Over the next six weeks or so, our favorite Canadian trusts and high-yielding corporations will report fourth quarter 2008 earnings. As the period included the worst credit crunch in history, it’s only natural to expect some fall off from third quarter and 2007 results.

The key question is whether or not the results are worse than what’s already reflected in share prices. With scores of trusts trading below book value and with yields in the mid-teens and higher, the bar is set very low. Consequently, it won’t take much for trusts to hurdle it, and even post share price gains on what would ordinarily be considered dismal results.

As I’ve pointed out since Canadian Edge’s inception, share prices of trusts and high-yielding corporations tend to track their dividends over time. Good business means rising dividends, which in turn boost share prices. Weakening enterprises tend to suffer dividend cuts, which send share prices lower. The converse is strong dividends tend to indicate the underlying business is still sound.

As of yet, only a handful of companies on either side of the border have announced their fourth quarter and full-year 2008 earnings. That’s in large part because year-end regulatory filings require so many t’s to be crossed and i’s dotted, and the penalty for errors can be severe.

What a fairly large number of outfits in the US do is preannounce results. That is, they provide the investment community with information on what to expect when the full set of numbers is released. The idea is–at least as much as possible–to eliminate the potential for share-price damaging negative surprises.

Canadian trusts and high-yielding corporations generally don’t follow this practice. But they do telegraph future results in one very important way: through their distributions.

Simply, trusts and high-yielding corporations pay out large percentages of cash flow in distributions. When business falls off, they have no choice but to make cuts. In fact, dividend reductions basically amount to earnings warnings, i.e. that the numbers aren’t going to look good.

On the other hand, if a trust or high-yielding corporation is able to continue declaring distributions either at or above current levels, it’s a pretty good sign that things are still humming along at the underlying business. We won’t know for certain until the numbers are actually released. But we can infer there will be no real negative surprises, at least nothing of the magnitude to trigger a dividend cut.

Where We Stand

The best news thus far in this, the season of preannouncements, is how our holdings outside the oil and gas production business have been maintaining and even increasing distributions over the past several months. That’s even as the global credit/economic crisis has intensified and their share prices have been subjected to unprecedented volatility.

Atlantic Power Corp’s (TSX: ATP-U, OTC: ATPWF) 8 percent distribution hike kicks in with this month’s payment (Jan. 30). Other trusts have announced “special distributions” to square up finances to avoid taxation.

This week, Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF) actually increased a previously announced special payment from CAD0.10 to CAD0.165, slated for Jan. 31. Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF) will pay a special distribution of CAD0.24 a share on Jan. 30.

As for the rest of the Conservative Portfolio, each has now affirmed its current distribution rates for both the January and February payments. That’s no guarantee the weakening North American economy won’t eventually hit cash flow enough to cut distributions, before things turn up. But it’s a pretty clear sign that the underlying businesses are still holding their own in the most difficult environment in decades.

That’s not a real surprise, given the stable underlying nature of their businesses. All four real estate investment trusts, for example, are very conservatively run, have strong finances and feature high-quality assets that have proven their ability to weather downturns.

My four power trusts sell essentially all of their output to the most creditworthy of customers, regulated utilities and provincial government entities. The infrastructure-based trusts also boast extremely creditworthy customers. And even Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) continues to announce expansion moves that would only be possible if the underlying business were healthy.

Of course, I intend to look at the fourth quarter numbers for each of these holdings very carefully. And given the economic and financial shocks, it’s quite possible some have been knocked off stride. Early indications are, however, that the underlying businesses are still weathering the storm. And since that’s clearly not reflected in their currently very low share prices, all of them continue to rate strong bargains.

Hunkering Down

Energy producing trusts haven’t fared nearly as well. That’s certainly to be expected when oil prices fall more than USD100 a barrel and natural gas prices drop by two-thirds in barely six months.

Energy producing trusts’ cash flows are determined by a very simple formula. That’s what they produce times the selling price, less all the costs of getting that output to market.

