Our regular review of How They Rate revealed that, for the second straight month, there were no dividend cuts in the Canadian Edge coverage universe.

We are adding one company to the Watch List this month. And we’re removing two others.

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) sold off sharply in late 2011 and has been in a steady downtrend ever since, as investors grow increasingly concerned about the renewal of a soon-to-expire power purchase agreement (PPA) for its key Cardinal natural gas cogeneration facility.

Cardinal currently accounts for about a third of Capstone’s revenue and a quarter of earnings before interest, taxes, and depreciation (EBITDA). But it generates about two-thirds of Capstone’s distributable income, as Cardinal’s debt has been paid down over the term of the expiring PPA.

Cash flow from the plant and the terms of a new PPA are crucial factors in determining the sustainability of Capstone’s current dividend rate.

Capstone is seeking a new PPA for the plant with the Ontario Power Authority (OPA). But negotiations have taken much longer than management anticipated. Management’s disclosure of its concern is what caused the stock to dive from CAD6.12 on Nov. 25, 2011, to CAD3.81 by Dec. 9, 2011. Capstone closed as high as CAD8.54 on Feb. 14, 2011.

The shares reached an all-time low of CAD3.51 on the Toronto Stock Exchange (TSX) on Nov. 27, 2013, bounced to as high as CAD3.74 on Jan. 21, 2014, and currently sit at CAD3.61.

Although not bearing directly on Capstone’s negotiations with the OPA, the Government of Ontario’s Ministry of Energy did release its Long-Term Energy Plan, “Achieving Balance,” in December 2013. The release of this plan was widely viewed as a precursor to any new deal for Capstone and Cardinal.

This plan reflects a stepped-up commitment to renewable energy, with the Ontario government setting a goal of 20,000 megawatts (MW) of renewable energy power generation being online by 2025. That would represent almost half of Ontario’s total generation capacity.

The OPA did finalize a 20-year power supply agreement with TransAlta Corp (TSX: TA, NYSE: TAC) for its gas cogeneration facility in Ottawa, the agreement for which expired at the end of 2013. TransAlta announced the deal on Aug. 30, 2013.

Based on the timing of the TransAlta deal, it’s likely that Capstone’s negotiations will continue into the middle of 2014.

According to the terms of TransAlta’s new PPA its gas plant “will become dispatchable.” “Dispatchable generation” refers to sources of electricity that can be turned on or off, or adjust their power output on demand, at the request of power grid operators.

According to TransAlta, “This will assist in reducing the incidents of surplus baseload generation in the market, while maintaining the ability of the system to reliably produce energy when it is needed.”

It is highly likely that Capstone and the OPA will reach a new PPA covering Cardinal. It’s also highly likely that the new PPA will include terms similar to the deal executed between TransAlta and the OPA.

The Ontario government has committed to no new nuclear and an increasing dependence on renewables and efficiency.  No new nuclear means lower overall supply, and more renewables means more variable power supplies.

Cardinal is also a flexible facility, so it makes sense that Cardinal’s power supply agreement would also provide for the plant to become dispatchable.

The Ottawa agreement provides for TransAltas’s plant to ramp up and down in response to the needs of Ontario’s power system. Dispatchable plants receive two types of revenue from the utility: payment for energy produced and a capacity payment based on the plant’s ability to respond to system needs.

The capacity factor for dispatchable facilities varies greatly. They’re switched on whenever demand is high or moderate or when renewable power production is low. They’re switched off at times of low demand or high production from renewables.

Such plants usually operate at capacity factors between 30 percent and 70 percent with more efficient, low-cost facilities operating at higher capacity factors. Cogeneration facilities tend to be among the most efficient.

In 2012 and 2013 Cardinal ran at a capacity factor equal to over 90 percent. New capacity payments would go some way to making up for the lost revenue when Cardinal no longer operates as a baseload facility. But at this stage it seems highly likely, as the market is clearly pricing in, that management will cut the dividend.

Capstone Infrastructure, a new addition to the Dividend Watch List, is a hold.

Exchange Income Corp (TSX: EIF, OTC: EIFZF) was founded in March 2004 with the mandate of acquiring companies in the industrial and transportation sectors that have strong operating characteristics but that lack the size and growth opportunity to effectively access public markets independently. Since its inception the company has successfully acquired and integrated 11 companies.

Acquisitions have been the primary vehicle of growth through the company’s history and will likely drive growth going forward.

It’s a well-diversified portfolio that generates stable and defensible earnings. Management also has a track record of adding accretive acquisitions to the mix, which supports earnings and dividend growth.

We added the stock to the Dividend Watch List out of an abundance of caution in November 2013 after management warned that third-quarter earnings before interest, taxation, depreciation and amortization (EBITDA) would be approximately half the total for the prior corresponding period due to weaker-than-expected margins for its rapidly growing WesTower unit, which provides construction and infrastructure services to the telecommunications industry.

