There’s nothing like a reliable business to weather unsteady times. And although they come from opposite sides of the industry risk spectrum, High Yields of the Month ARC Energy Trust (TSX: AET-U, AETUF) and Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF) definitely have that in common.

Both date their origins as trusts back to the 1990s, well before the boom during the middle of this decade. As a result, in contrast to many more recently created and now-defunct trusts, they were constructed on conservative financial principles for long-term sustainability. That’s served them very well during the trust stress tests of the past two years and will continue to do so as long as these challenging times last.

New Conservative Portfolio addition Great Lakes is the largest power trust in North America, with 1,021 megawatts of hydroelectric generating capacity. The trust’s fleet encompasses four distinct geographic regions, each with its own watershed characteristics: British Columbia, New England, Ontario and Quebec. Solid conglomerate Brookfield Asset Management owns 50.1 percent of the shares and provides financial backing.

Great Lakes’ output is sold to large utilities and governments under contracts with an average duration of 14 years. That translates into exceptionally steady revenue with basically no risk of default, even in a slowing economy. Third quarter cash flow before non-cash items, for example, nearly doubled on a 46 percent jump in revenue. That drove the payout ratio based on distributable cash flow down to just 64.6 percent.

Great Lakes’ cash flow has been affected by one major variable over the years: water conditions. Strong third quarter results were driven by record production, only partly offset by weaker results in British Columbia. Just a year ago, however, the trust’s third quarter payout ratio surged to 134.8 percent, as power generation fleet-wide slipped to just 81 percent of its long-term average.

The good news: Thanks to low debt and ample cash reserves, management was more than able to continue paying the distribution without a hitch, as well as fund its capital projects. The Dominion Bond Rating Service confirmed its strength at the time, affirming the trust’s STA-2 (high) stability rating. In fact, the trust rater actually removed Great Lakes from the “developing” category, where it had been placed following the Halloween 2006 trust tax announcement.

The ability to weather bad times without a hitch is the major attraction of Great Lakes Hydro shares in the current market. But the trust promises to consistently grow revenue as well by investing in similar ultra-reliable projects. In fact, management now believes it will be able to literally outgrow its 2011 tax liability, maintaining the same distribution in 2011 that it pays in 2010 whether it’s organized as a trust or corporation.

Over the past nine months, Great lakes invested CAD8.4 million in capital expenditures and another $1.9 million in “major” maintenance projects. Much of the work has involved upgrading existing sites to boost production and better control costs. But management has also begun to look at acquisitions, particularly as a way to boost cash flow and help defer taxes starting in 2011. More growth is likely to come from higher rates in several areas as contracts are renegotiated more in line with tighter markets.

Financing remains very conservative, both in terms of new projects and protecting cash flows against currency swings. With regard to the latter, management’s approach has been to try to rely on natural hedges such as matching US dollar outlays against inflows rather than with derivatives.

For the former, capital spending has returned to a more normal level with the recent wind down of the Cedar Project. Refinancing needs are light over the next several years, and the trust has CAD23.3 million in the bank, with an additional CAD26 million in credit facilities. And majority owner Brookfield has proven a reliable backer as well, spinning off projects in the past at good prices to help its investment expand cash flows.

It all adds up to an exceptionally steady investment. The shares have bounced up some from my recommendation a couple of weeks ago. But with these strengths, they’re worth every cent of the premium they trade to other energy infrastructure trusts. Buy Great Lakes Hydro Income Fund up to USD20.

Great Lakes’ power business has been ultra-steady this year. But ARC Energy Trust has been rocked by historic volatility. Oil and natural gas prices are less than half their midsummer levels, yet gas is still higher than where it began the year. That’s partly because energy prices have been increasingly in the hands of speculators this year. But the credit squeeze and resulting economic/market panic has also taken a severe toll on prices.

That kind of pricing environment has made long-term planning extraordinarily difficult, if not impossible. Through it all, however, ARC’s management has kept a steady hand on the tiller, treating both price spikes and plunges with equal equanimity.

