During last month’s Canadian Edge online web chat, which was held on May 28, with the next installment scheduled for June 25 at 2 pm (go here for details), recent action in Just Energy Group Inc (TSX: JE, NYSE: JE) was on many participants’ minds.

I replied as follows to one question (“Just Energy appeared to be recovering then took a big hit. What’s your one-to-two-year outlook and recommendation?”):

I sold the stock from the CE Portfolio last spring in one of my first moves after taking over management of the publication.

Just Energy took on a lot of debt expanding into activities beyond its core retail energy marketing business. During its recent conference call management hinted at a possible dividend cut as it contemplates ways to manage its debt and get its balance sheet back in shape.

It’s also weighing the sale of non-core assets, one of which is a waterheater rental business that might be attractive to CE Portfolio Holding EnerCare Inc (TSX: ECI, OTC: CSUWF).

I’m also not a fan of Just Energy’s management team and business practices, which were the subject of an extremely unflattering but well-reported piece in the Toronto Globe & Mail’s weekly magazine last year.

In my view, coupled with an undisciplined growth strategy, the ethical issues mark this as not a high-quality business.

 Just Energy followed through this week with the announcement of the sale of National Home Services, its waterheater and HVAC home services business to Reliance Comfort LP for CAD505 million.

Upon closing of the transaction Just Energy will repay CAD400 million in debt, shoring up its balance sheet.
Due to the reduction in earnings before interest, taxation, depreciation and amortization (EBITDA) and base funds from operations, Just Energy will also cut its dividend, moving from monthly payments of CAD0.07 per share, which will remain in effect in June, to quarterly payments of CAD0.125 per share beginning in September.

The new annualized rate of CAD0.50 per share is 40.5 percent lower than the old rate of CAD0.84 per share per year.

Although EnerCare didn’t acquire the NHS assets–which include approximately 300,000 installed waterheaters–it will benefit from the removal of an aggressive door-to-door competitor from the market. We have more on EnerCare, including a review of its first-quarter financial and operating results, in this month’s Portfolio Update.

Just Energy slid from a closing price of CAD8.70 on the Toronto Stock Exchange (TSX) on May 14 to CAD5.87 by June 3. The share price has bounced back to CAD6.55 intraday June 5 following the announcement of the asset sale, debt reduction and dividend cut.

We continue to rate Just Energy a sell.

New to the Dividend Watch List this month is Liquor Stores NA Ltd (TSX: LIQ, OTC: LQSIF).

A turnaround strategy is driving up administrative costs at the same time management is trying to grow the business via the addition of new stores. Same-store sales growth in Canada and the US, meanwhile, was negative in the first quarter, suggesting the business model is not immune to the economic cycle.

And the payout ratio for the three months ended March 31, 2014, was negative.

There are no debt maturities before the end of 2015, though there are significant rollovers looming in 2016 and 2018, amounting to 70.3 percent of current market capitalization.

Liquor Stores earns Safety Rating points for its debt as a percentage of assets and its operation in a sector traditionally viewed as recession-resistant, alcohol. But there are serious signs of weakness here. Hold.

Here’s the rest of this month’s Watch List.

Argent Energy Trust (TSX: AET-U, OTC: ANGYF) slashed its monthly distribution rate from CAD0.0875 (CAD1.05 on an annualized basis) to CAD0.02 (CAD0.24 per year) on April 10, 2014, citing “recent market activity resulting in a significantly lower unit price” and a corresponding “significant” change in the company’s “balanced financial structure.”

Argent also cut its 2014 capital program to USD55 million from USD70 million and reduced its annual production guidance to a 2014 average level of approximately 6,000 barrels of oil equivalent per day (boe/d), a more modest growth rate above 2013 production of 5,591.

Management reported first-quarter funds from operations of CAD14.9 million, up from CAD13.6 million a year ago, as production grew by 21 percent to 6,390 boe/d. The new dividend rate represents 25 percent of first-quarter FFO per share. Sell.

Atlantic Power Corp’s (TSX: ATP, NYSE: AT) first-quarter project income declined by 36.1 percent and adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) were off by 7.6 percent, as availability declines to 92.7 percent due to several plant outages, harsh weather, low water flows at Curtis Palmer and continued challenges at Piedmont.

The payout ratio for the period was negative, as management reported negative cash flow.