We’re now removing it from the Watch List.

Management emphasized at the time of its warning that a dividend cut was not being considered.

Management has navigated similar challenges with other of its operating businesses, and it is addressing the current issue head-on.

Management reported third-quarter EBITDA of CAD15.6 million, in line with revised guidance. But overall revenue was up 21 percent to CAD267.3 million, as its manufacturing unit posted 25 percent growth.

And Exchange Income has maintained its CAD0.14 monthly dividend rate for payments due Dec. 15, 2013, Jan. 15, 2014, and Feb. 14, 2014.

Exchange Income’s share price has recovered from the three-year closing low of CAD17.99 it established on Oct. 7, 2013, on the Toronto Stock Exchange (TSX) in the aftermath of its third-quarter EBITDA warning, trading at CAD22.02 as of midday Friday, Feb. 7.

Exchange Income Corp, which is yielding 7.6 percent, is a buy up to USD22.

We’re also removing New Flyer Industries Inc (TSX: NFI, OTC: NFYED) from the Watch List following management’s report of stronger-than-anticipated deliveries in the fourth quarter of 2013 compared to the previous year.

New Flyer delivered 635 equivalent units (EU)–60-foot articulated buses represent two EUs–in the fourth quarter of 2013, an increase of 64 percent over the fourth quarter of 2012.

At the end of 2013, New Flyer’s total backlog was 7,678 EUs compared to 9,890 EUs at the end of the third quarter of 2013.

Management noted that although the bid universe reduced slightly in the fourth quarter of 2013–18,592 EUs compared to 19,453 EUs at the end of 2012–it anticipates that procurement activity by public transit agencies throughout the US and Canada will remain robust throughout 2014 based on expected customer fleet replacement plans and the expiration of current customer contracts during the next two years.

New Flyer also announced that it’s been awarded a USD138 million contract to supply the New York City Transit Authority with 276 heavy-duty 40-foot Xcelsior clean diesel buses.

New Flyer reported a 48.2 percent increase in third-quarter revenue to USD309 million, as bus deliveries grew by 49.5 percent to 577 equivalent units. Free cash flow surged by 121.8 percent to CAD13.1 million. New Flyer is a buy under USD10.

Please note that, because of the volatile nature of commodity pricing, all Oil and Gas companies in the How They Rate coverage universe should be considered permanent members of the “other receiving votes” section of the Dividend Watch List.

Here’s the rest of this month’s List. Not all members are sells, though the most conservative investors should avoid the lot of them.

Atlantic Power Corp (TSX: ATP, NYSE: AT) reported third-quarter and nine-month operating and financial results that in a vacuum were solid.

But management’s prepared remarks and answers to analysts’ questions during the company’s third-quarter conference call leave open the distinct possibility of another dividend cut announcement in early 2014. Sell.

Barrick Gold Corp’s (TSX: ABX, NYSE: ABX) third-quarter earnings beat estimates on solid operating performance. But a new bought-deal equity financing got a cool reception on Bay Street and Wall Street.

Management has also suspended operations at the USD8.5 billion Pascua-Lima min on the Argentina-Chile border, a move that should actually help stabilize the balance sheet.

The biggest gold producer in the world reported the second-biggest quarterly loss in Canadian corporate history for the second quarter and slashed its quarterly dividend rate by 75 percent to USD0.05 per share from USD0.20.

Despite the cost reductions and the dividend cut, Barrick’s balance sheet is still weak, burdened by USD15.8 billion of debt, though only USD1.8 billion is maturing between now and the end of 2015. Sell.

Bonavista Energy Corp (TSX: BNP, OTC: BNPUF) reported a 12 percent increase in third-quarter production to 73,632 barrels of oil equivalent per day, as natural gas output rose 18 percent and natural gas liquids (NGL) output was up 14 percent.

That and higher realized prices fueled a 46 percent increase in funds from operations (FFO) to CAD120.1 million, or CAD0.61 per share. The payout ratio for the period was 34 percent, down from 37 percent for the second quarter.

And management held the dividend steady at CAD0.07 on Jan. 15. Hold.

Colabor Group Inc (TSX: GCL, OTC: COLFF) reported a 1.9 percent decline in third-quarter sales to CAD343.6 million, though management emphasized the improvement compared to the second quarter and highlighted cost savings that are part of its turnaround strategy.

The dividend rate was maintained at CAD0.06 per share. Hold.

Eagle Energy Trust’s (TSX: EGL-U, OTC: ENYTF) third-quarter production was flat sequentially but up 8 percent year over year at 3,052 boe/d. Output growth on a year-to-date basis is up 22 percent.

FFO was up 17 percent to CAD11.6 million, or CAD0.37 per share, and the payout ratio for the period was down to 41 percent versus 67 percent for the second quarter. Management reiterated its 2013 guidance.

