The most important numbers for Canadian Edge Portfolio recommendations, however, are still earnings. Canada’s trusts and high-yielding corporations still sell at steep discounts to their levels prior to the fall of Lehman Brothers last September, when the financial crisis hit in earnest. Solid earnings are the only real guarantee they’ll recover that lost ground.

Moreover, we’ve seen 77 distribution cuts in the How They Rate universe over the last nine months, and several trusts are perilously close to bankruptcy. Only solid earnings ensure dividends will continue to be paid, and that businesses will be around to fight another day.

Since this bear market began in mid-2007, I’ve approached each earnings season with a maximum of trepidation. Would the numbers show that our picks were still holding their own, or would they reveal some heretofore hidden weakness? My resolve has been to swap any truly weakening situation for a stronger business–and I’ve done so on several occasions, though happily not often.

This quarter’s earnings season has come with its special set of challenges. As I point out in the Feature Article, Canada’s economy once again shrank in the first three months of the year. Global credit conditions remain tight, and commodity markets–which drive the country’s foreign exchange–are still depressed.

The upshot is that posting strong numbers is more difficult than ever. The good news: Portfolio picks to report thus far have once again done the job.

There are still quite a few announcements left, which I’ll be updating in Flash Alerts and again in the June issue. But as for the picks below, we can be confident they’re still holding together as businesses. That’s good news for dividend safety in the near term and a prospective powerful recovery in the longer term.

Note that there are two changes to the Portfolio this month. I’ve added High Yield of the Month Colabor Income Fund (TSX: CLB-U, OTC: COLAF) to the Conservative Holdings and sold Advantage Energy (TSX: AVN-U, NYSE: AAV).

Advantage Energy is still sitting on an enormous potential natural gas reserve in the Montney Shale area, and I’m fully on board with management’s plan to use all available cash to develop it. The shares continue to trade at less than a fourth of conservative estimates for net asset value, essentially the value of proven reserves in the ground less attached debt. And natural gas prices in my view have nowhere to go but up.

Unfortunately, Advantage’s planned conversion to a corporation will be a taxable event for US investors. Given the massive decline in the shares, I suspect few holders have capital gains. For me, however, there are potential complications–such as incorrect withholding–that we’re better off avoiding, particularly since the trust no longer pays a dividend. Take the loss; sell Advantage Energy Income Fund. The other Portfolio holdings give us plenty of natural gas exposure.

Measuring Up

Conservative Holdings’ fortunes aren’t tied to the price of energy or any other commodity. The question, rather, is how much their primarily non-cyclical businesses are affected by tighter credit and slower growth.

The good news this earnings season: All of those reporting thus far have posted strong first quarter numbers. That even includes Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF), which announced a 31.6 percent distribution cut along with its numbers (see below). And while the environment is still very challenging, they appear to be headed for the same in the second. Distributions are safe, core businesses on track and credit problems nil.

Note first quarter results for Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) and new Conservative Holding Colabor Income Fund are reviewed in High Yield of the Month.

AltaGas Income Trust’s (TSX: ALA-U, OTC: ATGFF) funds from operations for the first quarter fell from CAD0.87 a year earlier to CAD0.75 but still covered the distribution by a comfortable margin. The shortfall was mainly due to share issues used to finance construction and acquisition of new fee-generating assets, and therefore should be reversed in coming quarters.

Earnings also beat Bay Street estimates handily, despite slower throughput in the gas area of the business and lower spot market prices for power produced. The trust also earned a credit rating boost from S&P to BBB+. Meanwhile, debt to capitalization fell to just 33.6 percent as of March 31 from 37.8 percent in December and 45.1 percent a year ago, thanks to a CAD41.8 million reduction in debt. That’s extraordinary for a company still investing heavily in new assets and a testament to the business’ overall strength.

Looking ahead, the trust has several “carbon neutral” power projects in the works and is expanding its ethane and gas liquids recovery infrastructure at its Harmattan complex. Management has hedged out most commodity price risk for both its gas and power businesses. Coupled with strong liquidity, that makes profits predictable even if the economy does remain in the doldrums.

Still yielding well over 13 percent, AltaGas Income Trust is a strong buy up to USD20 for superior long-term growth and income.

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) had another solid quarter, as growth of Internet and other advanced services again outpaced the steady contraction of its traditional local and long distance phone operation.