All of those factors are variable. But energy prices are the only one wholly outside trusts’ control. Management does have some leeway regarding how much development it will do. But mainly, when energy prices rise, cash flows rise and management has more money to pay distributions. When energy prices fall as they have since summer 2008, they have less money to pay out. Dividend cuts are inevitable.

Thus far in this down cycle, all of our recommended Canadian Edge energy producer trusts have trimmed distributions at least once. The only exceptions are Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) and Vermilion Energy Trust (TSX: VET-U, OTC: VETMF).

Peyto’s extremely low operating costs and long-life reserves appear to be the primary reason it has held thus far. Meanwhile, Vermilion has the ability to sell into markets where oil and gas prices are considerably higher, namely Australia/Asia and Europe. Both are under a great deal of pressure, however. In fact, the Bay Street consensus is currently projecting a 33 percent haircut for Peyto’s payout, starting with the March disbursement.

As I stated in the January Feature Article, current trading prices for oil and gas producer trusts are already reflecting the potential for deep future distribution cuts. That’s even true of trusts that have made relatively large deductions already.

On Thursday afternoon, I caught up Andy Mah, CEO of Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV) for an update on the state of the market and his trust’s strategy. In his view, if oil fails to rebound from sub-USD50 levels and natural gas can’t move substantially above USD5 per million British thermal units (MMBtu) in the coming months, we’re likely to see another wave of producer trust distribution cuts.

Advantage, of course, has already cut its distribution from a prior rate of CAD0.12 per month to CAD0.08, effective with the Jan. 15 payment. As Mr. Mah points out, the trust is sitting on top of a major reserve find–Montney Glacier–that it’s only beginning to tap into. Other players in the region, including ARC Energy Trust (TSX: AET-U, OTC: AETUF), are equally bullish on the area and Advantage has been able to lock in a very valuable position.

Advantage has also hedged a large portion of expected 2009 production at prices that now look very favorable. Approximately 54 to 55 percent of natural gas–by far its most important product–is hedged at an average price of CAD8.10. Meanwhile, 18 to 20 percent of projected oil output is locked in at CAD55 per barrel.

That’s certainly a big plus when it comes to dealing with this environment. But it’s unrealistic to expect hedging alone to ensure current distribution levels if energy prices continue to tank from here.

In short, energy trusts are hunkering down to survive this slump. Trusts like Advantage do have one great strength that’s not shared by development and exploration companies. Mainly, they exploit deep pools of energy where there’s a tremendous amount of geologic knowledge already. When they drill, they know what they’re going to get. That provides them unmatched certainty and the ability to keep producing even if energy prices fall.

No management, however, is able to completely hedge out the impact of energy prices. That means producer trusts’ distributions and share prices are at the mercy of what happens to oil and gas.

Here in early 2009, the bar for trusts’ success has rarely if ever been lower. As I’ve pointed out, share prices now are in the same ballpark as they were when oil was selling for less than USD20 a barrel and natural gas was under USD2 per MMBtu. And the violence with which energy prices have fallen has both destroyed future supply–via cancelled and postponed development–and unwound conservation measures.

The drop in demand that’s caused the crash in energy prices is very real. And if the global economy continues to weaken this year, it may take prices down even further. But sooner or later, the global economy will revive. And when it does, it will go back to demand levels that prevailed when the financial crisis broke this fall. At that point, we’re not going to have the supply to meet it and prices will spike.

That scenario is the main reason I continue to hold onto energy producer trusts as a sector. Deep asset pools, strong management and solid balance sheets are why I’m sticking with my individual selections over others in the group.

We may find with fourth quarter earnings that some of our Portfolio energy trusts no longer boast those strengths. If that’s the case, we’ll have no choice but to pull up stakes and look for an alternative, regardless of the losses suffered the past six months.

Some trusts may also decide they want to move more quickly to shore up cash flow by converting to corporations early and therefore cutting distributions more deeply. That alone won’t trigger a sell recommendation from me. But I will closely scrutinize any management that makes such a move to decide whether the trust/corporation is still worth hanging onto.

