Thanks to conservative financial practices–namely little reliance on debt financing–Canadian energy producing trusts are in good shape to dodge the worst of the credit crunch. And thanks to using the cash windfall from higher energy prices in the first half of the year to reduce debt, distributions are proving more resilient than expected.

Energy producing trusts, however, can only do so much to factor out the impact of volatile energy prices. The deeper and longer this recession is, the lower oil and gas prices may sink, and the more likely it is we will indeed see bigger distribution cuts. The same also holds true for other natural resource trusts and dividend-paying corporations.

In my view, the possibility of further distribution cuts is well priced in for almost every energy and resource trust. Even the strongest bear yields in the double-digits, and half of the group pays out more than 20 percent. A dozen energy producers trade at book value or less, as do almost all the How They Rate entries tracked in the Natural Resources section.

Also, as we’ve seen twice this year already, energy and natural resources markets can and often do turn on a dime. For example, they started the year ice cold, caught fire in early spring, topped out in summer and have since plummeted to levels not seen since the late 1990s.

We’re going to have to get some visibility on a bottom for the economy before energy and natural resources prices can take off again. But the same supply and demand challenges that pushed them up before the financial crisis are still in effect today. In fact, by sending commodity prices into a tailspin, the crisis effectively reversed the progress toward conservation, alternatives and development of new supplies that will ultimately be needed to move the balance of market power back to the consumer.

In other words, a recovery for energy may still be some months off. But it’s inevitable. And when it does occur, energy producers and other natural resource trusts and dividend-paying corporations will be off to the races, just as they were in the first half of 2008. That’s the reason we’re sticking with our energy trusts, despite the thrashing they’ve taken over the past several months.

There is a group of trusts, however, that’s almost equally beaten down but has far more revenue security–and therefore doesn’t face the risk of distribution cuts if the recession lasts longer than expected: Strong business trusts.

We already hold a large number of these in the Conservative Holdings. The best proof of their worth is third quarter earnings. I analyzed roughly half of these in the November issue and highlight the remainder in this issue’s Portfolio section. To a recommendation, all posted solid third quarter numbers, and most guided toward a strong fourth quarter and 2009 as well.

One of those reviewed in November, Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF), got some additional good news this month for its stability. Mainly, the takeover of major shareholder BCE (TSX: BCE, NYSE: BCE) appears to be on the rocks after a major accounting firm refused to issue a solvency report for the post-buyout company. A successful leveraged buyout of the phone giant would very likely have forced BCE to unload its stake in Bell.

Failure of the deal would eliminate that risk. That’s another solid reason to buy Bell Aliant Regional Communications Income Fund up to USD25 if you haven’t already.

This month, I’ve added three more recession-resistant trusts to the Conservative Portfolio. Two are reviewed in the High Yield of the Month section: Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) and CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF).The third–Innergex Power Income Fund (TSX: IEF-U, INGRF)–is spotlighted below, along with eight other solid trusts.

All would be worthy additions to any portfolio and are tracked in How They Rate.

Of all the industry groups represented by Canadian income trusts, electric power generation easily enjoys the most revenue security. As long as a company or trust runs its power plants efficiently, it will have a market for its output–and steady cash flows. Power is typically sold under long-term contracts to either giant utilities or government-run entities, which often both build in price increases and include automatic adjustment for change in fuel costs as well.

Power trusts can still get into trouble by taking on too much debt, if there’s trouble at a facility or from a currency squeeze if it has extensive operations in the US. Primary Energy Recycling (TSX: PRI-U, OTC: PYGYF), for example, ran into problems at its Harbor Coal facility that forced it to suspend and ultimately permanently reduce its distribution last year.

More recently, Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) has been literally unable to buy the wood waste needed to run its two biomass plants, due to the meltdown of the Canadian timber industry in the wake of the shutdown of the US homebuilding sector. And Algonquin Power Income Fund (TSX: APF-U, OTC: AGQNF) dramatically slashed its payout this fall, as it was having trouble accessing capital markets to fund growth.

Power trusts that navigate these pressures, however, are easily the most secure bets on the market. And with yields and book value multiples at multiyear lows, they’re also bargains.

Atlantic Power Corp’s (TSX: ATP-U, OTC: ATPWF) 8 percent dividend increase last month should put to rest any fears about its underlying business. So should the recent statements from management at Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF) and Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) affirming their payouts for 2009 and beyond, as well as their resiliency in the face of the recession and financial crisis.

Atlantic Power Corp, Great Lakes Hydro Income Fund and Macquarie Power & Infrastructure Income Fund are all strong buys.

With a well-run fleet of carbon-neutral power plants, Innergex Power Income Fund is every bit as solid. The trust’s portfolio is roughly 73 percent hydroelectric power plants and 27 percent wind. Plants are managed by Innergex Renewable Energy under a long-term agreement with the fund.