Distributable cash flow again covered distributions handily with a payout ratio of 83 percent, even after a 13 percent increase in capital spending to upgrade the network for faster services. The trust also completed the sale of its Defense oriented unit, focusing operations and boosting the balance sheet with proceeds of CAD16 million now, to be followed by CAD8.5 million later in the year.

The company’s “reset” of its cost structure is also paying benefits, resulting in rising margins during the quarter even as overall revenue slipped 1.2 percent. Internet revenue grew 10.8 percent on 8.6 percent customer growth and a 5.4 percent increase in revenue per user, as the trust’s data business continued to grow.

Coupled with no real debt due until 2011, this is the very picture of a healthy business that’s weathering the toughest market in generations. Bell Aliant Regional Communications Income Fund remains a buy up to USD25.

CML Healthcare Income Fund (TSX: CLC-U, OTC: CMLIF) reported first quarter revenue growth of 38.6 percent, fueling double-digit cash flow growth and driving its payout ratio down to 84.6 percent.

The keys were the trust’s US expansion, steady operations and rate increases at the Canadian operations, and cost controls. These are trends that should continue to show up on the bottom line for the rest of the year, even as the trust boosts efficiency by digitizing its information network.

A long-time player in Canada’s national medical industry, CML is in prime position to profit richly from President Obama’s moves to increase the government role in the US. And it has the financial power to make that happen as opportunities arise. Buy CML Healthcare Income Fund–still the unanimous buy choice of all four analysts who follow it–up to USD13.

Consumers Waterheater Income Fund’s (TSX: CWI-U, OTC: CSUWF) results were at first glance disappointing. Not only did the payout ratio move up to 109 percent, but the newly acquired Stratacon submetering business hit a snag, as Ontario regulators raised questions about its expansion strategy.

Behind that headline news, however, the picture was somewhat more encouraging. Revenue rose 11.3 percent year-over-year and 5.6 percent sequentially from the fourth quarter; the core water heater rental business remained solid, paced by a 3.9 percent boost in rental rates.

On the financing front, Consumers has been able to refinance a CAD310 million bridge loan on very economic terms, with three- and five-year debt yielding 6.2 percent to 6.75 percent, respectively. Those rates are higher than those on the existing loan, but management expects to be able to make up the difference in operations going forward without threatening the dividend.

Without a doubt, Stratacon is the biggest challenge facing the trust now. Cash flow at the unit came in at negative CAD1.2 million, largely the cost of actions taken in response to Ontario regulators’ restrictions. Management has also suspended its planned ramp up of sub-metering operations in Ontario, pending a decision by the Ontario Energy Board (OEB) in “written” proceeding planned for later this month.

Until the OEB matter is resolved, Consumers management has said it expects a drag on cash flow and an abnormally high payout ratio. That’s the main reason the shares have slipped over the past week, even as other trusts have rallied. At this point, however, management maintains it has controlled its financial exposure and is still committed to the current dividend rate.

With a cut already arguably priced in at a yield of well over 18 percent, the shares are due for a big rally if they’re right, when the OEB situation is resolved. But until we see more news, Consumers Waterheater Income Fund is now a hold.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) has made a habit of reporting blockbuster results in tough times for the energy industry, and the first quarter 2009 was certainly no exception. The Foothills region of Alberta, where the trust’s assets are concentrated, remained vibrant. And management controlled commodity and financial risk, producing a near triple in cash flow from year-earlier levels.

The quarter’s distributable cash flow rose 183 percent to CAD1.87 per share. That level actually exceeded the trust’s annual distribution rate, as the first quarter payout ratio sank to just 24 percent. Natural gas liquids infrastructure cash flow rose 7 percent on asset additions, while marketing income surged 26 percent on improved asset optimization. Even gathering and processing income rose, as processing throughput actually rose despite weak spreads and slackened activity.

Long-term debt was slashed by nearly 30 percent as the trust successfully refinanced some and paid off more. Looking ahead, management points to the rollback of Alberta’s “Our Fair Share” initiative as a growing incentive for drilling in the high potential areas it serves. The trust has had to adjust some of its project spending in recent months, as activity in some areas has slowed, for example the deferral of the planned expansion of a gas plant in British Columbia.

Nonetheless, as the largest processor of gas in Alberta and with access and ability to process every variety of the fuel, it’s been able to consistently find other areas to invest and keep growth on track.

