Most trusts have already converted to corporations in response. Real estate investment trusts (REITs) are exempt, however, so they will remain as trusts.

All but one of our trust recommendations have converted. We still like the long-term outlook for all these picks, and we see them as buys. All of our REIT recommendations remain buys, as well.

However, because their operations have changed, we’re adjusting the TSINetwork Ratings on four of our former trusts.

Here’s a look at how we assign our ratings. We follow that with an analysis of the four stocks and why we changed the rating on each one.

We award TSINetwork Ratings on a point system, using nine key factors that determine a company’s ability to survive a business setback and go on to greater success when conditions improve. These factors are:

• One point for a long-term record of profit.
• One point for a long-term record of dividends.
• One point for industry prominence—two points for industry dominance.
• One point for an attractive balance sheet, with adequate equity and manageable debt.
• One point for Canada-wide operations, or two points for multinational operations.
• One point for being able to serve all shareholders. To merit this point, firms must be free of excess government regulation, free of too much dependence on a single supplier and free of the influence of a parent company or from insider abuses.
• One point for freedom from business cycles.
• One point for the ability to profit from a secular trend, or two points for the ability to profit from two or more secular trends. Secular trends (such as global economic liberalization) go far beyond mere business cycles; they reflect ongoing changes in society.
• One point for offering products or services that profit from habitual behaviour.

Companies with 11 or 12 points fall into the top category: Highest Quality. Those with eight to 10 points are of Above Average quality. Six or seven points means they are of Average quality; four or five points, Extra Risk; two to three points, Speculative; one or no points, Start-up.

PENN WEST PETROLEUM $21.63 (Toronto symbol PWT; Shares outstanding: 469.4 million; Market cap: $10.2 billion; TSINetwork Rating: Average; Dividend yield: 5.0%; www.pennwest.com) has raised its production by over 56% over the last five years. It is now one of North America’s largest oil and gas producers.

The company has made big investments in its operations in order to boost its production. Even so, its $2.9 billion of long-term debt is a reasonable 28.4% of its market cap. It has also lowered its debt from $3.5 billion at the start of 2010.

Penn West converted from a trust to a corporation on January 1, 2011. However, it has $7.0 billion of tax pools that it is using to offset the new tax. That’s letting it maintain its $1.08-a-share annual payout, which yields 5.0%. As well, the payout (like all dividends paid by converted trusts) is now eligible for the dividend tax credit if you hold your shares outside an RRSP.

We’re raising Penn West’s TSINetwork Rating to Average from Extra Risk.

Penn West is still a buy.

PEMBINA PIPELINE CORP. $27.59 (Toronto symbol PPL; Shares outstanding: 167.3 million; Market cap: $4.6 billion; TSI Network Rating: Average; Yield: 5.7%; www.pembina.com) is buying rival Provident Energy for $3.2 billion.

The Provident purchase diversifies Pembina’s operations and should immediately add to its cash flow. As a result, the company is raising its monthly dividend by 3.8%, to $0.135 from $0.13. The shares now yield 5.7%.

We’re raising Pembina’s TSINetwork Rating to Average from Extra Risk.

Pembina Pipeline Corp. is still a buy.

BELL ALIANT INC. $28 (Toronto symbol BA: Shares outstanding: 227.8 million; Market cap: $6.4 billion; TSINetwork Rating: Average; Yield: 6.8%; www.aliant.ca) sells telephone and Internet services to 2.8 million customers in Atlantic Canada, as well as rural parts of Ontario and Quebec. The company also sells wireless services through an alliance with BCE, which owns 43.8% of Bell Aliant.

We’re lowering Bell Aliant’s TSINetwork Rating to Average from Above Average. It’s still prominent in its industry, with a record of steady profits and dividends, and its balance sheet remains strong. But it faces rising competition across all of its businesses. In addition, many of its phone customers are switching to wireless devices—owning a telephone land line is becoming less and less of a habitual behaviour for many Canadians.

Bell Aliant is still a buy.

VERESEN $15.15 (Toronto symbol VSN; Shares
outstanding: 169.8 million; Market cap: $2.6 billion; TSINetwork Rating: Average; Dividend yield: 6.6%) owns and operates energy pipelines and processing plants. Its major holding is its 50% stake in the Alliance gas pipeline, which runs 3,000 kilometres from Fort St. John, B.C., to Chicago. Enbridge owns the other 50%.

To diversify its operations and grow beyond Canada, Veresen has successfully expanded its power generation business. It now owns hydroelectric plants in New York State and B.C.; natural gas-fired plants in Ontario, California and Colorado; and waste heat plants in B.C. and Saskatchewan.

Veresen’s shares yield a high 6.6%. However, it only pays out around 75% of its cash flow as dividends, so it should be able to maintain its annual rate of $1.00 a share.