Rather than really ramp up the distribution in the first half of the year as energy prices surged, the trust shared its good fortune with investors in the form of two “top-up” increases, each at the rate of 4 cents Canadian per month. It was then able to unwind the top-ups and prices fell, without cutting into the core rate of 20 cents Canadian per month.

A further plunge in energy prices could still force a further reduction in ARC’s payout. Third quarter earnings, however, were very encouraging. The trust posted a 5.3 percent increase in daily output of barrels of oil equivalent (BOE) and held operating costs relatively steady at CAD10.19 per BOE. The payout ratio was just 68 percent, and only 61 percent excluding some one-time factors.

Realized selling prices for oil and natural gas came in at USD114 per barrel and USD8.68, respectively. Those are somewhat above current levels, which would argue for a further contraction of cash flows in the fourth quarter and uptick in the payout ratio. ARC has two key advantages: very low debt and a stake in one of the most prolific areas of natural gas development in North America, the Montney play in northeastern British Columbia.

Last month, ARC announced a dramatic increase in proved-plus-probable reserves from its lands in the region, setting a target of a 13 percent increase in overall production by 2010 to 72,000 BOE per day. The trust has ramped up its capital budget for exploration and development in the region by 10 percent to CAD585 million for 2009. Half of that will be spent in the Montney area, but there are also numerous opportunities in other key regions such as Pembina.

Increasing levels of capital spending add up to greater financing needs. But with net debt of just 0.8 times annual cash flow and 13 percent of total capital, there’s a lot of room to take on more without significantly weakening the balance sheet. And in the words of ARC management, this new development “sets the stage for a defined period of profitable growth for ARC.”

Simply, the trust’s success since inception has been built on developing large, long life pools of oil and gas. These new results from Montney ensure it will have the reserves to continue that approach for a long time to come. That’s why the shares have run up so hard since the top-up distribution cut was rolled back. And it’s why they’ll run a lot further in the years ahead, even as investors continue to enjoy a yield of nearly 15 percent.

Again, as is the case with all oil and gas producer trusts, energy prices are everything. Strong operations and conservative management can only get a trust so far if prices are falling out of bed. The good news is ARC’s 10-year plus reserve life, low debt, balanced output (50 percent oil, 50 percent gas in the third quarter) and geographic diversification give it the ability to ride out the low points, keeping investors in the game to scale the heights when conditions turn up again.

My view is still that an energy price rebound is inevitable. Prices have steadied the past couple of weeks. But we may not have seen the ultimate bottom for oil and natural gas in this down cycle.

On the other hand, we haven’t seen the kind of conservation, switching to alternatives and new discoveries that ended the 1970s bull market in energy either. In fact, the recent price drop has most definitely discouraged any move in that direction. That means a return to the supply and demand squeeze we saw earlier this year as economic conditions improve.

When that happens, ARC and other trusts will return to their mid-2008 levels. In fact, my guess is they’ll wind up heading a lot higher. One of the nice things about owning ARC is it’s certain to be at the head of the pack when that happens. ARC Energy Trust still rates a buy up to USD30 for those who don’t already own it.

For more information on ARC Energy Trust and Great Lakes Hydro Income Fund, visit the How They Rate table. Click on the “.UN” symbol to go to the website of our Canadian partner MPL Communications for press releases, charts and other data. These are substantial companies, so any broker should be able to buy them, either with their Toronto or over-the-counter (OTC) symbols. Ask which way is cheapest.

Note that both trusts’ dividends are considered qualified for tax purposes in the US. Tax information to use as backup for filing them as qualified—whether or not there are errors on your 1099—is listed on the Canadian Edge Web site, under the menu item Income Trust Tax Guide.

As is customary for virtually all foreign-based companies, the host government—in this case Canada—withholds 15 percent of distributions paid to US investors at the border. This tax can be recovered by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation, though unrecovered amounts can be carried forward to future years.

Both trusts will be subject to trust taxation beginning in 2011. Both, however, should be able to mitigate much of the prospective burden, ARC with tax pools and Great Lakes by the nature of its asset base and its US operations. During Great Lakes’ third quarter conference call, management stated its intention to maintain the current payout past 2011 by a variety of means, including expanding into wind power.