Atlantic’s share price surged in late April and early May after management engaged advisers to evaluate strategic alternatives, with speculators extrapolating the move into an imminent takeover or merger situation.

The dividend level is still in play as well.

When we still held Atlantic in the CE Portfolio, following its February 2013 dividend cut we noted that the best possible outcome for shareholders was a sale to a larger, better-capitalized company with the wherewithal to absorb Atlantic’s debt and maximize cash flow from its still-attractive set of power-generation assets.

It appears management is thinking along similar lines, though of course no deal is assured, particularly as the company is looking at other moves as well. Sell.

Barrick Gold Corp (TSX: ABX, NYSE: ABX) reported a 22.6 percent decline in first-quarter revenue, while adjusted earnings per share slid to USD0.20 from USD0.92.

Production and sales volumes were down, while realized prices were significantly lower than a year ago. And merger talks with Newmont Mining Corp (NYSE: NEM) that could have led to the creation of a global mining giant have broken down.

Barrick’s balance sheet is still shaky, burdened by USD12.8 billion of debt against a market cap of USD22 billion, though only USD65 million is maturing between now and the end of 2015. Sell.

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) reported a 21.4 percent increase in first-quarter revenue, while adjusted funds from operations per share were up 14.9 percent to CAD0.207.

Management also finalized a new CAD60.5 million credit facility for the 24 megawatt (MW) Saint-Philemon wind farm and boosted capacity on its existing borrowing facility to CAD90 million from CAD50 million.

The key recent development is a new 20-year non-utility generator contract with the Ontario Power Authority for its 156 MW Cardinal combined-cycle, natural gas-fired facility. Management has asserted that the new power purchase agreement (PPA) “provides certainty…on Cardinal’s longevity and contribution to Capstone’s cash flow profile and dividend sustainability following 2014.”

Capstone’s payout ratio in 2015 and 2016 will likely exceed 100 percent of adjusted funds from operations, reflecting Cardinal’s reduced cash flow contribution starting in 2015. But management believes it has sufficient liquidity to fund its needs over this period, including cash and cash equivalents on hand, operating cash flows from its various businesses, and its corporate credit facility. Hold.

Colabor Group Inc (TSX: GCL, OTC: COLFF) reported a 4.9 percent decline in first-quarter sales to CAD279.3 million, as severe winter weather and a slow economy exacerbated the impact of the termination of a large supply contract in April 2013 and exit of the company from low-margin tobacco distribution operations.

But cash flow was positive at CAD11.9 million, reversing a year-ago figure of negative CAD25.8 million. Cash flow per share was CAD0.44, leading to a payout ratio based on a CAD0.06 per share current dividend rate of 13.6 percent. Hold.

Crius Energy Trust (TSX: KWH-U, OTC: CRIUF) posted 49.2 percent growth in first-quarter revenue to USD177.6 million, but cost of sales was up 61.6 percent to USD158.1 million as gross margin shrank to USD19.1 million from USD20.9 million a year ago.

Management also reported an adjusted EBITDA loss of USD4.3 million.

On Feb. 10, 2014, management cut the monthly dividend rate by 30 percent from CAD0.0833 to CAD0.0583, attributing the decision to soaring costs of energy during a particularly cold first quarter in the markets it serves as well as slowing customer growth.

Management expects to maintain the new level throughout 2014. The board will review the dividend policy at year’s end, which suggests another cut from the present annualized rate of CAD0.70 is possible.

The market is clearly pricing in another dividend cut, with the yield on the stock–based on the reduced dividend rate–as of this writing at 15.1 percent. Hold.

Eagle Energy Trust (TSX: EGL-U, OTC: ENYTF) reported an 18 percent increase in first-quarter funds from operations to CAD10.3 million, or CAD0.32 per share.

Working interest sales volume was 3,010 barrels of oil equivalent per day (boe/d), weighted 85 percent to oil, up from 2013 average sales volume of 3,004 boe/d.

Management notes that it has “no current plans to reduce” distribution in aftermath of Argent’s 77.1 percent cut.

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

FP Newspapers Inc (TSX: FP, OTC: FPNUF) reported first-quarter net earnings of CAD500,000, or CAD0.079 per share, down from CAD1 million, or CAD0.141 per share, a year ago.

FP Canadian Newspapers LP–FP Newspapers is entitled to 49 percent of distributable cash of the LP–reported print advertising revenue of CAD15.2 million, down 10.9 percent year over year. Display advertising color, the largest category, shrank by 15.8 percent to CAD9.5 million.