We’re raising Veresen’s TSINetwork Rating to Average from Extra Risk.

Veresen is still a buy.

In the three months ended September 30, 2011, Dundee’s revenue rose 75.4%, to $110.9 million from $63.2 million a year earlier. Most of the increase came from properties the trust recently purchased.

Dundee’s cash flow rose 69.4% in the latest quarter, to $36.6 million from $21.6 million. Cash flow per unit rose just 11.5%, to $0.58 from $0.52, due to more units outstanding (the trust issued new units to pay for the acquired properties).

Dundee has spent a total of $1.5 billion on acquisitions in 2011, up from $900 million in 2010. The trust’s growth-by-acquisition strategy adds risk, but it is steadily diversifying its holdings outside western Canada by purchasing more properties in eastern Canada. At the start of 2010, about 70% of Dundee’s properties were in western Canada. That’s now down to less than 50%.

The trust pays a monthly distribution of $0.183, for a 6.7% annual yield.

Dundee REIT is still a buy.

CHEMTRADE LOGISTICS INCOME FUND $14.69 (Toronto symbol CHE.UN; TSINetwork Rating: Speculative) (416-496-5856; www.chemtradelogistics.com; Units outstanding: 37.1 million; Market cap: $545.0 million; Dividend yield: 8.2%) is one of North America’s largest providers of removal services for resource firms, such as oil refineries and base-metal processors. These companies create sulphur, acid and other by-products as part of their processing activities. Chemtrade converts these substances into useful chemicals, like sulphuric acid. The trust also makes other chemicals.

In the three months ended September 30, 2011, Chemtrade’s cash flow per unit jumped sharply, to $0.85 from $0.28 a year earlier. Revenue rose 88.4%, to $268.5 million from $142.6 million. That mostly reflects the contribution of Marsulex Inc., which Chemtrade bought for $419.5 million in June 2011. Marsulex provides a wide range of environmental services, including improving air quality and treating and handling industrial by-products and hazardous waste. Revenue also rose due to rising industrial demand and higher market prices for sulphuric acid.

The trust pays a $0.10 monthly distribution. That gives it a high 8.2% yield on an annualized basis. It pays out just 60% of its cash flow to unitholders.

Chemtrade plans to continue operating as an income trust. That’s because it believes that it is structured in such a way that its earnings will be subject to a Canadian tax rate of no more than 10%. That will help it keep its distributions high.

Chemtrade Logistics Income Fund is a buy.

In the three months ended March 31, 2011, Dundee’s revenue rose 57.4%, to $91.0 million from $57.8 million a year earlier. That’s mainly because the trust bought about $475 million of new properties in the quarter, mostly in Ontario.

Dundee’s cash flow rose 72.9% in the quarter, to $28.8 million from $16.6 million. Cash flow per unit rose just 1.9%, to $0.55 from $0.54, on more units outstanding. (The trust issued units to pay for the acquired properties.)

The trust pays a monthly distribution of $0.183, for a 6.7% annual yield. Because it’s a REIT, Dundee is exempt from Ottawa’s tax on income-trust distributions, which came into effect on January 1, 2011.

Dundee’s growth-by-acquisition strategy adds risk. However, its purchases are helping it cut its reliance on western Canada. At the start of 2010, about 70% of Dundee’s properties were in western Canada. That’s now down to less than 54%.

Dundee REIT is still a buy.

CHEMTRADE LOGISTICS INCOME FUND $14.79 (Toronto symbol CHE.UN; TSINetwork Rating: Speculative) (416-496-5856; www.chemtradelogistics.com; Units outstanding: 30.7 million; Market cap: $612.5 million; Dividend yield: 8.2%) is one of North America’s largest providers of removal services for resource firms, such as oil refineries and base-metal processors. These companies create sulphur, acid and other by-products as part of their processing activities. Chemtrade converts these by-products into useful chemicals, like sulphuric acid. The trust also makes chemicals, such as sodium chlorate.

In the three months ended March 31, 2011, Chemtrade’s cash flow per unit jumped 55.6%, to $0.84 from $0.54 a year earlier. Revenue rose 33.8%, to $169.6 million from $126.8 million. This was mostly due to rising industrial demand and higher prices for sulphuric acid.

The fund has now completed its $419.5-million purchase of Marsulex Inc. This company provides a wide range of environmental services. These include improving air quality, and treating and handling industrial by-products and hazardous waste. Marsulex’s services nicely complement Chemtrade’s existing strengths.

The fund pays a $0.10 monthly distribution. That gives it a high 8.1% yield on an annualized basis. The trust pays out roughly 76% of its cash flow to unitholders.

Chemtrade plans to continue operating as an income trust. That’s because it believes that it is structured in such a way that its earnings will be subject to a Canadian tax rate of no more than 10%. That will help it keep its distributions high.