Third quarter earnings were stellar. Riding historic operating efficiencies, favorable weather conditions and the acquisition of two wind farms, generation surged 41 percent. That spurred a 48 percent jump in operating revenue and a 25 percent increase in distributable cash flow–after capital spending–driving the payout ratio down to 89 percent. That performance was even more remarkable given that the third quarter is historically a seasonally weak one when cash flow rarely covers the distribution.

Abundant water flows get some credit and are likely to even out over time with weaker flows. But management has pointed out several factors that should keep profits on an even keel going forward, even if the recession should deepen.

First, all of Innergex’s power is sold under long-term contracts to public utilities, which historically have been basically recession proof. The contracts now in place have an average weighted life of 15.6 years, providing superb revenue security. The plants are also very young, with an average age of six years, compared to estimated useful lives of 25 to 50 years.

As for exposure to the credit crunch, it’s also virtually nil. Innergex has no credit facilities coming due until 2013, eliminating the need to refinance in the near to intermediate term. Moreover, of that 2013 facility, CAD9.2 million of the total CAD10 million is unused, meaning it could be paid off easily with cash on hand and remains a useful financing tool for future acquisitions.

Rounding out the balance sheet details, some 92 percent of facilities are based on fixed rates, and the trust’s effective interest rate is just 4.43 percent. The balance sheet includes a cash reserve of CAD25.1 million, enough to finance some 10 months of distributions even if the trust didn’t earn a dime.

Those are some pretty compelling statistics. So is the fact that Innergex sells for just 1.3 times book value, yields more than 10 percent and has enjoyed a wave of insider buying over the past month at higher than current prices. Buy Innergex Power Income Fund up to USD12.

I’m not adding it to the Portfolio this issue, but Northland Power Income Fund (TSX: NPI-U, OTC: NPIFF) is a compelling choice for new money. The trust also yields more than 10 percent and sells for just 1.6 times book value after taking a tumble this year. But third quarter results were rock solid and dispelled any hint of weakness, a big reason Bay Street favors its shares.

The trust’s third quarter payout ratio came in at just 80.8 percent, its portfolio of cogeneration and wind farm plants again ran well, and it realized a gain from an indirect investment in the Panda-Brandywine plant. Full year distributable cash flow is now expected to be in line with the CAD1.28 per unit realized in 2007, with upward pressure on selling prices expected to lift net going into 2009.

Northland’s management has said the credit crisis “is expected to have minimal impact on the fund and its operations other than the costs under the fund’s operating and acquisition credit facility are expected to increase when the facility is renewed in May 2009.”

The uncertainty with rolling over the facility is one reason Innergex is a slightly lower risk bet. But notably, Northland’s debt-to-equity ratio is just 34.3 percent, very low considering the capital intensive nature of the fund’s assets. The bottom line is the price is low and so is risk. Buy Northland Power Income Fund up to USD14.

Food services isn’t quite as recession-resistant as electricity. But Colabor Income Fund (TSX: CLB-U, OTC: COLAF) and North West Company Fund (TSX: NWF-U, OTC: NWTUF) continue to post very steady results by operating distribution businesses from scale.

Colabor’s big move was in 2007, when it completed the takeover of a rival. The deal was so large that it violated the “safe harbor” rule for the number of shares trusts can issue without triggering the tax before 2011. As a result, Colabor has been paying the trust tax since 2007. Ironically, there’s been no impact on its dividend to date, which in the third quarter was only 74 percent of distributable cash flow.

Third quarter revenue was up 47.6 percent year-over-year, and cash flow came in at more than double 2007 levels. Bay Street is bullish, and so are insiders as the trust yields nearly 16 percent. Buy Colabor Income Fund up to USD8.

North West operates on a different reporting schedule than other trusts, with the result that earnings are often announced a month or more after others’ numbers are in. But the retailer to remote areas has consistently reported solid numbers, year in and year out, and there’s little sign that formidable record is in any way at risk.

Second quarter net income was up 41 percent on a 34.6 percent increase in sales and a 41.7 percent jump in food sales. The trust continues to open new facilities in Canada as well as in the US (Alaska), which now accounts for roughly a third of sales. This one’s been around for a long time, and it will be around a long time more. Yielding around 8 percent and priced at just 69 percent of annual sales, North West Company Fund is a solid buy up to USD16.

The movie business in the US is notoriously cyclical. In Canada, however, it’s continued to weather the weakening environment, at least as long as quality movies are produced and screened. That’s proven to be a winning formula for Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF), the owner and landlord of 129 theatres and 1,317 screens in Canada operating under a range of brands from Cineplex Odeon to Scotiabank Theatres.

Third quarter revenue was off 2 percent from a year earlier as attendance sank 6 percent. That hit cash flow by 5 percent and distributable cash flow by 10.2 percent. Those results, however, had a very tough comparison with record 2007, which was boosted by The Order of the Phoenix, the latest installment of the Harry Potter series and the lack of a comparable blockbuster this year.

Looking behind the numbers, attendance remained strong, revenue per patron actually rose and the trust’s payout ratio still came in at just 47 percent, providing a tremendous cushion to the distribution for safety. The trust has also made great strides diversifying revenue streams via on-screen advertising and is increasingly the dominant player in Canada movie-going.

