—whose securities trade as part debt and part equity, or “enhanced income securities”—reached a new credit agreement last month.

The new deal allows Primary to continue paying at a monthly rate of 6.667 cents Canadian a share, which is down from the May rate of 9.5833 cents Canadian. The company will have until the second quarter of 2008 to come back into compliance with the original covenants of its credit agreement.

That should be less of a problem now that repairs to a steam-turbine blade have been successfully completed at the North Lake Energy facility and the plant has been restarted. Primary should be able to recover at least some of the USD1.8 million in lost revenue and repair costs from the outage, though timing is unknown.

The shares have been pummeled and, with the distribution apparently steady for now, should have basically bottomed at this point. But until the overall numbers start to turn up, conservative investors should generally avoid Primary Energy Recycling. For one thing, the Harbor Coal unit troubles have yet to be resolved, and it’s also possible we’ll see other operating problems crop up. There are plenty of other power trusts with yields almost as high as Primary’s and without its risks.

Countryside Power (COU.UN, COUFF) has entered an agreement to be acquired by Fort Chicago Energy Partners for CD9.60 per share in cash. The deal isn’t at any real premium. But given Countryside’s numerous negative contingencies—a very high payout ratio, the loss of a third of its cash flow, uncertainty about how the US Biogas suit proceeds will be invested and potential problems with California revenue—shareholders should take the deal and run or better sell their shares beforehand. The trust maintains it will continue to pay its regular quarterly distribution until the deal is completed, which should occur in the next couple months and long before any future credit deadlines arise.

Fording Canadian Coal (FDG.UN, NYSE: FDG) held its quarterly distribution at 65 cents Canadian a share in July. Meanwhile, Westshore Terminals Income (WTE.UN, WTSHF)—which stores the majority of the trust’s metallurgical coal that’s shipped overseas—actually boosted its regular payout to 25 cents Canadian from 22.5 cents in the first quarter.

The higher tally is a pretty good sign that cash flows have stabilized for both trusts, at least for the time being. Fording’s metallurgical coal reserves are among the most valuable in the world, and the overall properties remain solid, though cash flows are extremely vulnerable to the ups and downs of met coal demand and prices.

Ironically, Fording’s share price has risen sharply in the past few months, even as the trust has continued to trim its distribution. That’s a result of increased takeover speculation and well as realization that it’s a solid situation that will pay out big cash flows for years to come, though it may be a while before we revisit the levels of the boom year of 2005. Fording Canadian Coal is a buy up to USD30; Westshore Terminals Income is a buy up to USD14.

Takeovers took two troubled trusts off the Watch List last month. Macquarie Power & Infrastructure (MPT.UN, MCQPF) completed its takeover of Clean Power Income Fund (CLE.UN, CEANF). Those who didn’t sell Clean on my recommendation must now wait for Macquarie to sell their shares on the market before they can get their cash proceeds. Macquarie shares have some off a bit, as is normal for an acquirer in a deal where stock is involved. The money should show up in accounts later this month, however.

Thunder Energy Trust’s (THY.UN, THYFF) takeover by a private capital firm Overlord Financial-led consortium has also wound up. Those who didn’t sell ahead of time will now receive CD4 per share in cash. Note the trust elected not to pay its July 16 distribution to shareholders of record June 22.

Two trusts going on the list this month are Noranda Income Fund (NIF.UN, NNDIF) and Clearwater Seafoods Income Fund (CLR.UN, CWFOF). Noranda’s zinc-processing volumes are expected to fall in the second quarter because of difficulties at the hydrometallurgical section of the plant. Management states the change isn’t expected to impact 2007 monthly distributions, which are protected from cash flow shortfalls by a reserve. But given the trust’s very high payout ratio, the situation bears watching. Hold Noranda Income Fund.

Clearwater’s new woes stem from delays in the delivery date of a new clam vessel because of a shipyard accident. The vessel was being towed from the wharf to the drydock when it capsized and sank under 16 meters of water. Happily, no one was injured, and insurance should cover the immediate costs. It’s also not expected to affect distributable cash in 2007.

But the accident will delay growth in the clam operation in 2008, which had been offsetting more difficult conditions in other areas of the business. Sell Clearwater Seafoods Income Fund.

Here’s the rest of the Watch List. I expect several more to come off the list in the next month or two as takeovers are completed and second quarter earnings come in.

Canetic Resources (CNE.UN, NYSE: CNE)
Clearwater Seafoods Income Fund (CLR.UN, CWFOF)
Connors Brothers Income Fund (CBF.UN, CBICF)
Countryside Power (COU.UN, COUUF)
Daylight Resources Trust (DAY.UN, DAYYF)
Enterra Energy Trust (ENT.UN, NYSE: ENT)
Essential Energy Services Trust (ESN.UN, EEYUF)
Fording Canadian Coal (FDG.UN, NYSE: FDG)
Freehold Royalty Trust (FRU.UN, FRHLF)
Harvest Energy Trust (HTE.UN, NYSE: HTE)
Newport Partners Income (NPF.UN, NWPIF)
Noranda Income Fund (NIF.UN, NNDIF)
Paramount Energy Trust (PMT.UN, PMGYF)
Peak Energy Services Trust (PES.UN, PKGFF)
Precision Drilling (PD.UN, NYSE: PDS)
Sound Energy Trust (SND.UN, SNDFF)
Sun Gro Horticulture Income Fund (GRO.UN, SGHRF)
Tree Island Wire Income Fund (TIL.UN, TWIRF)
Trilogy Energy (TET.UN, TETFF)
True Energy Trust (TUI.UN, TUIJF)
Vault Energy (VNG.UN, VNGFF)
Wellco Energy Services Trust (WLL.UN, WLLUF)
Westshore Terminals Income (WTE.UN, WTSHF)

ETF Loon-acy

Exchange traded funds (ETFs) have multiplied like rabbits. Early rollouts focused on specific sectors or markets, but recent funds have focused on niches. Rydex recently introduced eight new ETFs, known as CurrencyShares, into the market. These ETFs focus purely on currency.

