Conservative Holding Atlantic Power Corp (TSX: ATP, OTC: ATLIF) reported fourth-quarter and full-year 2009 numbers on the high side of management’s guidance range for distributions from its projects. The payout ratio for 2009 was 87 percent. On a conference call to discuss results CEO Barry Welch reiterated Atlantic’s guidance that it would sustain its current payout rate “into 2015 without any positive contribution from potential acquisitions or organic growth opportunities.”

The fourth-quarter payout ratio ticked up to 87 percent, consistent with a management forecast that has the metric in triple digits in 2010 and 2011 before higher cash flow from Selkirk kicks in and pushes the ratio down in 2012. This is a function of the complex accounting for Atlantic’s methods of acquiring and capitalizing its power generation, transmission and distribution assets.

A decline in adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) is attributable to one-time factors and the results of acquisitions and dispositions of assets–all of which were anticipated in management’s forecast for 2009 and have been accounted for in its projection for the sustainability of the current payout until 2015.

Adjusted EBITDA from continuing operations at Atlantic’s power projects was USD28.2 million for the fourth quarter, USD128 million for the year. A new 10-year tolling agreement with a lower contract rate took effect Jan. 1, 2009, at Pasco, and natural gas costs were higher at Lake. Selkirk won’t pay out to shareholders until its non-recourse debt agreement is satisfied, while capacity was down at Chambers for reasons in (planned major maintenance) and beyond (economic factors) management control.

Cash flow available for distribution declined by USD29.2 million in 2009, though decreases at the project level were largely anticipated, as noted above. Atlantic has a USD100 million credit facility, USD50 million of which is available to add projects via acquisition. In addition, management has USD20 million to USD30 million in cash to use to grow the business–some of which it’s using to fund an investment the development of two biomass-fuel power plants. The power-purchase agreement (PPA) for the first of two plants to be built by Rollcast Energy passes on fuel costs to the off-taker.  

Basically, the assets in place and the long-term contracts that define the cash flow they generate will support Atlantic’s dividend for the next several years. For 2010 management forecast USD70 million to USD77 million in project distributions–USD23 million to USD30 million below 2009 levels–and a payout ratio of 100 percent.

Barry Welch noted during the Tuesday morning conference call that the market for acquisitions is recovering, and so are credit markets. With its newly simplified capital structure and de-levered balance sheet, Atlantic is poised to bounce once it hits the New York Stock Exchange sometime in the second quarter. Its liquidity position already improved March 22, when it was added to the S&P/Toronto Stock Exchange Composite Index.

Significant costs during the quarter included USD6 million for the termination of the Arclight management agreement, USD4.5 million associated with the corporate conversion and USD3.7 million related to retiring the convertible debentures that formerly comprised part of the old IPS.

Over the next several years Atlantic must renegotiate terms for several key projects. But this is a focused management team that knows what it’s doing–how to navigate the ins and outs of federal stimulus funds, state-level power regulation, company-specific pressure points to put its power assets in the best position to generate long-term, stable cash flow. The experience gained by transitioning Pasco from a power-purchase agreement to a less lucrative tolling agreement is useful for future dealings in Florida at the same time it results in the elimination of commodity-price exposure.

Management will continue to add projects in a way that will make it a reliable dividend-payer for years to come; growth won’t be done “at the sacrifice of stability for the dividend,” in the words of Barry Welch. Dividend increases will be based on acquisitions, but then only if it makes sense in context of all other projects.