The small producer’s fortunes remain particularly tied to ups and downs of commodity prices. Hold.

FP Newspapers Inc (TSX: FP, OTC: FPNUF) reported a decline in third-quarter net income to CAD900,000, or CAD0.125 per share, from CAD1 million, or CAD0.141 per share a year ago. Revenue for FP Canadian Newspapers LP, in which FP Newspapers holds a 49 percent stake, slid by 4.5 percent to CAD25.1 million.

Management once again maintained the CAD0.05 dividend rate for the January payment due Feb. 28. But the payout ratio for the fourth quarter is likely to at least approximate the 200 percent figure for the third quarter. Sell.

Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF) reported a 1 percent increase in third-quarter production to 8,699 boe/d, while average realized prices were up 23 percent.

This combination drove a 39 percent increase in FFO to CAD36.4 million, or CAD0.54 per share. The payout ratio for the period came down to 78 percent from 93 percent in the second quarter.

Debt reduction efforts have been significant and successful. But there’s not much margin for error for a relatively small producer that’s dependent on commodity prices rather than production growth to drive FFO growth and dividend stability. Hold.

GMP Capital Inc (TSX: GMP, GMPXF) reported a 26.6 percent decline in third-quarter revenue to CAD42.6 million, as management noted low levels of activity in the primary and secondary securities markets.

The net loss for the period was CAD0.01 per share, and the payout ratio was once again negative. Sell.

Labrador Iron Ore Royalty Corp (TSX: LIF, OTC: LIFZF) reported a 10.9 percent rise in third-quarter royalty income to CAD35.6 million, while distributable cash was up 8.1 percent to CAD20 million, or CAD0.31 per share.

Management declared CAD0.25 per share and CAD0.125 per share regular and special dividends on Dec. 11, 2013, maintaining the payout practice established during the preceding seven quarters.

The ultimate fate of the dividend is tied to what happens with the facility that generates Labrador’s cash flow. Rio Tinto’s (London: RIO, ASX: RIO, NYSE: RIO) efforts to sell its controlling stake have thus far been unsuccessful. Hold.

Northland Power Inc (TSX: NPI, OTC: NPIFF) reported third-quarter adjusted EBITDA of CAD75.7 million, a 101 percent increase attributable to new contributions from the North Battleford and ground-mounted solar facilities.

And S&P boosted the company’s rating to BBB from BBB-.

Management has conceded that the dividend won’t be covered by free cash flow until 2014, though it maintained the current rate in January for payment in February. Hold.

Parallel Energy Trust’s (TSX: PLT-U, OTC: PEYTF) reported preliminary 2013 average daily production of approximately 7,150 barrels of oil equivalent per day (boe/d), a 20 percent year-over-year increase. Fourth-quarter output reached 7,250 boe/d, as the small producer overcame difficult weather conditions in November and December.

Parallel reported a 22.5 percent increase in third-quarter production on a year-over-year basis but a 4.8 percent sequential decline to 7,100 boe/d. Funds from operations (FFO) were off by 4.4 percent compared to the second quarter but up 27.9 percent year over to CAD10.8 million, or CAD0.20 per share. The payout ratio crept up to 74 percent from 70 percent in the second quarter.

This small producer already has one dividend cut under its belt, though fourth-quarter production trends were solid. FFO for the period will be key. Hold.

Precious Metals & Mining Trust’s (TSX: MMP-U, OTC: PMMTF) manager, Sentry Investments Inc, announced on June 27, 2013, that Precious Metals & Mining’s monthly cash distribution “will be changed” from CAD0.07 per unit to CAD0.035 per unit.

This 50 percent cut became effective with the Aug. 15, 2013, payment to unitholders of record on July 31, 2013, and will remain at this level until further guidance is provided by Sentry.

The Sentry board made the move “given the current environment for gold mining equities,” which comprise the bulk of Precious Metals & Mining’s portfolio.

The price of bullion increased more than five-fold from 2003 to 2011. But major gold mining companies generated little to no free cash flow. And they’re likely to generate negative free cash over the next several years. Sell.

Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSSF) reported a 5.5 percent slide in third-quarter sales, but gross profit was up 17.6 percent to CAD1.4 million and EBITDA more than doubled to CAD1.1 million as new business and market-share gains drove volume growth despite lower prices.

Coffee is still a tough, volatile business, and it’s a hard model on which to base a dividend-paying business. Hold.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF) reported a 2 percent sequential increase in third-quarter production to 7,560 boe/d, as natural gas output rose 11 percent compared to the second quarter.

Funds from operations were up 3 percent to CAD16.5 million, or CAD0.55 per share.

The small oil and gas producer remains highly susceptible to fluctuating commodity prices, though management maintained the CAD0.06 monthly dividend rate for payments in February, March and April. Hold.