According to the Rydex prospectus, CurrencyShares Canadian Dollar Trust (NYSE: FXC) allows investors to buy into a trust denominated in the particular currency that bears interest according to that currency’s particular interest rate. The Canadian dollar is the seventh-most-traded currency in the world, accounting for approximately 4 percent of global foreign exchange transactions. The US dollar/Canadian dollar pair is the sixth-most-traded currency pair in the world.

Rydex’ CurrencyShares carry a 0.4 percent expense ratio for the privilege to invest in the Canadian dollar. The expenses are paid out of the interest (if the interest rate exceeds the 0.4 percent expense ratio) that’s received on the account.

Although we generally shy away from ETFs and don’t recommend it for each and every Canadian income trust investor, shorting the CurrencyShares Canadian Dollar Trust is one way to hedge your downside. Though Rydex claims its funds provide a cost-efficient means to spread risk via currency, the explosion of the foreign exchange market has made it far cheaper to take direct positions.

According to the fund fact sheet, “Because CurrencyShares will be traded as securities, transaction costs will be substantially reduced compared to currency spot market transactions.” The real value, though, is for investors looking for simplicity. A currency trade is fairly easy and inexpensive, but the Rydex CurrencyShares ETFs charge more than four times the expense ratio than that of ETFs that trade on the S&P 500.

Bay Street Beat

A trust from outside the Canadian Edge coverage universe, Cineplex Galaxy Income Fund (CGX.UN, CPXGF), topped the most-recent edition of Bloomberg’s poll of Bay Street analysts. Cineplex Galaxy, which was added to the S&P/Toronto Stock Exchange Composite Index in mid-June, earned a perfect 5.0 average.

Cineplex Entertainment LP, the largest movie exhibitor in Canada, owns, leases or has a joint-venture interest in 129 theaters with 1,297 screens serving approximately 60 million moviegoers a year. Its brands include Cineplex Odeon, Galaxy, Famous Players (including Coliseum, Colossus and SilverCity) and Scotiabank Theatres. Cineplex Galaxy Income Fund owns approximately 75.7 percent of Cineplex Entertainment LP. Look for it to be added to the How They Rate coverage this summer. 

Aggressive Portfolio mainstay Vermilion Energy Trust (VET.UN, VETMF) also scored well, notching a 4.923 average. Trinidad Energy Services Income Trust (TDG.UN, TDGNF) also continues to stand in good stead on Bay Street; still reaping the benefits from its recent expansion into relatively strong US markets, Trinidad drew a 4.818 average rating. As detailed in the Portfolio article, Trinidad remains a potential takeover candidate.

High Yield Of The Month and new Conservative Portfolio holding Energy Savings Income Trust (SIF.UN, ESIUF) is also popular among Bay Street analysts to the tune of a 4.778 average rating. Fellow Conservative Portfolio denizen Yellow Pages Income Fund (YLO.UN, YLWPF) notched a 4.75 average, while Aggressive Portfolio member ARC Energy Trust (AET.UN, AETUF) scored a 4.333.

I don’t often vary from the wisdom coming down from Canada’s version of Wall Street, and when I do, it’s for good reason. Aggressive Portfolio recommendation Advantage Energy Income Fund (AVN.UN, NYSE: AAV) was on the low end of analysts’ esteem, drawing a 2.0 average, but it’s well positioned to cope with the 2011 tax on trust distributions and operates a solid asset base.

TimberWest Forest Corp (TWF.UN, TWTUF, 2.375 average) has hired a real estate industry veteran to oversee its Vancouver Island land assets, and management continues to cut costs to deal with the struggling US housing market. TimberWest also maintains a relatively low payout ratio.

Conservative Portfolio holding Algonquin Power Income Fund (APF.UN, AGQNF, 2.667 average) has considerable US operations, meaning a large chunk of its distribution will be shielded from the pending tax. Provident Energy Trust (PVE.UN, NYSE: PVX, 2.778 average), an April 2007 addition to the Aggressive Portfolio, was one of just a few energy trusts to post an increase in per-share cash flow during the first quarter. Provident’s recent acquisition of Capitol Energy Resources should be immediately accretive to the bottom line.

The fate of Conservative Portfolio holding Bell Aliant Regional Communications Income Fund (BA.UN, BLIAF, 2.846 average) is tied to parent BCE, the new owners of which may choose to sell shares to the public. Its rural phone systems generated a solid 3.6 percent revenue gain and 4.3 percent increase in distributable cash flow during the first quarter. Bell Aliant continued to adjust to the march of time as growth in broadband revenue more than offset falling traditional landline operations.