As for credit concerns, Cineplex renegotiated all of its credit facilities in 2007. Current agreements now extend to 2012, and the trust has hedged out interest rate risk as well.  That’s a big reason why all nine Bay Street analysts covering the trust are bullish. Buy Cineplex Galaxy Income Fund, which now yields more than 9 percent, up to USD18.

Safe Yields in Stranger Places

The three remaining trusts worthy of special mention all hail from businesses not traditionally known for being resistant to recessions. But they’ve nonetheless built operations that have continued to grow despite the weakening economy, while paying outsized distributions and staying away from credit problems.

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) depends on the health of the global market for sulphuric acid. That’s been extremely robust of late. Third quarter revenue rose 175 percent, spurring a 65 percent surge in gross profit and a doubling of earnings before non-cash items and interest expense. The payout ratio for the quarter was just 33 percent.

Looking ahead, distributable cash flow after maintenance capital expenditures is now expected to come in at CAD2 a unit for the 12 months ended Sept. 30, 2009. Management went on to state with its fiscal 2008 earnings release the long-term nature of the bulk of its contracts will mitigate the impact of potential weakness in the market for sulphuric acid, as well as the global nature of its market. Both factors should help the trust to meet its goal of “sustaining our CAD1.20 per unit annual distribution rate over the long term despite the peaks and valleys of commodity pricing.”

The trust’s business is capital intensive. Management, however, has mitigated the trust’s exposure to the credit crisis by extending its credit lines to Aug. 2, 2011, on stable terms. The trust has also taken advantage of recent Canadian dollar weakness to reduce its long-term exposure to currency swings, as much of its business is now conducted outside of Canada. Insiders have been consistent buyers of the shares, which now yield nearly 14 percent.

Buy Chemtrade Logistics Income Fund up to USD13 if you haven’t already. Note that management has consistently maintained it will sustain its lofty distribution long after 2011 trust taxation kicks in.

IBI Income Fund’s (TSX: IBG-U, OTC: IBIBF) core business of providing planning, design and implementation of operations and other consulting services may not sound recession-resistant. But thanks to a blue chip portfolio of corporate and government clients–as well as a series of well-placed strategic acquisitions–the trust’s core business is doing a pretty good imitation of that.

Third quarter revenue soared 63.3 percent from year-earlier levels, and net earnings ticked up 21 percent, as the trust grew its consulting services business with both acquisitions and by adding “organically” to existing operations. The payout ratio based on distributable cash flow fell to just 59.4 percent from 71.5 percent a year ago.

Meanwhile, backlog of fee volume remained equivalent to eight months of activity at the current rate, providing a solid cushion should the core business experience any slowing. And the company is among the scant few employers anywhere in North America that’s actually hiring personnel.

As consulting is not a capital intensive business, the debt IBI does have on its books is primarily the result of what’s been needed for expansion. Cash flow coverage of interest expense, therefore, stands at 9.5-to-1 and isn’t a significant risk.

The trust’s yield of 14 percent and price of just 90 percent of book value are clearly out of step with its lack of risk. That’s one reason insiders have been avid buyers in recent months and why Bay Street remains so bullish on the trust’s prospects. IBI Income Fund is a buy up to USD15.

We already hold one transportation company in the CE Portfolio, newly converted corporation TransForce (TSX: TFI, OTC: TFIFF). As reported in November, the company’s earnings are strong, and it continues to execute on its strategy of consolidating smaller fare in Canada’s transport sector, though it’s received little recognition for its success in the marketplace of late. TransForce is a buy up to USD8. 

I’m sticking with TransForce for now, but new money may be better off in rival Mullen Group Income Fund (TSX: MTL-U, OTC: MNTZF). Unlike TransForce, Mullen hasn’t yet converted to a corporation, and management is holding its cards on the issue close to the vest.

Also unlike its rival, Mullen has been consistently expanding into western Canada, particularly in transport services to the oil and gas industry, over the past several years. That’s a strategy that’s had its ups and downs. Third quarter earnings, however, are a pretty clear indication the trust’s efforts are getting traction. Revenue surged 34.8 percent and income soared 53 percent, as the trust successfully absorbed the purchase of three oilfield services competitors, and its oil sands services business continued to grow. Funds from operations were up by more than 50 percent, remarkable during a quarter when overall economic growth slumped.

Also, despite its acquisitive nature, Mullen has kept the debt monkey off its back. The majority of obligations has been placed in private debt markets at “favorable rates” and doesn’t start to mature until June 30, 2016. That should be plenty of time for credit conditions to improve. It’s also a conservative base from which the trust can manage further consolidation of its still highly fragmented industry.

Mullen hasn’t really gotten any more respect for its efforts than TransForce. It does, however, yield somewhat more at 15 percent, and management has made noises to the effect it intends to maintain as much of that as possible in 2011, again a contrast to TransForce’s large distribution cut to fund growth. Trading for just 78 percent of book value, Mullen Group Income Fund is a buy up to USD12.