Hydroelectric power is ubiquitous in many Canadian provinces, so much so that the word “hydro” has come to stand for electricity generally; the names of the government-run companies that provide such power–BC Hydro, Manitoba Hydro, the former Ontario Hydro, now Hydro One, Hydro-Quebec, Newfoundland and Labrador Hydro–reflect this significant presence.

For decades Canadians have exploited another of the Great White North’s abundant natural resources, water, to create electricity. Canada is the second-largest producer of hydroelectric power in the world, trailing only China. It’s one of a handful of nations–Brazil, Norway, Switzerland and Venezuela are the others–that produce more than half their total generation from hydro.

According to the US Energy Information Administration (EIA), in 2008 Canada produced 369.5 terrawatt hours (TWh) of electricity using hydroelectric dams, almost 12 percent of all the hydroelectricity generated in the world and 61 percent of all electricity generated in Canada.

For reference sake, China produced 585.2 TWh; the Middle Kingdom is the most aggressive country in the world when it comes to increasing hydro capacity. There are 19 projects with generating capacity of more than 2,000 MW in various stages of construction, representing approximately 76,000 megawatts (MW) of generation capacity; another nine projects worth 40,000 MW have been proposed.

It’s an explosive story in Asia. It’s a familiar, reliable one in North America.

One of the steadiest hydro producers, Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), doubled the fun with its fourth-quarter and full-year 2009 earnings announcement, revealing expectations-beating operational results as well as an investor-friendly distribution increase. With 42 hydroelectric facilities and one of Canada’ largest wind farms, Brookfield Renewable boasts total installed capacity of 1,700 MW.

Management boosted the distribution 4 percent to annualized rate of CAD1.30 per unit, a level it considers “sustainable after the fund’s conversion to a corporation later this year.” Brookfield Renewable, like so many trusts, will maximize the tax benefits it currently enjoys and convert as late as possible in 2010.

Fourth-quarter revenue was CAD87.9 million, up from CAD39.9 million a year ago. Revenue for 2009 was CAD288 million, up 47 percent. Income before non-cash items was CAD39.3 million for the fourth quarter, up from CAD18.7 million. For the year it was CAD140 million, a 40 percent increase. An 80 percent payout ratio gives management enough room to use cash to grow even after it pays a solid dividend.

CEO Richard Legault discussed plans to spend CAD500 million over the next five years, many of which will be done with Brookfield Renewable Power Inc. The typical project will be anchored with a 20-year power purchase agreement (PPA), which means predictable, locked-in cash flow that justifies a little more leverage.

The highlight of 2009, of course, was the former Great Lakes Hydro Income Fund’s transformation into “Brookfield Asset Management’s (TSX: BAM/A, NYSE: BAM) exclusive vehicle for contracted hydro and wind generation in Canada” via the combination with the former Brookfield Canadian Renewable Power.

Since October 2006 management has focused on tightening operations, cutting costs and adding assets. Increased and more efficient output has helped the company grow cash flow, which, in turn, means the distribution has been steady–through the post-Halloween Nightmare period as well as into and out of the recession. Great Lakes Hydro/Brookfield Renewable started paying CAD0.10 per unit per month in June 2003. It raised the distribution to CAD0.10125 for the January 2005 payment, then to CAD0.1033 for January 2006. About the worst thing you could say is management tightened the purse from August 2006, after it hiked the monthly payout to CAD0.10417.

For February 2010 Brookfield Renewable Power will pay CAD0.1083 per unit. At 6.4 percent the yield certainly doesn’t grab you by the throat. But management has shown it knows how to sustain the payout. Slow and steady is winning the race: Since Great Lakes’ inception in 1999 the fund has grown seven fold, and if you bought on CE’s recommendation in November 2008 you’re up more than 48 percent in US dollar terms versus 40 percent for the S&P/TSX Composite and just 15 percent for the S&P 500.

Two percent annual dividend growth doesn’t sound very ambitious. But take a look around and count the number of firms that were even able to maintain their dividend from 2007 to 2009. Brookfield Renewable Power Fund packs the gear to continue to grow its dividend well beyond 2011.

