Some Numbers

That seems to be what our Canadian trusts are saying to the relentless selling of their shares of recent weeks, at least as far as their distributions are concerned.

I don’t know the last time I saw a company yielding over 20 percent raise its dividend. But that’s exactly what Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) handed us today, in the form of an 8 percent increase.

The move was made with the closing of the previously announced acquisition of the Auburndale power plant in Florida. The 155 megawatt natural gas-fired cogeneration unit is expected to add $20 to $23 million to cash flow in 2009 and $8 to $10 million a year from 2010 to 2013.

The $134.5 million deal was financed from cash flow, $55 million from Atlantic’s credit facility and another $35 million in non-recourse debt, which amortizes to zero when the current sales contract expires. Atlantic has now extended to 2015 the time during which its current raft of projects and contracts will finance its distribution, and should continue to extend that date as it locks in future cash flows.

Atlantic’s distribution increase once again answers any questions about its cash flows and ability to sustain its business during the worst North American economic environment in decades, as well as its ability to access capital in a tight environment. It also illustrates an attitude on the part of management that appears to be catching on across the spectrum of trusts backed by strong businesses. Mainly, if the share price is going down, they’ll still ensure investors continue to get dividends.

In an emotional market like this one, it’s hard to say when this approach will really start attracting buyers. Atlantic shares tacked on a mid-teens gain today in the wake of this news. But that’s only after rather sudden and vicious decline that started shortly after it released third quarter earnings Nov. 12.

What we can say is that Atlantic’s actions prove its underlying business is still strong. And many others are making much the same statement. Market history shows these are the kinds of investments that money flows back into when the macro situation inevitably stabilizes and emotions calm.

Atlantic’s focus on long-term power sales contracts to US utilities is of course a formula that should ensure revenue stability under all but the absolute worst market conditions, since no regulated utility has ever defaulted on an independent power contract. But there are many more trusts out there that are also saying “so what” to current market conditions, and are showing they have the financial and operating muscle to back up their words.

Staying Strong

This week, for example, similarly battered Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) issued financial guidance for 2009, affirming its ability to pay its now 26 percent dividend yield for at least another year. CEO Gregory Smith said, “The Fund’s portfolio is continuing to deliver strong performance, which reflects the stability of our regulated and contractually-defined infrastructure assets throughout the economic cycle.”

The fund’s expectation is to maintain a 100 percent payout ratio in 2009, which includes capital spending. That’s also a testament to its ability to finance its operations and growth without accessing capital markets or even its parent Macquarie Bank, which has been answering its own critics with a series of bold moves.

Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF) affirmed its distribution and business stability in a press release dated Nov. 19. The trust, whose shares have been taking daily hits, also announced a plan to buy back up to 10 percent of its shares. And it also stated “that the current unit monthly distributions of $0.1033 per unit are not in any way threatened by the current economic downturn.” Those are words I’ve never heard from any investment yielding 21 percent.

Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) shares have held up better than most. But the trust’s yield has nonetheless risen to more than 11 percent. One reason, based on some of the calls and emails I’ve received seems to be a misperception that, one, the Canadian oil sands region is shutting down and, two, that the trust is at risk to a big loss in revenue because of that.

To be sure, oil sands activity has slowed with oil cracking $50 a barrel this week and some players announcing cutbacks in development. Pembina’s exposure, however, is strictly through capacity-based contracts–revenue from which isn’t affected by throughput. Rather, the only way it’s at risk is if the counterparty is unable to pay. And in this case, the main one is the Syncrude venture, operated by a division of ExxonMobil (NYSE: XOM) and backed by a half-dozen major oil companies with the financial power to dwarf most national governments. The company also has a contract with Canadian Natural Resources (TSX: CNQ, NYSE: CNQ) for its newly constructed Horizon Pipeline, but there’s nothing to indicate any worry here either.

Finally, Pembina reiterated this week that it expects to maintain its current dividend rate “post-2010 and through to at least 2013.” Again, today’s sellers may not believe it, but the trust’s actions will continue to vindicate those who stick with it.

Still Growing

Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF) was the final trust in the Canadian Edge Portfolio to report third quarter earnings. And the news was well worth the wait.

The shares have been all over the map, as investors speculated about the impact of falling grain prices on sales. Yet the trust rang up another explosive quarter, with sales rising nearly 50 percent and earnings by more than 10 percent.

Demand remained strong and improvements at the Westfield facility, which was a severe drag last year, again paid off with improved capacity and efficiency. The dividend payout ratio was just 55 percent, providing sound backing for the increase earlier this year.