Unlike most trusts, Keyera has continued to increase its distribution since the Halloween 2006 announcement of the trust tax. That, plus the steady business, low debt and low payout ratio, augurs well for the dividend of nearly 11 percent, both in 2011 and well beyond. Buy Keyera Facilities Income Fund up to USD20 if you haven’t already.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) will maintain its distribution at an annual rate of CAD1.05 per share according to management’s statement in its first quarter earnings release.

Actual results were trimmed by a 7.8 percent drop in revenue due to lower availability rates at the hydro, wind, biomass and natural gas power plants that cut output by 4.8 percent. The hydro and wind plants were affected primarily by seasonal and weather factors, while the gas and biomass plants were taken offline at a higher rate for maintenance. Lower output was partly offset by higher rates and a payment from the Ontario Electricity Financial Corp.

Distributable cash flow for the quarter slipped to CAD0.30 per unit from CAD0.33 a year earlier. That was still enough to cover the payout by a comfortable margin, with a ratio of 88 percent. But it was lower coverage than last year’s 80 percent. The investment in Leisureworld produced a 15.3 percent boost in revenue, on higher rents and stable occupancy, providing a solid cushion to cash flow.

On the financial front, the trust has no major near-term commitments and remains in good shape to make an acquisition if opportunities arise. Looking ahead, management’s top priority is devising a 2011 strategy, which it expects to announce by the end of the year. Given Macquarie Group’s dedication to paying dividends, I expect a new model that will focus on yield, though the possibility of a steep dividend cut can’t be ruled out entirely.

On the plus side, the share price of just 92 percent of book value and high yield are more than enough compensation for the near-term uncertainty. Still solid Macquarie Power & Infrastructure Income Fund is a buy up to USD8 for those who don’t already own it.

RioCan REIT (TSX: REI-U, OTC: RIOCF) actually recorded an increase in occupancy in the first quarter 2009, to 97.5 percent from 96.9 percent a year ago. It also renewed leases on 91.7 percent of maturing properties, scoring respectable rent increases. It completed the acquisition of six grocery store-anchored shopping center properties in the greater Montreal area at low prices, while developing and redeveloping another 180,000 square feet of property. And it was able to secure financing at reasonable rates, as well as partners for its enterprises to lessen the financial burden, while buying back CAD3.4 million of its own shares for retirement.

This performance is an extraordinary testament to management’s acumen and flexibility for any market. The fact that RioCan was able to pull it off this year is nothing short of phenomenal, and a very good omen for its investors whether this economy slumps further or bounces back quickly.

Overall funds from operations were basically flat in the quarter, mainly due to share issuing to fund growth that will show up in rising cash flow going forward. The REIT also saw a slight uptick in chargeoffs due to bankruptcies and rent non-payments, though that was mostly offset by rent increases and higher occupancy.

The first quarter payout ratio pushed above 100 percent due to portfolio expenses and dilution. But management expects a full year payout based on funds from operations per share of CAD1.50, for a payout ratio of 92 percent, well in line with previous levels. And its statements during the conference call were unequivocal, affirming only a complete “blow up” of cash flow would cause management and the Board to consider any such action. That’s a stark contrast with the US REITs, which are now slashing dividends in response to falling occupancy and debt woes. Buy RioCan REIT up to USD15 if you haven’t yet.

TransForce’s (TSX: TFI, OTC: TFIFF) transportation business has been truly in the eye of storm during this crisis, as shipping has fallen along with growth. First quarter sales fell 10 percent, excluding fuel surcharges, and cash flow dipped 15 percent as virtually all of its divisions suffered.

The now-converted corporation, however, has several advantages for outlasting the slump. First, as a corporation it’s been able to shepherd cash flows to continue its long-term strategy of growing operations and consolidating the Canadian transportation industry. Second, not all of its operations are hurting, as the Package and Courier units again produced solid results. Third, cost cutting has borne fruit, resulting in more resilient margins even as lower fuel costs have helped with customer retention.

Operating expenses exclusive of fuel costs were cut 16.6 percent from year-earlier levels. To be sure, earnings and funds from operations have fallen sharply from year-earlier levels. And until the North American economy–including the US–does bounce back, management will be swimming upstream.

