Normally, I don’t like to overload readers with flash alerts so soon after sending a new issue. But with this stress-tested earnings season colliding with a recession-fearing market, an additional update is needed.

At this point, the only Canadian Edge Portfolio selections that haven’t reported third quarter earnings are Atlantic Power Corp (ATP.UN, ATPWF) from the Conservative Portfolio and Advantage Energy Income Fund (AVN.UN, NYSE: AAV) from the Aggressive Portfolio. The good news is, despite several ongoing economic shocks in North America, the vast majority of recommended trusts are reporting covered distributions handily with distributable cash flow.

The performance of our Conservative Portfolio holdings was no great surprise, given their solid underlying businesses and prudent financial policies. AltaGas Income Trust (ALA.UN, ATGUF), Artis REIT (AX.UN, ARESF), Keyera Facilities (KEY.UN, KEYUF), Northern Property REIT (NPR.UN, NPRUF), Pembina Pipeline Fund (PIF.UN, PMBIF) and Yellow Pages Income Fund (YLO.UN, YLWPF) all reported very strong growth that points the way to further dividend growth.

RioCan REIT (REI.UN, RIOCF) also posted solid results, even as it continued to ramp up more aggressive spending on growth. So did Bell Aliant Regional Communications Income Fund (BA.UN, BLIAF), which is now noticeably picking up business at the expense of rivals. And Canadian Apartment REIT (CAR.UN, CDPYF) had another fine quarter of high occupancy and expansion, bringing its payout ratio down to 77.8 percent for the quarter.

Growth was slower but very steady at Algonquin Power Income Fund (APF.UN, AGQNF) and Energy Savings Income Trust (SIF.UN, ESIUF), which is particularly impressive because both had to overcome the impact of the crash in the US dollar on their considerable operations in this country. Greenback weakness also apparently wasn’t a real problem for Arctic Glacier Income Fund (AG.UN, AGUNF), which posted record distributable income in the quarter as growth from acquisitions offset a lower value of US dollar receivables.

Two Conservative holdings didn’t cover distributions with distributable cash flow during the quarter. One was Boralex Power Income Fund (BPT.UN, BLXJF).

As I explained in the Portfolio section in the November issue of Canadian Edge, however, it was no fault of its own. Rather, it was weaker-than-expected water flows, which historically have been reversed from quarter to quarter. As a result, there’s no immediate danger to the distribution.

Macquarie Power & Infrastructure’s (MPT.UN, MCQPF) cash flows are seasonal, and its third quarter payout ratio of 143 percent is in line with past years as well as management expectations. Revenue rose 49 percent on the past year’s acquisitions, and management expects ample free cash flow for distributions going forward.

I will be monitoring to make sure it makes good on its projections. But for now, there doesn’t appear to be any danger to the distribution either.

Aggressive but Solid

If the rising Canadian dollar made things difficult for trusts outside the oil and gas business, it’s been doubly so for trusts inside it. The rising loonie directly offsets gains in oil, which is priced in US dollars. And this is on top of the challenge presented by still-weak natural gas prices and the radical slowdown of Canada’s natural gas drilling activity.

As a result, I fully expected to see at least one recommended trust fail to match up to expectations. As it turned out, I was pleasantly surprised: None reported any problem earning distributions by a comfortable margin.

That was even true of the three Aggressive Portfolio holdings involved in energy services. The worst of the three was Precision Drilling (PD.UN, NYSE: PDS), which was announced previously and is discussed in the November issue of Canadian Edge.

As I pointed out, recovery still looks a ways off because activity in Canada’s gas patch is light. But on the bright side, the trust still looks able to cover its distribution with cash flow well into next year, even if conditions remain slack.

The other two came in far better. In fact, results were markedly upbeat.

Newalta Income Fund (NAL.UN, NALUF) reported very strong growth at its eastern Canada operations, which are involved in other industries besides energy. And it also shored up operations in the west by cutting costs and focusing on stronger areas. The result was a sharp drop in its quarterly payout ratio and renewed statements from management that it expects cash flow to continue to bounce back.

Management also affirmed its belief that momentum was moving in the right direction and that it would again be earning its distribution and then some by early next year. In fact, it nearly earned it in the third quarter.