Chemtrade Logistics Income Fund is a buy.

We analyze Chemtrade in Stock Pickers Digest, our newsletter for aggressive investing.

In the three months ended March 31, 2011, the income trust’s cash flow per share jumped 55.6%, to $0.84 from $0.54. Revenue rose 33.8%, to $169.6 million from $126.8 million. This was mostly due to a recovering economy and higher prices for sulphuric acid.

Chemtrade recently announced that it will buy Marsulex Inc. for $419.5 million. Marsulex provides environmental services that include controlling air quality and treating and handling industrial by-products and hazardous waste. The company also makes and sells chemicals.

Adding Marsulex should build on the income trust’s existing strengths. Moreover, Chemtrade is already very familiar with Marsulex. That lowers the risk of unpleasant surprises.

The company expects Marsulex to immediately begin adding to its cash flow per unit, even without accounting for savings from eliminating overlapping functions.

The income trust’s distribution is $0.10 a month, which yields a high 8.3% on an annualized basis.

You can get our clear buy/sell/hold advice on Chemtrade and dozens of other companies that may be appropriate for the part of your portfolio you devote to aggressive investing in Stock Pickers Digest. What’s more, you can get the latest issue absolutely free. Click here to learn how.

Chemtrade has three divisions: the Sulphur Products and Performance Chemicals division supplies 54.5% of the income trust’s revenue. Pulp Chemicals accounts for 8.5% of revenue. The International division supplies the remaining 37.0%. This division removes and markets sulpur and sulphuric acid outside of North America.

In the three months ended December 31, 2010, the income trust’s cash flow per unit fell 31.7%, to $0.28 from $0.41 a year earlier. This was partly due to reduced production from a few of its larger sulphuric-acid plants, especially the plant in Beaumont, Texas, which had been damaged by a fire in 2008. That plant was shut down for half of the fourth quarter, forcing the company to use higher-cost supply sources and routes to make deliveries to customers.

Also, insurance recovery from the fire and exchange rates increased the income trust’s income in the fourth quarter of 2009. That made the 2010 fourth-quarter results worse by comparison.

However, higher sulphur prices and demand for sulphuric acid pushed revenue 13.9% higher, to $151.3 million from $132.8 million.

Chemtrade pays a $0.10 monthly distribution, which yields 8.6% on an annualized basis. The fund paid out 89.5% of its cash flow to unitholders in 2010. However, its 2011 payout ratio will fall to an estimated 80%.

You can get our full analysis, including our clear buy/sell/hold advice on Chemtrade and dozens of other aggressive investments in Stock Pickers Digest. What’s more, you can get one month free when you subscribe now. Click here to learn how.

The new tax puts income trusts on an equal footing with regular corporations. Some income trusts converted to conventional corporations before the new tax came into effect, or plan to do so in the coming months. Others will continue to operate as trusts.

(In light of the new tax, we’ve analyzed some trusts that may be appropriate for income-seeking investors in a just-published issue of Canadian Wealth Advisor, our newsletter for conservative investing. One of these trusts has made a number of big investments in wind power. Read on for further details.)

Whether they convert or not, the new tax has made many investors wary of trusts. However, some trusts remain well positioned for long-term gains, even with the new tax. In fact, most real estate investment trusts (REITs) are exempt from the new trust tax.

REITs resemble income trusts, but with a key difference: REITs invest in income-producing real estate, such as office buildings and hotels. We analyze a number of REITs in Canadian Wealth Advisor.

Here are two things we keep in mind when looking for income trusts to add to our recommendations.

1. Look for income trusts that don’t plan to cut their distributions. Regardless of whether income trusts convert to conventional corporations, they must now pay corporate taxes. That means they have less cash to distribute to unitholders.
   
   The biggest distribution cuts will continue to come from trusts that pay out a high percentage of their cash flows as distributions. So, when looking for trusts to recommend, we focus on those with lower payout ratios (less than 75%, say). That’s a good indicator that they will be able to maintain their distributions.
2. Take tax losses into account. Many of the trusts we recommend in our Canadian Wealth Advisor newsletter hold tax-loss pools that they can use to defer the new tax until later in 2011 or beyond.
   
   This flexibility adds appeal, but factors like this only make up part of our decisions. We also look at a trust’s overall investment quality, using factors like payout ratio, cash flow, profitability, industry prominence and so on.

Did your broker tell you about the investment that soared 119.1% in just 8 months while generating a hefty 5.7% current yield? Canadian Wealth Advisor subscribers regularly get the "inside track" on these types of high-quality "safe money" investments. Now you can join them. Click here to learn how you can profit from Canadian Wealth Advisor.