Admittedly, this is one we would have been better off unloading some months ago, or even when it first announced a year ago that it was converting to a corporation. But the payout ratio based on cash flow is still just 50 percent. More important, TransForce is a strongly focused company with great assets in a business that’s absolutely essential and will grow robustly over the long term.

At a price of just 21 percent of sales and 90 percent of book value–and with little debt risk and no 2011 risk–that makes it worth holding onto. In fact, I’m upgrading TransForce to a buy up to USD5 for those who don’t already own it. Again, this one may take some patience. Long term, however, that should pay big rewards.

Yellow Pages Income Fund’s (TSX: YLO-U, OTC: YLWPF) consistent growth of recent quarters stalled in the first quarter, as distributable cash flow per share was flat at CAD0.35. The culprit, ironically, wasn’t the directory business, which has literally evaporated for its US counterparts. The print business continued to hold its own, while the online division continued to surge. Overall, online revenue grew by 29.2 percent and now represent nearly 17 percent of overall sales on an annualized basis.

Rather, the pain was felt in the vertical media operation (20 percent of revenue, 12 percent of cash flow), where a decline in automotive and real estate advertising took down revenue by 23 percent and cash flow by 30 percent. The trust invested in these operations in order to diversify and therefore shore up cash flow.

The negative turn in these business, which continues a fall off that began in the fourth quarter, illustrates they’re somewhat more cyclical than the core print/online directories business, and are likely to be a drag on operations as long as this recession lasts.

Yellow’s first quarter distributable cash flow did cover its distribution comfortably, with a payout ratio of 82.9 percent. Management, however, has elected to take a more conservative route, cutting its distribution by 31.6 percent to an annualized rate of CAD0.80 per share. It’s also stated a new goal of maintaining a 60 to 70 percent payout ratio coming into its planned conversion to a corporation in 2011.

That’s something of a change from its previous assertion that it would be able to hold the current level of distribution and bring down the payout ratio simultaneously. Management’s implication is that will use the saved cash to bring its debt down. I suspect the move also has to do with concerns about the vertical media business in the weak economy.

Whatever is the case, the cut was definitely priced in already, evidenced by the market’s non-reaction. In fact, there seems to have been at least some relief that Yellow is apparently avoiding the fate of the bankrupt US directory companies. The bottom line is the low bar has saved the trust from a steep drop in the wake of the distribution cut, and management’s actions should make Yellow a stronger company for both the near term and as we approach 2011.

Nonetheless, when a business makes this kind of strategic shift, a little investor caution is called for. Consequently, I’m downgrading Yellow Pages Income Fund to a hold.

If you own it, stick with it. If management is on target with its assumptions, we’re still going to get a huge recovery in the shares, and the distribution is still generous. There’s still a risk of more bad news to come, however, if management isn’t telling all. New money is better off going elsewhere, at least for now.

Growth Stars

Aggressive Holdings’ fortunes all revolve around commodity prices, and therefore economic growth. Several have found ways to stabilize cash flow in this difficult time by shoring up niches and minimizing debt, and have therefore dodged the worst of the slowdown. Most, however, have had to trim distributions at least once since last summer, as cash flows have followed commodity prices lower.

My benchmark for Aggressive Holdings in recent reporting periods has been first and foremost the underlying business’ ability to survive. Debt servicing and the ability to fund capital expenditures are one key. Operating costs and FDA (finding, development and acquisitions) costs for energy producers are others. For producers, I’m very interested this time around in realized selling prices for oil and gas. Those that have held cash flows together at lower realized selling prices have proven themselves best.

The bottom line here is if commodity-dependent trusts and high-yielding corporations are able to survive the current period, they have bright futures. A return to growth will bring rising commodity prices, lifting cash flows and distributions. Ultimately, I look for prices to exceed what we saw last summer, as the fallout of the past nine months’ demand destruction takes hold. That means a full recovery and then some for our favorite producer trusts.

Again, the key now is to survive the tough time. We may have seen the bottom for oil and natural gas. And the longer prices stay down here, the more supply destruction we’ll see and the higher prices will go later on. But it’s still quite possible we’ll revisit the USD30 to USD40 per barrel range for oil and even USD2 natural gas. We want to be sure what we own can stay on track as businesses.

Ag Growth Income Fund (TSX: AFN-U, AGGRF) announced last month it would convert to a corporation early without cutting its distribution. This month, it released first quarter numbers that clearly demonstrated why it can accomplish that.