Regarding its outlook, management had this to say in its report:

Strong sales of portable grain handling and aeration equipment, which account for approximately two-thirds of the Fund’s total sales, have resulted in low inventory levels throughout the Fund’s distribution network. In addition, demand in the Fund’s segment of the agricultural space remains strong due to an increase in on-farm storage and successive large corn harvests. As a result, fourth quarter demand for portable grain handling and aeration equipment is expected to significantly exceed historical levels. Management anticipates that strong demand for portable grain handling and aeration equipment will continue into 2009.

That’s very positive guidance in such a volatile market. And it’s a good sign that this trust has carved out a very profitable niche that will carry it through the current turmoil. One reason: Many of its products are used in the production of ethanol, the use of which is mandated by law and for better or worse is in no danger of going away.

One of the bigger surprises for me during the past few months has been the lack of distribution cuts at the Canadian Edge Portfolio’s more focused natural gas plays. That’s likely due to two things. First, the run up in natural gas prices was far less pronounced than the surge in oil prices in the first half of 2008, and the decline in the second half while severe has been less so than oil’s as well.

Second, Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV), Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF), Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) and Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) have been playing things very close to the vest for over two years now, since gas prices peaked and began to decline in 2006. All of them treated the surge in gas earlier this year as a one-time windfall, rather than a permanent benefit. They cut debt and funded expansion projects, rather than ramped up dividends.

As a result, they’re in better shape to weather this than they were at the beginning of 2008. Equally important, as long as management is able to fund capital spending and debt reduction, it’s willing to say “so what” to falling share prices, rather taking the attitude shareholders should be rewarded with cash if the share price isn’t cooperating.

This afternoon, I spoke to a reader who asked if I really thought these trusts we own are going to recover and aren’t just going to zero. This kind of verification is not only the best possible assurance for the distributions, but it’s also the best guarantor that we will ultimately see recovery in these inherently volatile shares.

It’s worth noting again that a large chunk of our losses in US dollar terms for trusts have been due to the steep slide in the value of the Canadian dollar. The Canadian dollar is a petro currency, so its fortunes follow those of oil. That means when energy prices fall, we get hit in the currency as well as the local market.

On the other hand, it also means that when energy prices recover, so will the Canadian dollar. And the rise could be quite stunning, as Canada is running a surplus with the rest of the world and its government is in surplus. That’s obviously a stark contrast with this country, which will run a deficit of nearly 10 percent of GDP in 2009 as the government throws everything but the kitchen sink into reviving the economy.

Of course, there’s no way of knowing when this will happen. And just because our trusts’ managements are sustaining distributions in the face of falling share prices doesn’t guarantee the timing for when buyers will come back to the local market.

Case Closed

Over the past few weeks, it appears that we’ve been seeing a lot of selling of individual trusts by closed-end mutual funds. One of these is EnerVest Diversified Income Fund (TSX: EIT-U, OTC: EVDVF).

Like all closed-end funds, EnerVest has historically employed leverage to increase its income stream and therefore distribution above what it would be simply based on dividends paid by individual holdings. Management has been generally judicious about how much debt it’s taken on. But the sudden drop in Toronto Stock Exchange–hence the value of EnerVest’s portfolio–pushed debt above the fund’s limits by late October. The result is management has used cash to cut leverage and has also sold some of its holdings.

In September, the fund announced a warrant offering, allowing Canadians to buy additional shares and a cash dispensation to compensate US investors for not being able to participate. This week, it pulled that offering due to lack of minimum interest.

Had it been successful, the proceeds would have eliminated any further leverage concerns for EnerVest. As it stands now, more sales of assets are possible. But management has nonetheless affirmed its monthly payout of 7 cents Canadian and the shares actually rallied with the announcement, probably because cancellation eliminated what had become a dilutive transaction for existing holders.

In my view, EnerVest is still as good as any fund for holding Canadian trusts, though I prefer to own individual issues instead. The larger point, however, is that closed end funds have become net sellers of trusts, not on investment merit but on liquidation need. And that’s been a negative for trust prices.

Again, market history shows this kind selling is always short lived. In the near term, it can fuel a vicious cycle as closed-end fund selling drives down prices and therefore the value of closed-end fund portfolios, mandating more selling to cut leverage. At one time, there were more closed-end funds that owned trusts than trusts themselves. So unfortunately there may be more of this to come, though it may already be petering out.

In a market like this one, this kind of thing may seem like just one more cross to bear and some may find that too much emotionally. For those in that camp, my advice is to do whatever it takes to get the emotion out of your decisions.

That may mean turning off the television or it might mean selling a few particularly weak positions for cash. But the kind of statements these trusts are making in the face of market adversity is exactly why we want to keep owning them. This is not the time for wholesale liquidation, any more than it is to start doubling down. Stay the course.