Despite the seizing up of global credit markets and plunging energy prices, six Canadian Edge How They Rate entries boosted distributions last month, versus only three that cut payouts.

Of the cutters, Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF) took the most drastic action. Just weeks after slashing dividends 18.2 percent, management “suspended” all payments “indefinitely,” stating “the markets clearly aren’t recognizing the value of Arctic Glacier’s distributions to shareholders” and that the trust will now deploy cash resources to “strengthen the balance sheet.”

Last month, I outlined the challenges facing Arctic, from rising transport costs for ice to the slowing US economy and the continued anti-trust investigation of its industry by the US Dept of Justice. Today’s move by management undoubtedly indicates these pressures are, at a minimum, not getting any easier to bear.

That’s certainly the message in the price of Arctic shares, which have plunged by more than 80 percent since my sell recommendation last month. On its face, management’s move is a necessary step toward the trust’s future recovery. On the other hand, this is the second major nasty surprise we’ve seen in recent months from Arctic.

If Arctic can recover its footing, it would be a fabulous trust to own for the long haul, given its ability to dodge the 2011 trust tax and the heretofore stable nature of the packaged ice business. The point is, however, that we don’t have any evidence the situation is stabilizing, and there’s no dividend to reward us for being patient. Despite the crack-up last month, my advice is still to sell Arctic Glacier Income Fund.

Sun Gro Horticulture Income Fund (TSX: GRO-U, OTC: SGHRF) has also suspended its distributions, effective after last month’s payment. Management cited the “exceptionally poor peat harvest” and the trust’s need to get its debt lower. That should come as no great shock as it comes on the heels of what had been a multi-year decline in business conditions at the trust.

Vancouver-based Sun Gro remains the largest producer of sphagnum peat in North America and the largest distributor of peat moss, both essential elements of gardening and landscaping. That’s a position it’s enhanced in recent years with acquisitions in the US, taking advantage of a soft industry and a strong Canadian dollar. Some 80 percent of sales volume now goes to the US, and peat-mixing plants are now evenly divided on both sides of the border.

That’s a pretty good foundation for a recovery. Unfortunately, we’re not likely to see one until the US economy at least touches bottom, and we’re not going to get a dividend while we wait, either. This is the kind of business for which private capital has proven willing to pony up, and the trust now trades for barely half book value. That may be enough for long-suffering shareholders to hold on a while longer. But there are better buys in this market.

Last month’s other distribution cut was a somewhat different animal. As I noted in the Sept. 8 Flash Alert, ARC Energy Trust (TSX: AET-U, OTC: AETUF) has elected to roll back the second half of a two-part “top-up” dividend increase, enacted in the wake of the oil and gas price spike earlier this year.

The primary stated reason for the rollback from 28 to 24 cents Canadian was the 45 percent drop in gas prices from June 26, along with a 22 percent drop in oil. Those declines have actually worsened, increasing speculation management will eventually roll back the second half of the “top-up” increase, taking the monthly rate back to its base level of 20 cents Canadian.

The good news is ARC’s base rate is very defendable, having been paid last year with energy prices at much lower levels. ARC shares have meanwhile been pushed back to the level they held when they were paying at that level, despite the fact that management used much of the cash windfall from the energy price spike to invest in its business and improve sustainability.

As I wrote in the Feature Article, all energy producing trusts are at risk to distribution cuts if energy prices fall far enough in the coming months. The difference is—in stark contrast to two years ago—today’s energy producer trusts have been well stress tested: relying on their own resources throughout a period of low energy prices, restrictions on the number of new shares they can mint and conditions of tight credit.

Those that have survived have proven their ability to stand up to another drop in energy prices. Moreover, they’ve had the benefit of a cash windfall earlier this year, which they used by and large to enhance financial strength and reserve development.

The upshot is we may see dividend cuts this year and into early 2009, particularly if the US economy really gets laid out. But these businesses will survive it, and almost certainly in far better shape than anyone suspects. In any case, those high yields are discounting an awful lot of bad news that hasn’t yet occurred. I’m sticking with ARC Energy Trust, which rates a buy up to USD30. For more, see the Feature Article.

Note the oil and gas trust that appears to be at the most risk to a sizeable payout cut now is Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF). That’s because it’s wholly reliant on oil sales and realized selling prices are bound to tumble sharply from the USD130 plus garnered in the second quarter of 2008. Also, the dividend has been ramped up extremely sharply over the past year, and the payout ratio is very high. I still like the franchise, but a cut could be bad news for the share price in the near term. Hold Canadian Oil Sands Trust only if you can afford that risk.

