On the Conservative Portfolio side, Energy Savings has succeeded in an industry where virtually everyone else failed in the 1990s: the unregulated retail energy markets in the US and Canada. Its secret is relentless, aggressive expansion, accompanied by effective risk management that’s never left the overall business dangerously exposed to energy prices and credit risks.

From its humble roots as a provider of gas in unregulated markets in Ontario a decade ago, the trust has grown to provide natural gas service to retail customers in Ontario, Alberta, British Columbia, Manitoba and Quebec, as well as Illinois, Indiana and New York. It also sells electricity in retail markets in Ontario, Alberta and New York and has recently expanded into Texas as well.

The company boosted customer rolls by 10 percent in its fiscal year 2007 (ended March 31). That, in turn, boosted sales 25 percent and gross margin—sales minus the cost of energy sold—by 22 percent. Distributable cash flow after marketing costs surged 28 percent, enabling management to boost distributions four times during the year for a total of 12 percent.

Fiscal 2008 targets call for the trust to add 19 percent more customers, fueled by explosive growth in the Texas market. That’s expected to boost gross margin and distributable cash flow between 15 and 20 percent, up from management’s earlier projections of 10 to 15 percent.

Energy Savings has already boosted distributions once this fiscal year, lifting the monthly payout to 9.7 cents Canadian, or roughly 4.5 percent last month. Assuming it comes close to hitting projections this year, we can look forward to three more boosts, with the next likely one coming with the October payment.

Long term, Energy Savings’ continued success depends on two things: continuing to identify and expand successfully into new markets and effectively hedging its exposure to often-volatile energy markets. The trust has been successful in both thus far, and the scale and experience gained in the past decade are pluses.

Challenges loom, however. As a relatively small player in unregulated energy markets, Energy Savings still has multiple areas in which to expand, in many cases doing so under the radar of larger competitors. The trust has, however, faced some difficulties attracting needed personnel to gain market share economically. That forced it to scale back growth targets last year, though margins per new customer added were 56 percent above projections.

The good news is last year’s moves to strengthen and streamline the sales force should produce both gains in margins and robust customer growth. And although only so many markets in North America feature gas and electric retail competition, the trust should have plenty of opportunities for growth in the Texas market. The USD34 million purchase of Just Energy Texas LP should begin adding to cash flow almost immediately.

In Canada, the trust’s growth has dropped off as competition has heated up. But its Green Energy Option rollout should rev things up again, particularly with greenhouse gas and global warming issues coming to the fore. The program is targeted at businesses, which are increasingly under pressure to go green.

As for staffing needs, a recent plan to allow the issue of unit appreciation rights as incentives has now won at least the tacit approval of investor watchdog group Institutional Shareholder Services Canada Corp. That should help the trust keep growing without giving away the store in salaries.

The greatest challenge to Energy Savings since its inception has been managing its energy price risk. The trust typically signs on residential and small to midsize commercial and industrial customers to long-term, fixed-price contracts. As it owns no power plants itself, the trust’s profit depends on how well it matches its sales with purchases of energy.

In Canada, the trust has done this by entering long-term deals with large, financially secure giants that control most of the country’s power generation and gas supplies. This spring, for example, management inked a deal with Bruce Power that will tie in supplies for a minimum of three years.

Unfortunately, there’s no way to ensure the trust will be equally successful long term in its efforts to grow and hedge energy supplies. But given the conservative focus of management, we should have plenty of warning in quarterly results should things begin to unravel. And in any case, there’s no sign of that now.

Being able to deal effectively with 2011 taxation is a key criterion for every Conservative Portfolio holding. Energy Savings’ management was one of the first to declare it would continue to pay a competitive dividend no matter how the trust is ultimately taxed. The continued robust distribution increases are a clear sign it’s putting its money where its mouth is.

As it basically has few hard assets, Energy Savings lacks some of the opportunities to generate tax shelters with noncash expenses that infrastructure-based trusts enjoy. A decade of rapid expansion, however, has left it with CD94.6 million in goodwill that can be written off against income in much the same way that rural phone companies shelter income in the US.

Perhaps more important to the trust’s future tax avoidance is its expanding presence in the US, a part of which is organized as a limited partnership (LP). US income is exempt from 2011 trust taxation, and LP organization minimizes the burden on this side of the border as well.

Finally, like Yellow Pages Income Fund (YLO.UN, YLWPF), Energy Savings’ rapid expansion leaves open the possibility it will simply be able to outgrow its future tax liability. And trading at only a little more than one times sales, it’s a perpetual candidate for a high premium takeover as well. A frequent buy recommendation in the past, Energy Savings is a new Conservative Portfolio holding and a buy up to USD16.

Shares of long-time Aggressive Portfolio member Newalta Income Fund have slumped the past few months, as the trust’s earnings have proven somewhat more sensitive to the crash in Canada’s natural gas patch than expected. With drilling activity down by nearly half from last year’s levels, it may be a while before conditions in that industry improve.

First quarter cash flows still covered the distribution and should continue to do so for the rest of 2007, though dividend growth will likely be muted. Even as overall funds from operations per share dipped 39 percent from 2006 levels—partly because of a 25 percent boost in outstanding shares and a 12 percent increase in dividends—the trust kept a tight rein on debt and expenses and hit its targets for integrating the newly acquired Atlantic Canada assets.

The Oilfield business unit—which processes the waste from crude oil production for a fee and sells the by-products—continues to run well as the need for environmental cleanup at sites increases. This division should enjoy rising sales going forward as regulations tighten for Canada’s energy patch and growth expenditures expand their presence.

A growing part of Newalta’s business comes from processing and selling by-products of waste from industrial business sites. This unit—which isn’t dependent on the health of the energy patch—has expanded rapidly in recent years, particularly in the eastern half of the country. Volumes and margins are increasing, and the trust continues to expand its efficiencies with the integration of the Quebec and Atlantic Canada operations.

Its drill site business is the portion most affected by the energy patch slowdown. But even here, management has taken steps to reduce exposure to Canadian energy patch weakness, placing 13 drill site units this spring into Texas and other Midwestern US markets. Management plans further expansion of its services in these geographic areas, demand for which should accelerate sharply as environmental concerns escalate on this side of the border.

Overall, Newalta should be progressively less dependent on the Canadian energy patch going forward and better able to capitalize on the demand for cleanup services at resource-based sites throughout North America. The vast majority of capital expenditures continue to be focused on expanding new sources of fee-based revenue, which promises to keep sales and cash flow growing at a robust rate for years to come.

On the trust taxation front, management is studying its options, though not as part of any official strategic review. The trust withdrew a request for an advance tax ruling on a proposed reorganization earlier this year and doesn’t anticipate any similar moves until next year at the earliest. Moreover, the board of trustees’ plan remains to continue paying out a high percentage of cash flow in distributions, with the rest going to growth capital investments.

Ultimately, Newalta’s fate may lie in a high-premium takeover. Its business mix is unique and ripe for robust future growth. And the shares continue to trade well below last year’s highs, largely because of lingering weakness in Canada’s energy patch and fears of the fallout on future cash flows. That should diminish in coming quarters as the trust’s new operations produce stronger results and energy patch conditions improve.

Like recently bought-out CCR, the trust is cheap, selling for less than twice book value and twice sales. A takeover offer should fetch at least a 20 to 30 percent premium to that level.

I’ll be happier if one doesn’t occur and we get the benefit of very healthy, long-run business growth. But in any case, yielding close to 9 percent, Newalta Income Fund is a buy all the way up to USD30.