Revenue rose 57 percent, lifting cash flow 118 percent and net earnings 436 percent from year-earlier levels. Much of the credit goes to a well-executed expansion of production facilities. But credit also goes to what’s still a very robust market for corn handling equipment, despite the dip in corn prices over the past nine months.

Management remains bullish on 2009, stating that by its reckoning US corn plantings would be the third-largest on record. It’s also seeing no problem with access to credit for its customers, a key factor in continuing to grow revenue.

Meanwhile, outside of opportunities for expansion, Ag’s own credit needs are light, and management expects early conversion will ease its ability to access equity markets as well. All in all, this is a very positive story. It will depend on commodity prices to some extent for long-term health, which is why Ag is in the Aggressive Holdings rather than the Conservative Holdings. But Ag Growth Income Fund is a solid buy up to USD30 for those who don’t already own it.

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) came in with record energy production, up 15 percent from year-earlier levels, as its drilling program continued to pay off even in a tough environment. Coupled with price hedging, that held the trust’s payout ratio down to just 48 percent.

Daylight was also able to arrange CAD170 million in financing and continue its pace of acquisitions of prime properties. That was all achieved despite average realized prices of only USD5.26 per million British thermal units (MMBtu) for natural gas and USD46.17 per barrel for light oil.

Looking ahead, production is expected to rise at a robust clip for the full year, though less so in the second quarter. Realized oil prices are likely to rise. Realized natural gas prices, however, may well head the other way, barring a recovery from currently very low spot prices. The 48 percent payout ratio and solid balance sheet provide some cushion against this.

At the end of the day, Daylight, like every other trust, depends on energy prices that are volatile and, at least in the near term, very depressed. Despite their recent surge, the shares still trade at a sizeable discount to net asset value, the yield is generous and I’m very encouraged by these results. Daylight Resources Trust is a buy up to USD11. But again, this is a bet on energy and will require some patience.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) also produced some strong numbers for its first quarter 2009. The payout ratio came in at just 52 percent, as production gains and cost-cutting offset a drop in realized selling prices to USD44.50 per barrel for oil and USD5.37 per MMBtu gas.

As with Daylight, Penn West is likely to benefit from higher realized prices for oil and lower prices for gas, provided current levels hold, though it’s ultimately at the mercy of where those prices go.

More encouraging, however, was management’s progress dealing with the debt load, a legacy of several years of aggressive acquisitions. The trust completed its purchase of Reece Energy Exploration last month, for example. This task was aided by successful asset dispositions, though the application of savings from recent distribution cuts and share issues were also key.

As I pointed out last month, Penn West has something of a credibility problem with many analysts stemming from a March distribution cut after the CEO had stated publicly that it could hold the current level at USD50 per barrel oil. That almost certainly accounts for the trust’s selling price of less than half net asset value and the fact that of the 13 analysts covering it, there are no buys, 11 holds and 2 sells.

These results should go a long way toward assuaging some of those credibility concerns, and I continue to recommend Penn West Energy Trust up to USD15. To repeat, however, this trust’s fate depends on energy prices that are volatile, and so are its fortunes.

Trinidad Drilling’s (TSX: TDG, OTC: TDGCF) strategy of relying on long-term contracts has been tested by the collapse of the drilling industry in North America. So far, however, it appears to be holding firm, as the company has been able to renegotiate 17 contracts effectively to hold the revenue.

Not surprisingly, rig utilization rates in both the US and Canada did fall in the first quarter from last year’s levels. Trinidad’s rates, however, continue to remain well above those of rivals. Meanwhile, the payout ratio remained very low at just 25 percent of cash flow, the company bought back 8 percent of its shares and refinancing commitments are minimal. In fact, the company was able to actually expand its credit line on reasonable terms, even in a depressed environment for its sector.

Trinidad has pulled in its horns regarding expansion, halving its capital spending plans for 2009 this month. And it also recorded an asset impairment of CAD23 million. And as long as the energy market remains weak, we’re going to see more of this kind of news.

When drilling activity does revive, however, Trinidad is sure to be one of those still standing, and in line to grab all the business it can handle. That’s really the play here, and like all things energy it will require patience.

But at a price of just 57 percent of book value, the bar is low and the upside is high. Aggressive investors can buy Trinidad Drilling up to USD5.