This income trust’s tax losses will let it defer conversion

Brookfield Renewable Power Fund (Toronto symbol BRC.UN) will not convert to a conventional corporation until 2012. That’s because it has tax losses it can use to defer taxation. The trust’s units yield a high 6.2%

Brookfield owns interests in 42 hydroelectric-generating stations on 16 river systems in Quebec, Ontario, B.C. and New England. The fund also owns the Prince and Gosfield wind farms, both in Ontario. In total, Brookfield has 1,700 megawatts of generating capacity.

Wind power will boost generating capacity — but it has risks

The fund recently agreed to buy the 166-megawatt Comber wind project in southwestern Ontario for $567 million. Start-up is forecast for late 2011. At that point, wind power will make up 21% of Brookfield’s total generating capacity.

Wind farms can add longer-term risk, because they are heavily reliant on uncertain government subsidies. In Canadian Wealth Advisor, we take a closer look at Brookfield’s wind investments and its plan for dealing with the 2011 tax, and update our buy/sell/hold advice accordingly.

You can get our full analysis of Brookfield Renewable Power and 18 other safety-conscious investments in the latest Canadian Wealth Advisor. What’s more, you get this issue free when you subscribe today. Click here to learn how.

Pengrowth has $2.7 billion of tax pools it can use to offset income taxes. It expects to be able to delay paying taxes until after 2014.

That will let Pengrowth keep paying $0.07 a month (it now yields 6.5%). Starting with the February 15, 2011, payment, the monthly payout will be in the form of a dividend. That means investors who hold Pengrowth outside an RRSP will benefit from the dividend tax credit.

Pengrowth Energy is still a buy.

ARC has $2.2 billion of tax pools it can use to offset income taxes. That will let it keep paying $0.10 a month (it now yields 4.7%). Starting February 15, 2011, these dividend payments will benefit from the dividend tax credit if you hold your shares outside of an RRSP or a RRIF.

ARC Energy is still a buy.

Chemtrade has three divisions: The Sulphur Products and Performance Chemicals division supplies about 59% of the fund’s revenue. Pulp Chemicals accounts for 10% of revenue, and the International division supplies the remaining 31%. This division removes and markets sulphur and sulphuric acid outside of North America.

Environmental market is secure

Removal services are important for certain companies, such as oil refineries and base-metal processors. That’s because they create sulphur by-products during their processing activities. In order to meet environmental regulations, they must recover these byproducts or they could be forced to halt production. Chemtrade processes these by-products into useful chemicals, such as sulphuric acid.

Chemtrade mainly gets its sulphuric acid, liquid sulphur dioxide and sulphur by capturing sulphur-based emissions from base-metal smelters and oil refineries. Vale Inco and Xstrata Nickel’s smelters are Chemtrade’s main suppliers.

Chemtrade also produces sulphuric acid and ultrapure sulphuric acid at plants in Beaumont, Texas; Shreveport, Louisiana; Riverton, Wyoming; Tulsa, Oklahoma; and Cairo, Ohio.

In the three months ended September 30, 2010, Chemtrade’s cash flow per unit fell 30.2%, to $0.37 from $0.53 a year earlier. However, the decline was mostly due to the shutdown of the fund’s Beaumont, Texas, plant following a fire on May 15, 2010.

Chemtrade pays a $0.10 monthly distribution, which yields 8.5% on an annualized basis. The fund paid out 97% of its cash flow to unitholders in the latest quarter. However, its 2011 payout ratio will fall to an estimated 80%.

Chemtrade will remain a trust

Chemtrade plans to continue operating as an income trust, even after Ottawa’s new tax rules take effect on January 1, 2011. The fund believes that it is structured in such a way that its earnings will be subject to a Canadian tax rate of no more than 10%. That will help it keep its distributions high.

As well, the fund estimates that 50% of its distribution will qualify for the gross-up and dividend tax credit treatment applicable to dividends from taxable Canadian corporations, if investors hold the units outside an RRSP.

The fund’s exposure to cyclical and often volatile commodity-chemical prices adds risk. In addition, Chemtrade needs continued economic growth to keep demand for its services high and continue increasing its cash flow.

However, tightening supply and improving demand for sulphur and sulphuric acid is pushing prices higher. As well, increasingly strict environmental regulations should keep spurring demand for Chemtrade’s removal services.

Chemtrade Logistics Income Fund is a buy.

BCE owns about 45% of Bell Aliant. At current prices, it would cost BCE $1.8 billion to buy the remaining units. In the first half of 2010, BCE’s cash flow was $1.4 billion, or $1.81 a share, so it could easily afford to buy both CTV and Bell Aliant.

However, there’s little overlap between BCE and Bell Aliant, so there would be few cost savings from a merger. Still, the possibility of a takeover adds to Bell Aliant’s appeal.

Bell Aliant is a buy.