Full-year 2007 and fourth quarter earnings reports are starting to come in for our recommended Canadian trusts. There are still quite a few more to come because most trusts lack the legions of accountants big corporations have on staff to file quickly. But thus far, as was the case in the third quarter 2007, there’s very little evidence in the numbers that the US slowdown is negatively impacting underlying businesses.

Starting with oil and gas, ARC Energy Trust (TSX: AET-U, OTC: AETUF) reported a 6.5 percent increase in cash flow per unit, driving its fourth quarter payout ratio down to 72 percent. Production levels—which should be enhanced in 2008 by the discoveries in British Columbia—were slightly higher in the fourth quarter. Operating costs were basically flat with the prior year, while finding, development and acquisition (FDA) costs actually fell 15 percent and reserve replacement was 101 percent of 2007 output.

As expected, the trust benefited from higher selling prices for oil. But the average fourth quarter realized price of $77.53 per barrel is still some $20 per barrel below current spot prices. That means it will take a big drop in black gold to negatively impact 2008 cash flows, while steady to rising prices would mean higher selling prices and rising cash flow.

Perhaps more important are rising natural gas selling prices, which were up sequentially from the third quarter but still down 9.6 percent from a year ago. Gas is getting a lift from a return to normal weather volatility after two years of mild temperatures but also from the steep drop in Canadian output and a ramp-up of demand from electric utilities as a way of reducing carbon dioxide output.

Those look like entrenched trends, regardless of which way the US economy goes, and they’re bullish for gas prices and ARC, as well as the rest of the oil and gas bets in 2008. ARC Energy Trust is now a buy up to USD25.

Margins in the US telephone directory business have been sliced by competition and economic weakness. But contrary to some gloom on Bay Street, Yellow Pages Income Fund’s (TSX: YLO-U, OTC: YLWPF) fourth quarter results were stronger than ever.

Revenue rose 17.2 percent for the year as the company enjoyed steady returns from its print business and explosive growth at its online operations, now 10 percent of total directory revenue. “Organic” online revenue growth—not including acquisitions—was 44 percent, handily beating the trust’s aggressive target of 30 percent.

Growth in both print directory and online revenues was slightly lower in the fourth quarter than for the full year. But overall revenue and cash flow still rose by 8.8 percent and 12.2 percent, respectively. Distributable cash flow per share, meanwhile, increased 10 percent in the quarter, nearly matching the 11.9 percent for the full year.

Concurrent with the results, Yellow Pages also affirmed its forecast for similar growth in 2008. And management restated the view that it will be able to basically outgrow its tax liability when it converts to a corporation in 2011.

That means, as long as the business continues to run well, no dividend cut in 2011 and steady increases between now and then. Increasing revenue, a virtual monopoly on Canada’s directory business and rising margins—cash flow margins rose to 53.5 percent from 51.9 percent a year ago—are pretty good arguments the company will make good on its pledge. Yellow Pages Income Fund is cheap and a buy up to USD16.

Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF) was our first trust with significant US operations to report earnings, its fiscal third quarter. Ironically, it was the activity on this side of the border that provided the most fireworks.

After three quarters, customer additions are at 93 percent of full-year targets for gas and 69 percent for electricity. That offset lower-than-targeted growth in Canada. More important, third quarter margins were well ahead of targets in both countries, and 118 percent and 113 percent above for US gas and power, respectively.

As for the bottom line, management affirmed its full-year forecast of 15 to 20 percent growth in gross margin and distributable cash flow companywide, the same outlook it issued at the beginning of the fiscal year last spring. That’s a clear sign neither US weakness nor the drop in the US dollar is driving down results.

Excluding the special distribution in January, the trust’s payout ratio was 77 percent. It was 97 percent including marketing expenditures for the quarter and full year.

The upshot: All capital costs and distributions are being covered with internal cash flow, meaning no dependence on capital markets for growth. That’s a very bullish picture, and it’s why Energy Savings Income Fund remains a buy up to 18.

The US property market and financial system are in shambles. But as the February Feature Article made clear, that doesn’t apply to their Canadian counterparts.

Thus far, two recommended trusts from vastly different property sectors have confirmed Canada’s strength. Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) posted steady 8.4 percent revenue growth for the year, which actually accelerated to 11.3 percent in the fourth quarter.

Operating expenses as a percent of revenue fell nearly a percentage point to 47.8 percent from the prior year. Net operating income margin for the quarter—which excludes the impact of acquisitions and sales—rose by more than a percentage point to 52.2 percent.

Rents across the portfolio rose more than 3 percent as the REIT continued to upgrade to better properties. Meanwhile, occupancy rose to 97.8 percent from 97.2 percent the year before.

The result was solid distributable-income-per-share growth, despite an increase in shares to finance growth and a drop in the payout ratio to 92.8 from 98.8 percent last year. The upshot: All’s well at Canadian Apartment Properties REIT, a buy up to USD20.

Retail center-focused RioCan REIT (TSX: REI-U, OTC: RIOCF) is arguably operating in an environment that’s more economically sensitive. But its growth in funds from operations (FFO) actually accelerated to 13 percent in the fourth quarter from a robust 10 percent for the full year.

The REIT continued its aggressive development activity of 22 projects comprising 8.4 million square feet, a clear sign it’s not having any trouble financing its business. Rents rose 9 percent for the quarter and 12 percent for the year, while occupancy was a robust 97.6 percent portfoliowide, something US REITs can’t even dream about.