Earnings before interest, taxation, depreciation and amortization (EBITDA) were down 29.5 percent to CAD3.1 million

Cash available for distribution for FP Newspapers was CAD400,000, or CAD0.062 per share, down from CAD1 million, or CAD0.149 per share, a year ago. The payout ratio for the period was 241.9 percent.

Management once again maintained the CAD0.05 dividend rate for the May payment due June 30. Sell.

Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF) reported a 25 percent surge in first-quarter funds from operations per share to CAD0.45, even though average daily production from lands was down 5 percent. The payout ratio for the period was 93.3 percent.

The share price has pushed out to all-time highs in the aftermath of the highly successful PrairieSky Royalty Ltd (TSX: PSK, OTC: None) initial public offering (IPO) by EnCana Corp (TSX: ECA, NYSE: ECA), with the market expecting other exploration and production companies with significant land positions to follow EnCana’s path and monetize these assets. Freehold, with backing from major shareholder Canadian National Railway Co (TSX: CNR, NYSE: CNI) and its pension fund, could be an acquirer of more royalty lands.

The market is also building a higher floor for propositions such as Freehold’s. Hold.

GMP Capital Inc (TSX: GMP, GMPXF) posted a 31 percent increase in first-quarter revenue to CAD63.9 million. Adjusted net income surged to CAD5.4 million from CAD1.1 million a year ago, as the company put a little distance between it and a rough 2013.

Earnings per share of CAD0.07 compare to nil during the first quarter of 2013 Q1. Higher investment banking and trading activity are positives, as is a payout ratio of 71.4 percent. We’ll see how the second quarter shapes up. Sell.

Labrador Iron Ore Royalty Corp (TSX: LIF, OTC: LIFZF) reported a 3.1 percent increase in first-quarter royalty income to CAD26.9 million from CAD26.1 million year ago, and adjusted cash flow nearly doubled to CAD27.7 million, or CAD0.43 per share, from CAD14.4 million, or CAD0.22 per share, a year ago on strong Iron Ore Company of Canada sales volumes.

The payout ratio for the period was 59.5 percent.

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.

Liquor Stores NA Ltd’s (TSX: LIQ, OTC: LQSIF) place on the Watch List is explained above. Hold.

Northland Power Inc’s (TSX: NPI, OTC: NPIFF) first-quarter revenue and adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) were up 116.2 percent and 87.1 percent, respectively, as new projects, including the North Battleford gas-fired plant and phases I and II of its ground-mounted solar project, entered operation.

Free cash flow per share was up 58.2 percent to CAD0.413, and the payout ratio for the period was 65.4 percent. Northland is clearly on the way toward fulfilling management’s forecast that free cash flow will cover the dividend in 2014. Hold.

Parallel Energy Trust (TSX: PLT-U, OTC: PEYTF) reported a 2.9 percent decline in first-quarter production to 6,607 barrels of oil equivalent per day (boe/d), though a 30.6 percent rise in its average realized price per boe drove a 33.8 percent increase in funds from operations. The payout ratio for the period was 70.3 percent.

Leverage remains a major concern for this small producer. 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 9 percent growth in first-quarter processing volumes and an 81 percent surge in gross profit, but management noted that the benchmark coffee commodity price rose by 60 percent during the period, increasing from USD1.11 per pound at the beginning of January to USD1.78 per pound at the end of March.

The price spike led to significant unrealized losses on the coffee futures contracts the company uses to help manage commodity fluctuations.

Although losses on these derivatives are offset by corresponding gains in the market value of inventory, the gains cannot be recorded under international accounting standards until the inventory is sold.

The losses on derivative instruments during the quarter more than offset the increase in gross profit. As a result, Ten Peaks recorded a net loss of CAD700,000 and a year-over-year decline in earnings before interest, taxation, depreciation and amortization (EBITDA) during the period. Hold.

Zargon Oil & Gas Ltd’s (TSX: ZAR, OTC: ZARFF) first-quarter funds from operations per share were up 10.9 percent to CAD0.51, as realized oil and liquids and natural gas prices were up 21.1 percent and 72.1 percent, respectively, offsetting a production decline of 12.9 percent to 6,662 barrels of oil equivalent per day.

The production trend, though it stems from asset sales, is worrisome, particularly for a relatively small company so susceptible to commodity-price movements.