On the good news front, Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) made two very telling announcements last month. First, its parent Boralex Inc (TSX: BLX) shuttered two wood waste plants in order to shepherd supplies of wood residue fuel, which will be needed to ensure its operation during the winter peak demand months. Second, it affirmed its current monthly dividend rate, demonstrating the cut earlier this year had taken into account potential for troubles at the wood waste plants.

Woodwaste is basically in scarce supply because of the weakened condition of the timber industry in Quebec. That, in turn, is due to the extreme weakness of the US housing market, which has collapsed demand for lumber and therefore production of wood waste.

Ironically, the actual electricity and steam produced at the trust’s portfolio of 10 plants remains in very high demand, and parent Boralex Inc is also apparently on solid ground. As long as that’s the case, revenues should remain solid, though somewhat subject to the water flows to its hydro plants.

If we do see another dividend cut at Boralex, it would repudiate my basic rationale for continuing to hold the shares this year: that the power business is exceptionally stable and recession-resistant, that management was proactive with the last distribution cut and that the yield is sustainable. As it stands, I’m content to keep recommending Boralex Power Income Fund for speculative investors up to USD5, pending developments on the wood waste front. Boralex could be a huge winner from these levels, but only hold it if you’re willing to sell in the event of another dividend cut.

Eveready Income Fund (TSX: EIS-U, EISFF) is converting from an income trust to a corporation, with an anticipated effective date of Jan. 1, 2009. Ironically, however, it’s simultaneously starting to pay a cash dividend of 4 cents Canadian a share, up from zero cash paid out as a trust over the past year.

That’s a lower rate than the previous quarterly in-kind (stock) distribution, which rewarded investors with roughly 20 percent more shares over the past year. But committing to shelling out hard cash is a very promising sign for any company in the still quite challenged Canadian energy services sector, particularly with credit conditions increasingly tight. And it’s a clear sign that Eveready’s oil sands’ focus is working. Moreover, the new rate represents a generous cash yield of more than 7 percent on the current price and is immune from prospective 2011 taxation. Eveready Income Fund remains a buy up to USD4 for aggressive investors.

Here’s the rest of the Dividend Watch List. Second quarter payout ratios are now shown in How They Rate for all listed trusts and corporations. Note that Connors Brothers Income Fund (TSX: CBF-UN, OTC: CBICF) is now off the watchlist, thanks to an agreement to sell itself to a private equity firm for CAD8.50 per share in cash.

The takeout price is a sizeable premium to where Connors’ shares had fallen last month, though well below levels that prevailed earlier in the year. The transaction still needs the OK of investors at a meeting Nov. 10, which appears nearly certain. Until then, the shares should trade right around the takeout price. US investors should sell Connors Brothers Income Fund before the deal is completed to avoid any potential cross-border tax consequences.
 
Acadian Timber Income Fund (TSX: AND-U, OTC: ATBUF)
Big Rock Brewery Income Trust (TSX: BR-U, OTC:
Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF)
Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF)
Essential Energy Services Trust (TSX: ESN-U, OTC: EEYUF)
Extendicare Trust (TSX: EXE-U, OTC: EXMUF)
Harvest Energy Trust (TSX: HTE-U, NYSE: HTE)
Jazz Airline Income Fund (TSX: JAZ-U, OTC: JAARF)
Mullin Group Fund (TSX: MTL-U, OTC: MNTZF)
Newalta Income Fund (TSX: NAL-U, OTC: NALUF)
Newport Partners Income Fund (TSX: NPF-U, OTC: NWPIF)
Precision Drilling Trust (TSX: PD-U, NYSE: PDS)
Swiss Water Decaf Coffee Fund (TSX: SWS-U, OTC: SWSSF)
TimberWest Forest Corp (TSX: TWF-U, OTC: TWTUF)
Tree Island Wire Income Fund (TSX: TIL-U, OTC: TWIRF)

Bay Street Beat

Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF) has held a spot in the CE Portfolio from the very beginning, in July 2004, back when oil was below USD40 per barrel. Vermilion has posted a total return in excess of 180 percent for those who picked it up a little more than four years ago.

We still recommend it, and Bay Street seems to be as comfortable with the trust as we are. Vermilion was one of two trusts to earn a perfect 5.000 average in Bloomberg’s regular survey of analysts on Canada’s equivalent of Wall Street.