The Care of Bubbles

An interesting debate has raged in recent months over whether Canada’s housing market is in a bubble. This week Finance Minister Jim Flaherty acted to either rein in or prevent one, depending on where you stand on the issue. The Canadian Real Estate Association reported a 72 percent year-over-year increase in sales for December. The industry group forecast Canadian home prices and resales will approach record levels in 2010, helped by low interest rates.

Changes slated to become effective April 19 mean that Canadian homebuyers will have to meet standards for five-year, fixed-rate mortgages even if they opt for variable-rate mortgages. Limits on refinancing will also be stricter, and people buying a home that they don’t occupy must make a down payment of 20 percent.

According to a Bloomberg News report, Flaherty intends these measures to “moderate” the housing market. The finance minister said the changes will prevent borrowers from building up “unsustainable debt levels” and “help Canadians prepare for higher interest rates in the future.” In 2008 the Finance Dept promulgated rules that made the Canada Mortgage and Housing Corp limit amortizations to 35 years, down from 40 years, and offer loan insurance on 95 percent of the loan value, as opposed to 100 percent previously.

Act Now

Are you serious about investing in the Canadian story? Join Roger Conrad in sunny San Diego, California, April 23-24 for the 2010 Wealth Society Member Summit. You’ll have a chance to sit down with Roger one-on-one to talk about where to find the best ideas to generate total returns as Canadian income trusts convert to high-yielding corporations and how to position your portfolio for the year ahead.

Join Roger and his colleagues GS Early, Elliott Gue, Yiannis Mostrous, and Benjamin Shepherd at the historic Hotel del Coronado–one of the top 10 resorts in the world according to USA Today, one of the top 20 hotel/spas in the world according to Travel + Leisure, and the No. 2 place in the world to get married, according to the Travel Channel.

And on April 23-24, Coronado Island will also be the best place in the world for relaxation and profit. We’re expecting 72 degrees,sun and fun. You may find all details at www.InvestingSummit.com.

Call 1-800-832-2330 (between 9:00 a.m. and 5:00 p.m. EST Monday through Friday) or go online now to reserve your seat at the table. Space is limited.

The Roundup

In addition to Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), three more Conservative Holdings and an Aggressive Holding announced earnings last week. The numbers have been solid across the board.

As detailed above, Brookfield Renewable actually boosted its distribution to a level management considers sustainable well beyond 2011. The hydro-focused power generator has access to an ample supply of potential new projects–almost exclusively engaged under long-term power purchase agreements–and so can project with confidence its ability to pay a market-beating yield.

Here are the details for the other four reporters; tune in next week for more, including earnings highlights from the How They Rate coverage universe.

Conservative Holdings

Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) reported impressive fiscal third-quarter 2010 (ended Dec. 31, 2009) numbers, as its “Just Green” initiative–which allows customers to choose “green” sources from the company’s electricity and gas service options–continues to generate growth. Management reported 137,000 new customer additions, compared to 140,000 during the prior quarter, which was a record.

Overall sales were up 7 percent, while gross margin was up 17 percent per unit. Management expects gross margin growth to exceed its target range of 5 to 10 percent for 2010. Just Energy is on track for distributable cash growth at the lower end of previous 5-to-10-percent guidance range.

The company continues to add new customers at higher margins–average margin per customer was up 11 percent during the period. Just Energy’s customer base was 28 percent bigger than a year ago on acquisition growth and new additions, but gross margin grew 39 percent on an average margin per customer increase of 11 percent. And the bottom line was actually crippled by the weight of a declining US dollar, which fell 14 percent year-over-year versus the Canadian dollar.

The “Just Green” initiative–what was known as the “Green Energy Option”–is the catalyst for this auspicious growth. A net 37 percent of new customers chose green electricity or gas supply. Five percent of electricity customers and 3 percent of gas customers have taken the green option, but electricity sales more than tripled year over year and gas sales were up six-fold. Just Energy has a lot of room to grow.

Looking ahead, management expects gross margin and distributable cash after gross margin replacement to rise 5 percent and 10 percent per unit for fiscal 2010. After nine months gross margin is up 23 percent per unit, while distributable cash after margin replacement is up 13 percent per unit.

