Founded in 1962, new Conservative Holding Colabor has emerged as a leading distributor of food and other consumer products, serving primarily Ontario, Quebec and Atlantic Canada. Customers include major grocery chains, convenience stores, restaurants and hotel chains.

Converted to a trust in May 2005, Colabor is essentially a highly profitable middleman, moving products from producers to its customers. Demand for its products is basically recession-resistant. Consequently, management is able to boost profits by utilizing its superior scale and efficiency, as well as seeking out similar opportunities for growth.

Success is well demonstrated in Colabor’s solid first quarter earnings. Sales rose 42.7 percent over 2008 levels, triggering a 44.2 percent jump in cash flow. In addition, margins rose from 2.97 percent to 3.01 percent, demonstrating management is absorbing added scale well in this historically low margin business.

Distributable cash per unit after income taxes–the bottom line for every trust–rose 17.2 percent. That added up to a first quarter payout ratio of 87.8 percent, down from 98 percent a year ago. First quarter payout ratios are traditionally higher than those at other times of the year due to seasonal factors.

Colabor divides its operations into two major segments: Distribution operations (47 percent of first quarter sales) and Wholesale operations (53 percent). The Wholesale side of the business essentially buys products and distributes them to other wholesalers throughout Canada under long-term contracts. It’s divided into two sub-segments, food sales (73 percent of division sales) and retail (primarily extremely recession resistant consumer nondurables) product sales. The business earns its revenue primarily based on markup from selling at dealer list prices and from rebates offered by producers.

The Distribution business involves sales of some 8,000 food products from Colabor’s warehouses directly to some 3,000 businesses. While the Wholesale operation in focused on Quebec and Atlantic Canada, Distribution’s primary base of operations is Ontario. Profits also depend on markup of sales to end customers over dealer prices and rebates. Half of sales are covered under long-term contracts.

Both segments utilize long-term agreements to hold down costs and have the ability to pass through those costs to customers as well. Total debt to annualized cash flow is 1.66-to-1, barely half the 3-to-1 ratio prescribed in various debt covenants. Cash flow to interest expense, meanwhile, is 5.71-to-1, versus a prescribed minimum of 3.5-to-1.

As of the end of the first quarter, some CAD61 million of the CAD100 primarily credit line was outstanding. This amount won’t be due or up for renegotiated terms until 2011.

Since its 2005 conversion, Colabor’s most transforming event was its acquisition of Summit Food Services Distributors, completed in January 2007. The deal was underway when Finance Minister Jim Flaherty made his infamous pronouncement of prospective trust taxation on Halloween 2006 and the accompanying declaration that any trust issuing more than a prescribed number of shares would be taxed immediately.

Rather than back off the takeover, however, management elected to go ahead. The result is Colabor today, alone of all trusts, is being assessed income taxes–but it’s also much larger and more profitable than ever. Thanks to its structure and the unique nature of its business, the company had only CAD90 million in current income taxes for the first quarter, an effective rate less than 1.5 percent of its earnings before amortization and income taxes. And being freed of share issue limitations has allowed it to continue adding scale through acquisitions.

The upshot: Management states “cash flows from operating activities and the funds from operating credits are sufficient to support planned capital expenditures, working capital requirements, monthly cash distributions of CAD.0897 per unit and current income taxes and will comply with the banking syndicate’s ratio requirements.”

This assertion is certainly borne out in the first quarter numbers, and it’s a powerful endorsement of the trust’s 11 percent-plus yield. Selling for barely book value–warehouses plus inventories–and for just 11 percent of burgeoning sales, Colabor Income Fund is a buy up to USD10.

In contrast to newcomer Colabor, Pembina Pipeline Income Fund is a charter member of the Canadian Edge Portfolio. Throughout that time, its unit price has had some severe ups and downs. But the trust itself continues to reinvent itself into a more profitable company quarter after quarter.

First period numbers were again solid, with no real surprises; the trust was right in line with Bay Street guidance. Oil sands infrastructure was again the standout operation, as revenue nearly doubled on the addition of the Horizon Pipeline capacity-based contract.