In keeping with prior quarters, distributable cash flow growth continued to support modest dividend growth and the fourth quarter payout was down to 80.4 percent. Buy RioCan REIT, far higher yielding and higher quality than rival US REITs, up to USD25.

Finally, the power/utility sector has given us bullish news as well. I’m still projecting an earnings shortfall for Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) when it reports Friday because Great Lakes Hydro (TSX: GLH-U, OTC: GLHIF) has already come in with weak fourth quarter numbers, reflecting poor water flows. The share price already reflects it, which is why we’re still sticking with it.

In contrast, the news elsewhere is good. As reported in the February Canadian Edge, Bell Aliant Regional Communications Fund (TSX: BA-U, OTC: BLIAF) had very solid fourth quarter numbers, with broadband sales and acquisitions more than offsetting the steady erosion of basic copper phone connections. More important, the trust continued to show itself independent of US sluggishness, which is why Bell Aliant Regional Communications Fund is a buy up to USD33.

This week, Macquarie Power & Infrastructure Fund (TSX: MPT-U, OTC: MCQPF) turned in fourth quarter results that backed up management’s bullish decision to hike its distribution some weeks ago. Full-year revenue surged 36.4 percent, as the impact of acquisitions of power and retirement community assets—which are controlled by a venture with parent Macquarie Bank, in which the fund has a 40 percent stake—began to take hold. The strong fourth quarter pushed the trust’s full-year distributable cash flow per share up 6.8 percent and the payout ratio down to a considerably more modest 88 percent.

Overall power output was up 32.1 percent on the acquisitions as well as strong performance at the individual plants. Even the trust’s hydro facilities were strong at a 98.2 percent capacity rate versus 98.4 percent a year ago.

Important, management has affirmed a forecast for a similar performance in 2008, with very little variability for overall economic growth. That’s a very bullish picture, and it makes the current yield of well more than 12 percent a steal. Macquarie Power & Infrastructure Fund is a buy all the way up to USD12.

The Big Picture

Over the past couple weeks, we’ve seen some favorable market reaction to the numbers posted by our favorite trusts. ARC, in particular, has posted some strong gains, prompting me to raise its buy target to USD25 as noted above. Even trusts with strong fourth quarter numbers, however, continue to trade at almost ridiculously low valuations.

The most important thing to keep in mind at times like these is that the stock market is ultimately a weighing machine, not a popularity contest. Good numbers don’t guarantee an immediate buying wave and higher share price. In fact, even the best-performing trusts on the business front could sell off more in the next few months, if recession fears worsen.

As long as our trusts stay healthy, however, it’s only a matter of time before we see new highs for all of them. As I pointed out in February, the Trinidad Energy Services Income Fund’s (TSX: TDG-U, OTC: TDGNF) conversion to a corporation and accompanying dividend cut were a nonevent for its share price. In fact, Trinidad shares are now more than 10 percent above their level when the trust made that announcement.

Simply, 2011 taxation—so much in the mind of investors—is and has been more than priced in since the first few weeks of November 2006. What’s not priced in is good trusts’ ability to dodge the full rate and continue paying robust dividends well past 2011. More important, the ability of trusts backed by good businesses to grow rapidly to 2011 and beyond isn’t priced in either.

The bottom line: Sooner or later—as long as our trusts keep operating well—we’re looking at a massive boost in share prices. Meanwhile, we’re going to keep getting safe yields of 8, 10 even 12 percent and up, month after month. Those are fairly compelling reasons to hang in there if you own our favorites and to add positions incrementally if you don’t yet.

Note that our Maple Leaf Memo continues to report earnings for all trusts covered in Canadian Edge—including those outside the portfolio—as they appear. Make sure you’re signed up for this unique, complementary service, which also has commentary pertaining to trust issues, as well as on the markets and Canada in general.

Here are the Canadian Edge Portfolio companies that have yet to report, along with the scheduled dates. I’ll have a more complete discussion in the upcoming March issue, which will be e-mailed Friday, March 7.

Conservative Portfolio

• Algonquin Power Income Fund (TSX: APF-U, OTC: AGQNF) March 7
• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) Feb. 27
• Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF) March 20
• Artis REIT (TSX: AX-U, OTC: ARESF) March 27
• Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) March 26
• GMP Capital Trust (TSX: GMP-U, OTC: GMCPF) Feb. 28
• Keyera Facilities (TSX: KEY-U, OTC: KEYUF) Feb. 26
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF) March 11
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) March 7

Aggressive Portfolio

• Advantage Energy Income Fund (NYSE: AAV, TSX: AVN-U) March 20
• Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) Feb. 22
• Enerplus Resources (NYSE: ERF, TSX: ERF-U) Feb. 28
• Newalta Income Fund (TSX: NAL-U, OTC: NALUF) March 7
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) March 11
• Penn West Energy Trust (NYSE: PWE, TSX: PWT-U) Feb. 25
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) March 5
• Provident Energy Trust (NYSE: PVX, TSX: PVE-U) March 19
• TransForce Income Fund (TSX: TIF-U, OTC: TIFUF) Feb. 26
• Trinidad Energy Services Income Trust (TSX: TDG-U, OTC: TDGNF) Feb. 28
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) March 3