At this point, I consider the orderly ratcheting down of our trusts’ distributions as bullish for their survival and ability to ultimately recover losses. In fact, given the magnitude and speed of the recent rout in energy prices, their actions are really a testament to the value of their sustainability models.

In a washed out market like this one, the temptation is always to either double down or else sell out entirely. I continue to advise neither course for energy trusts.

Simply, if you already have positions, stick with them. But don’t try to wipe out losses by averaging down in a market that still might not have found its ultimate bottom and which, even if it has done so, still has the power to trip up numerous individual trusts and corporations. If you don’t own these trusts, now is an excellent time to take positions. But do so in a disciplined way that balances you among individual selections, rather than overload on one or two.

In my view, selected oil and gas producer trusts that survive this down cycle are headed for new all-time highs when things turn up again. Dividends will also be restored as cash flow rises. But again, cashing in on that will take patience, a continued focus on quality and the ability to sell unemotionally if a particular individual situation doesn’t work out. In short, keep your emotion out of it. Let the numbers be your guide.

Here are the approximate dates for fourth quarter earnings releases of Canadian Edge Portfolio recommendations. We’ll be reporting them in the complimentary weekly Maple Leaf Memo, Flash Alerts and the regular February and March issues of CE, as they’re released.

The February issue will be available Friday, February 6.

Conservative Portfolio

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) Feb. 27, 2009 (Estimated)

Artis REIT (TSX: AX-U, OTC: ARESF) Feb. 13, 2009 (Estimated)

Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) Feb. 13, 2009 (Estimated)

Bell Atlantic Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) Feb. 3, 2009 (Confirmed)

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) Feb. 13, 2009 (Estimated)

Canadian Apartment REIT (TSX: CAR-U, OTC: CDPYF) Feb. 26, 2009 (Confirmed)

CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) Feb. 13, 2009 (Estimated)

Consumers’ Waterheater (TSX: CWI-U, OTC: CSUWF) Feb. 20, 2009 (Estimated)

Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF) Feb. 6, 2009 (Estimated)

Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF) Feb. 5, 2009 (Confirmed)

Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) Mar. 11, 2009 (Estimated)

Keyera Facilities (TSX: KEY-U, OTC: KEYUF) Feb. 24, 2009 (Confirmed)

Macquarie Power & Infrastructure (TSX: MPT-U, OTC: MCQPF) Feb. 19, 2009 (Confirmed)

Northern Property REIT (TSX: NPR-U, OTC: NPRUF) Mar. 11, 2009 (Estimated)

Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) Mar. 6, 2009 (Estimated)

RioCan REIT (TSX: REI-U, OTC: RIOCF) Feb. 13, 2009 (Confirmed)

TransForce (TSX: TFI, OTC: TFIFF) Mar. 12, 2009 (Confirmed)

Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) Feb. 13, 2009 (Estimated)

Aggressive Portfolio

Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV) Mar. 6, 2009 (Estimated)

Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF) Feb. 13, 2009 (Estimated)

ARC Energy Trust (TSX: AET-U, OTC: AETUF) Feb. 12, 2009 (Confirmed)

Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) Feb. 20, 2009 (Confirmed)

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) Mar. 5, 2009 (Estimated)

Enerplus Resources (TSX: ERF-U, NYSE: ERF) Feb. 27, 2009 (Estimated)

GMP Capital Trust (TSX: GMP-U, OTC: GMCPF) Feb. 27, 2009 (Estimated)

Newalta Income Fund (TSX: NAL-U, OTC: NALUF) Mar. 6, 2009 (Estimated)

Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) Mar. 11, 2009 (Estimated)

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) Feb. 18, 2009 (Confirmed)

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) Mar. 5, 2009 (Estimated)

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) Feb. 13, 2009 (Estimated)

Trinidad Drilling (TSX: TDG, OTC: TDGCF) Mar. 11, 2009 (Estimated)

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) Mar. 2, 2009 (Confirmed)