Like Pembina’s contract with the Syncrude partnership–headed by ExxonMobil’s (NYSE: XOM) Canada unit and traded as Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF)–its contract with Horizon’s Canadian Natural Resources (TSX: CNQ, NYSE: CNQ) is based on capacity, not throughput. As long as the customer is in business, Pembina is guaranteed revenue, regardless of oil sands economics.

That’s also the arrangement for the Mitsui and Nipisi pipeline, which is slated to come on stream in 2011 and is already nearly 90 percent under long-term contracts with Canadian Natural Resources and EnCana (TSX: ECA, NYSE: ECA).

The fact that these projects are still going forward smoothly at a time of low energy prices and environmental concerns about oil sands is a testament to the strength of Pembina’s relationships in the energy industry, its ability to finance at economic rates and management’s ability to strategically locate assets. That’s also true of the trust’s other two divisions, Midstream and Conventional Pipelines.

First quarter revenue at both of these operations was relatively flat, while operating expenses and major pipeline maintenance at the Peace River system pushed up costs and hurt cash flow. Throughput at the conventional pipelines was also affected by the recession, dipping 8.1 percent from last year’s levels, though that was mostly offset by higher rates. In addition, some of the shortfall was due to maintenance-related outages and will be reversed in subsequent quarters.

Due to the Peace River costs, the overall first quarter payout actually exceeded distributable cash flow. That, however, is also expected to reverse throughout the year, as new assets come on line and costs return to normal levels. In fact, the full-year payout ratio–including capital costs–is still expected to come in between 80 and 90 percent.

Meanwhile, cash flow should take yet another leap forward on Pembina’s latest acquisition: The CAD300 million purchase of the Cutbank gas gathering network in Alberta from Talisman Energy (TSX: TLM, NYSE: TLM). Cutbank is expected to add CAD40 million in annual cash flow once the purchase gains needed regulatory approvals, now expected in June. The division will dramatically augment the company’s midstream business by adding 9 compressor stations and over 180 miles of gathering pipeline.

The fact that Pembina can pull off such a major purchase in this environment–issuing both stock and bonds to finance–is further evidence of its great strengths. There’s no meaningful amount of debt coming due until 2014 and spreads have been low and stable, reflecting the stable nature of the trust’s underlying business.

Dominion Bond Rating Service gave its stamp of approval to the deal by affirming the trust’s debt/equity funding mix and credit rating, stating that the purchase should reduce operating risk by further diversifying cash flow. It also expects the addition to “enhance Pembina’s ability to fund its current per unit distributions of CAD.13 per month.”

Pembina isn’t likely to hold a conference call until the Cutback deal is completed. But there’s plenty of good news here to sink your teeth into, not the least of which is the 11 percent-plus dividend yield paid monthly, now on the 25th. Buy Pembina Pipeline Income Fund if you haven’t already up to USD18.

Both Colabor and Pembina are subject to trust taxation beginning in 2011 but have insulated their distributions. Colabor, in fact, has been paying the trust tax since the acquisition of Summit over a year ago. As a result, it will actually benefit as the trust tax is reduced to 28 percent in 2012 from the mid-30s now.

Pembina had previously maintained it would be able to hold its current distribution payment steady until at least 2013 based on the cash flow from its energy infrastructure asset portfolio and plans for growth. Now, with the acquisition of the Talisman assets, it’s extended that statement to an indefinite time frame, even if it does elect to convert to a corporation in 2011.

The upshot is neither trust has much 2011 risk. In fact, the lifting of uncertainty as that date approaches–and the fact that dividends aren’t set to be cut–should give their shares a lift.

Both pay dividends that are considered qualified for income 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–can be accessed on the CE website via the Income Trust Tax Guide under the heading “Links to US Tax Statements.”

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.

For more information on Colabor and Pembina, visit How They Rate. 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 US over-the-counter (OTC) symbols. Ask which way is cheapest. Click on the trusts’ names to go directly to their websites.