Trinidad Energy Services Income Trust (TDG.UN, TDGNF), meanwhile, reported continued solid results, including actual rising utilization rates. The trust’s payout ratio returned to a moderate 61 percent for the quarter. That’s roughly the same figure for the year-to-date period.

As pointed out in the November Canadian Edge Feature Article, Trinidad is a different kind of driller from its peers, one of which—Essential Energy Services Trust (ESN.UN, EEYUF)—slashed its distribution by nearly a third this week. Although these drillers have focused on the Canadian market, Trinidad now does almost all its business in the US deep drilling market.

As a result, its drilling rates were again far superior to the energy averages in the third quarter. That’s just one more confirmation that this trust is capable of holding its distribution, despite extremely weak conditions in its core market.

As for our producers, they’ve taken a beating in the market recently because investors have worried about a decline in energy prices in a possible recession. But in contrast to Harvest Energy Trust (HTE.UN, NYSE: HTE)—which cut its distribution on weak refining results—all of the Canadian Edge Portfolio picks reporting thus far have turned in very strong third quarter results with strong distribution coverage.

Strongest were ARC Energy Trust (AET.UN, AETUF), Enerplus Resources (ERF.UN, NYSE: ERF), Penn West Energy Trust (PWT.UN, NYSE: PWE), Peyto Energy Trust (PEY.UN, PEYUF) and Vermilion Energy Trust (VET.UN, VETMF). ARC and Enerplus both came in with firm production and payout ratios of 70 percent. Penn West and Peyto were virtually identical at 71 percent, while Vermilion came in at just 34 percent.

Provident Energy Trust (PVE.UN, NYSE: PVX) was higher at 89 percent, but that was because of one-time factors at the midstream operations and shouldn’t carry over into coming quarters. Even Paramount Energy Trust (PMT.UN, PMGYF) came in well, with management affirming it could cover the payout at current energy prices.

Impressive, none of these results were achieved by selling oil at anything close to black gold’s current price. Rather, realized prices were on the south side of $70 per barrel of oil equivalent.

Meanwhile, realized gas prices were well below current levels. This suggests that even if oil comes down significantly and gas reverts to lower levels, these trusts should still be able to cover their distributions handily as well as make good on their production plans without adding significantly to debt levels.

No Credit

All of this solid news is in stark contrast to what’s been going on in the market. Rather than give these trusts credit for strong earnings news, investors on both sides of the border are running for the hills in fear of a recession dragging down energy prices.

Trusts have also taken a knock from the past few days’ retreat in the Canadian dollar, which has reduced the US dollar value of their share prices. The loonie is still well up for the year, but the effect has been to make the selloff of trusts even more dramatic.

I can’t promise we won’t see more selling of good trusts in the days ahead. A powerful macro downtrend is a terrible thing to behold, and it pretty much catches everything in its path.

As we saw last week, even trusts reporting very strong results were taken out and shot. Enerplus, for example, has tumbled from the high 40s to the low 40s, despite reporting a low payout ratio, lower debt (0.7 debt-to-cash flow ratio) and generally steady production and costs.

Management has basically confirmed higher royalty rates in Alberta are a nonevent for future cash flows and distributions. Exit-year production rate estimates have been reduced 3 percent but are expected to rebound by early next year. Again, that’s basically a nonevent for a very solid trust, but that hasn’t stopped investors from dumping it.

As long as trusts remain in good shape to keep paying their considerable distributions, they’ll recover from whatever near-term slide they experience. In fact, the more they pass these stress tests, the better all of us should feel about holding them to 2011 and beyond.

Provided you hold your trusts as part of a diversified portfolio of high-quality income investments, there’s no reason not to just ride this out. If you’re considerably more committed, you may feel better if you buy a few put options on some of the larger trusts that trade on the New York Stock Exchange, such as Pengrowth Energy Trust (PGF.UN, NYSE: PGH).

For most of us, however, the best idea is just to stick with our good trusts, particularly those that have just proven themselves yet again by posting strong third quarter earnings. They’ll keep paying us our distributions until their share prices ultimately recover.