Management plans to convert during the calendar fourth quarter of 2010. The initial dividend will be CAD1.24 annualized (CAD0.1033 per month), equal to the current distribution. These numbers support the conclusion that Just Energy will be able to maintain its current distribution as a corporation. Just Energy Income Fund is a buy up to USD14.

 “Just to put things in perspective,” offered RioCan REIT (TSX: REI-U, OTC: RIOCF) Chief Operating Officer Frederic X. Wacks during the company’s fourth-quarter and full-year 2009 earnings conference call, “Wal-Mart, Costco, Lowe’s [and] Home Depot are all at it right now. They are looking at a multitude of sights across Canada.” This was Mr. Wacks’ way of distinguishing RioCan’s business model from other, weaker forms: RioCan is entirely focused on big-name, big-box anchored, open-air strip malls–the commercial property niche considered by most to be the most conservative and stable in the industry. These types of properties have recovered first from the vicious global downturn, and RioCan is ready to exploit new opportunities.

What makes RioCan so special right now is its access to capital, a point CEO Edward Sonshine made several times during the earnings call. Potential partners in the US, for example, have to be impressed by RioCan’s cash on hand. And anyone who wants to sell a commercial property would love to have RioCan on the other end of the deal because there’s very little risk of financing falling through. This is fact: During the worst of the credit crunch RioCan was among the precious few companies that was actually able to borrow.

Headlining the fourth quarter, RioCan cemented a joint venture with US-based REIT Cedar Shopping Centers to run shopping centers south of the border. RioCan made an initial purchase of 6.7 million units, or 14 percent, of Cedar as part of the transaction. RioCan entered the US market after looking at it for three years and finally finding an opportune time.

RioCan was able to raise debt and equity capital during the period to fund further growth opportunities, and it still has more than 150 million in cash on the balance sheet. The timing of its entry into the US will drive funds from operations (FFO) growth down the line. Sonshine noted that RioCan plans to spend CAD500 million in 2010 on acquisitions.

As of Dec. 31, 2009, RioCan’s occupancy rate was 97.4 percent, up slightly from 96.9 percent on Dec. 31, 2008, and 97.3 percent on Sept. 30, 2009. FFO for the fourth quarter was CAD66 million (CAD0.28 per unit), down from CAD87 million (CAD0.39 per unit) a year ago. Net operating income was CAD118.2 million, virtually flat with year-ago totals.

According to RioCan CFO Raghunath Davloor, the annualized rental impact of the gap between a portfolio occupancy rate of 97.4 percent and an economic occupancy rate of 96.4 percent is CAD7.8 million. Also, a loss of CAD1.2 million versus a gain of CAD14 million on properties out for sale had an impact.

RioCan won’t be picking up distressed commercial properties in the US; that’s not how Sonshine rolls. The strategy laid out six months ago is focused on unenclosed, supermarket-anchored strip malls. And that’s what RioCan will spend its half-billion on in 2010. The general plan is to invest in properties with no downside, as opposed to properties with huge upside.

Sonshine also referred to two portfolio deals in the works in the US, which will probably be executed via two new joint ventures with two new partners, outside the six-state presence established via the Cedar deal. RioCan REIT is a buy up to USD20.

Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) hasn’t given investors too many upside surprises the past few years. That made its fourth quarter numbers very welcome indeed for us.

The company posted online organic growth–excluding acquisitions–of 24 percent, the latest evidence that its successful transition from a print to web-based directory world continues. Online initiatives included new applications for smart phones, including Blackberry, Google Android and iPhone.

Revenue and income from operations before goodwill impairment were basically flat from 2008, but cash flow from operating activities ticked up 8.4 percent. Overall revenue from the directory business was up 1.9 percent and cash flow ticked ahead 0.5 percent, despite the recession’s impact on advertising in general. Cash flow margins actually rose slightly to 58.8 percent from 58.7 percent a year ago.

As was the case for all of 2009, Yellow’s primary point of weakness has been the Trader business, which is still getting hit from exposure to the automobile and real estate industries. Fourth-quarter revenues fell 12.3 percent–excluding the sale of US assets–and cash flow margin slipped to 26.7 percent from 32.6 percent. That’s hardly ideal, but nonetheless an improvement from earlier in the year and a good sign management’s restructuring is working there as well.

