On February 28, Atlantic Power (AT) reported its Q4 and full year 2012 results. Included in the report was the announcement of a dramatic shift in Atlantic Power's dividend strategy and 2013 financial outlook. Atlantic Power will now be paying a $0.033 dividend starting with the March payment, a 65% cut from previous levels. Its 2013 guidance was also negative, with distributable cash flow "DCF" much lower than 2012 levels. In addition, Atlantic Power also announced that it had adopted a shareholder rights plan -- also known as a poison pill. This plan will greatly lower the chance of a possible takeover or buy out of Atlantic Power. Shares of Atlantic Power have declined sharply to this series of news, falling 30% as of this writing.
For Q4 2012, Atlantic Power reported a net loss of $58M, or $0.50 per share, compared with a loss of $0.27 per share for Q4 2011. For FY 2012, Atlantic Power reported a loss of $112M, or $0.97 per share, compared with a loss of $0.50 per share for FY 2011. For FY 2012, the dividend payout ratio was 100% compared to 109% for FY 2011. The payout ratio for FY 2012 was within Atlantic Power's guidance of 96% to 102%.
Even though Atlantic Power reported a loss for the year, this was not the cause for Friday's sell-off. Atlantic Power was an income stock, with a high dividend yield paid monthly. By reducing the dividend 65%, Atlantic Power has basically thrown that away. Even at a $7.00 share price, Atlantic Power would only yield 5.7%.
As recently as November 6, 2012, Atlantic Power had been giving reassurances about the sustainability of the dividend. Below are a few quotes from CEO Barry E. Welch regarding the dividend:
From the November 6, 2012 Q3 Conference Call (link)
The anticipated decrease in cash flow after Lake and Auburndale's PPAs expire in '13 will be partially offset by increases to our annual cash flows from the new projects, which include: $16 million to $19 million from Canadian Hills, starting in 2013; and $8 million to $10 million from Piedmont, also starting next year. In addition, we anticipate cash flow increases of $14 million to $18 million from our 50% interest in the Orlando project starting in 2014, after the expiry of its gas supply contract. These aggregate increases total $38 million to $47 million. In addition, we expect there'll be further contributions from ongoing accretive acquisitions and dispositions, which further support the company's continued ability to pay its dividend.
With respect to our growth targets and assumptions, we see the company on a trajectory to invest approximately $300 million to $400 million per year of equity capital in transactions that would be levered at approximately 50%. That translates to about $600 million to $800 million a year in asset value. When we translate that investment assumption into megawatts of renewable or gas-fired plants, we're very comfortable with how many deals we need to do in relation to the market for deals that are out there. We expect a target -- to continue to target a combination of operating projects, as well as development and construction stage projects. And in terms of cash accretion assumptions relative to our carrying cost of capital, we expect the development and construction projects to offer a few hundred basis points of accretion with operating projects at tighter levels. For all of these reasons taken together, we're confident in our ability to sustain the current dividend level.
From the August 10, 2012 Q2 Conference Call (link)
In total, we estimate the increase in our distributions from Orlando versus our estimate of 2013 cash flow to be approximately $14 million to $18 million on average between the years of 2014 and 2018. Other increases to cash flow include the previously guided $8 million to $10 million expected cash distributions from our Piedmont project for each full year of operation starting in 2013, $16 million to $19 million from our Canadian Hills project for each full year through 2020, at which time we expect distributions to increase, and improved cash flows from some of our gas-fired projects due to the impact of low natural gas prices on the unhedged portion of our gas purchases. It is these increases, plus expected contributions from continued accretive acquisitions that provide our comfort level with the sustainability of the current dividend.
Another cause for Friday's sell-off was the abysmal 2013 guidance that Atlantic Power provided:
Note that the projected 2013 adjusted EBITDA is actually expected to increase to $250 - $275M, from the $226M reported in 2012. Note that the EBITDA metric excludes the earnings generated by the recently sold Florida assets.
However, what I found to be the most worrisome was the dramatic decline in projected distributable cash flow (DCF). However, even with the increase in EBITDA, DCF is expected to decline to $85 - $100M, from the previous 2012 level of $132M.
With the 65% dividend reduction, Atlantic Power now projects a 65%-75% dividend payout ratio for 2013. However, this payout ratio is very misleading since it includes approximately $44M in cash flow from discontinued operations. Indeed, the discontinued operations represented $77M, or 58% of the 2012 DCF. Excluding the cash flow from the discontinued operations, the 2013 dividend payout ratio would be 100% and the 2012 payout ratio would have been 240%.
Let us do some quick math:
According to the Q3 2012 10-Q, the discontinued operations (which were located in the Southeast segment) generated $69.9M in EBITDA for the first 9 months of 2012. Now, when we annualized this, we arrive at $93.1M in EBITDA. Now, subtracting the Orlando operations (which were not sold) of $9M EBITDA, we arrive at $84.1M million in FY 2012 EBITDA. Atlantic Power claims that these $84.1M in EBITDA generated $77M, or 58%, of its 2012 DCF. That means that the other $226M in EBITDA generated only $55M, or 42%, of its 2012 DCF. In terms of gross margin, the discontinued operations generated 91.6%, while the other operations generated only 24.3%. Let me just say that I find this hard to believe. Atlantic Power needs to provide a more detailed breakdown of how it determines its cash available for distribution and how each project affects this metric.
Finally, Atlantic Power adopted a shareholder rights plan, also known as a "poison pill" provision. It will effectively be giving Atlantic Power the power to deter takeovers, which in my opinion, can only be seen as an attempt by management to keep their jobs.
Atlantic Power has failed its shareholders. The CEO has repeatedly misled its shareholders about the safety and sustainability of the dividend. Why did they raise the dividend early in 2012 only to cut it now? Nowhere in any of its investor presentations did Atlantic Power bother to mention that about 28% of its assets generated 52% of its cash available for distribution. I have sold my shares in Atlantic Power. I do not wish to own a company that blatantly misleads its shareholders.