Vermilion used its significant second quarter windfall–made possible by historically elevated oil prices and rebounding natural gas prices–to pay down debt. The trust has always maintained a conservative payout ratio (it clocked in at 33 percent for the second quarter), its debt-to-cash flow is below 1 and its costs per barrel of oil equivalent are relatively low. That’s what makes it the ballast of the Aggressive Portfolio, why it will sustain a market-beating yield and how it will eventually thrive once the global economy finds its legs.

Cineplex Galaxy Income Fund (TSX: CGX.UN, OTC: CPXGF), defying a slowdown in movie ticket sales to post a nearly 5 percent revenue increase in the second quarter, also drew a 5.000. Cineplex, “a big fish in a small pond,” according to CEO Ellis Jacob, owns 76 percent of Cineplex Entertainment, the largest motion picture exhibitor in Canada with 129 theaters serving more than 60 million people.

The company is expanding its operations to include online sales of merchandise and DVDs.

Other trusts scoring well with Bay Street were Precision Drilling (TSX: PD.UN, NYSE: PDS, 4.846), Bonavista Energy Trust (TSX: BNP.UN, OTC: BNPUF, 4.818), NAL Oil & Gas Trust (TSX: NAE.UN, OTC: NOIGF, 4.750), H&R REIT (TSX: HR.UN, OTC: HRREF, 4.714), Inter Pipeline (TSX: IPL.UN, 4.714), Baytex Energy Trust (TSX: BTE.UN, NYSE: BTE, 4.692), Crescent Point Energy Trust (TSX: CPG.UN, OTC: CPGCF, 4.692), Enerplus Resources (TSX:ERF.UN, NYSE: ERF, 4.692), CML Healthcare (TSX: CLC.UN, OTC: CMHIF, 4.600) and Calloway REIT (TSX: CWT.UN, OTC: CWYUF, 4.600).

Algonquin Power Income Fund (TSX: APF.UN, OTC: AGQNF) found itself among those S&P/Toronto Stock Exchange Composite Index companies with the lowest average ratings. But its 2.600 score was up from 2.200 in the last survey, the biggest ratings jump among index components.

A Tidy 15 Percent

The BCE (TSX: BCE, NYSE: BCE) story will be an interesting entry in financial history books, and it will hold a dubious place in the financial crisis saga: It’s the largest leveraged buyout in history, the last great deal inked ahead of the credit crunch. There’s now a lot of speculation–revealed in the action of the stock price–that the deal won’t get done.

Between Sept. 12 and Sept. 17, BCE slid 13 percent, taking it as much as 25 percent below the CAD42.75 offered, agreed and approved privatization price. BCE shares have fallen again, closing at CAD34.80 on the Toronto Stock Exchange the day after the US Senate passed a significantly revised version of a financial rescue package.

Xstrata (OTC: XSRAF) backed out of its USD10 billion deal to acquire Lonmin (OTC: LNMIY) because it doesn’t want to venture into the credit market to raise cash right now, raising questions about whether Ontario Teachers’ Pension Plan and the private capital partners it put together will ultimately get financing for their CAD52 billion buyout of BCE.

A consortium of banks including Citigroup (NYSE: C), Deutsche Bank (NYSE: DB), Royal Bank of Scotland (NYSE: RBS) and Toronto-Dominion Bank (TSX: TD, NYSE: TD) pledged about USD33 billion in debt to fund the deal; the financial meltdown has delayed that debt coming to market.

BCE is still a cash cow, and it’s growing in important segments. It generated more than CAD4 billion in revenue last quarter, and it signed up 111,000 long-term mobile phone subscribers, up from 43,000 a year ago, its fastest pace in more than two years. Those numbers are important to Ontario Teachers and its banks, but the stock no longer trades on fundamentals. It’s all about Washington, and then it’s all about the financing.

If the House passes and President Bush signs a bailout bill soon, confidence should return to the credit markets. That won’t happen overnight. But at this stage, the worst-case scenario for Ontario Teachers and BCE is a delay of the closing date from Dec. 11 to early 2009. Big banks will be more selective in their lending, but a national telecom in a fundamentally stable economy with solid assets, earnings and market share seems a good candidate.

If you have a little risk capital, this one could get you more than 15 percent between now and Dec. 11. BCE is a speculative buy for those with higher risk tolerance.