Along with its numbers, Yellow also announced a timetable for its conversion to a corporation in late 2010, as well as what its post-conversion dividend will be. The new monthly rate will be roughly 5.4 cents Canadian for an annualized rate of CAD0.65. That’s down from the current annualized rate of CAD0.80, though considerably better than the market was pricing in. The old rate will be maintained until the end of 2010 and continues to be covered comfortably by distributable cash flow (payout 58.9 percent in fourth quarter). Meanwhile, the new rate still equates to a yield of 11.5 percent and a payout ratio of just 60 to 70 percent based on expected cash earnings per share.

Yellow’s second dividend cut in as many years is yet another sign that management didn’t foresee the weakness in its business a couple years ago, when it was maintaining the trust could hold its dividend after converting to a corporation despite the taxes. But Yellow has made good on perhaps a far more important pledge–to bring down its once-daunting debt load. The company has now fully paid off its bank debt, eliminated refinancing risk through 2013 and cut debt-to-cash flow to just 2.5-to-1, from 3-to-1 last year. That’s a stark contrast to its bankrupt rivals in the US and a vote of confidence that the worst is behind this company.

The conversion dividend cut is likely to keep Yellow shares from reaching double-digits this year. But now on apparently much firmer ground than in quite a while and still paying a huge dividend, Yellow Pages Income Fund remains a buy for those who don’t already own it up to USD8.

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–February 26 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–March 16 (confirmed)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)–March 29 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–March 19
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–February 24 (confirmed)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–March 4
• Colabor Group (TSX: GCL, OTC: COLFF)–February 25
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–March 2 (confirmed)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–March 17
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–March 16
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–February 18 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–March 2 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–March 17 (confirmed)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–March 3
• TransForce (TSX: TFI, OTF: TFIFF)–February 25 (confirmed)

Aggressive Holdings

ARC Energy Trust (TSX: AET-U, OTC: AETUF) beat expectations as it dropped its payout ratio down to just 50 percent, while cutting debt to just CAD902.4 million from CAD961.9 million a year ago. Operating costs per barrel of oil equivalent (boe) produced were cut CAD9.91 from CAD10.09 a year ago.

As has been the case since energy prices peaked in mid-2008, year-over-year comparisons have suffered mainly because of energy prices. But fourth quarter showed distinct signs of a turnaround even in this area, as ARC realized average prices of USD72.61 per barrel for its oil output and USD4.58 per thousand cubic feet of natural gas sold.

Those healthy figures reflect management’s conservative hedging policies, which have to date locked up prices for 34 percent of the company’s expected production in 2010. That in turn has allowed ARC to maintain high levels of output, even as its been able to replace 347 percent of its full-year output. That kind of reserve growth is a major plus for the trust longer-term, and particularly as it converts to a corporation at the end of this year.

The company remains vulnerable to another dip in energy prices. But with realized prices still below spot, there appears to be a lot more upside than downside risk going forward in 2010. In addition, ARC’s finding, development and acquisition costs (FD&A) fell to only CAD6.44 per boe, a testament to its new finds in the Montney Shale area as well as use of new technology. Proved reserve life now stands at 10.3 years.

Management hasn’t yet confirmed its timetable for conversion to a corporation or its post-conversion dividend policy. It did state with fourth quarter earnings its intentions for a unitholder vote on conversion in December 2010 and that “current plans would see a dividend policy similar to the existing distribution policy with dividends being paid monthly.” That’s a very good sign for the future payout, though again the amount will depend heavily on where oil and gas prices are then.

The bottom line is ARC has weathered the tough times and remains well positioned to profit from the recovery. Moreover, it’s still cheap relative to its assets, trading at a discount to the net asset value of what it has in the ground. ARC Energy Trust is a buy up to USD20.

• Ag Growth International (TSX: AG-U, OTC: AGGZF)–March 16
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–February 26
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–March 2 (confirmed)
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–February 25 (confirmed)
• Newalta (TSX: NAL, OTC: NWLTF)–March 5
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–March 10
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–February 18 (confirmed)
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–March 10 (confirmed)
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–March 11 (confirmed)
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–March 3 (confirmed)
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–March 26