Longtime Canadian Edge Portfolio Conservative Holding Atlantic Power Corp (TSX: ATP, NYSE: AT) confirmed even worse than bad-case fears aroused by a Bay Street analyst last week when it announced fourth-quarter and full-year 2012 results late Thursday evening, Feb. 28.

Management slashed the dividend by 65.2 percent, from a monthly rate of CAD0.09583 to CAD0.03333 effective with the March payment that will be made on April 30. Shareholders of record as of Feb. 28 will receive a final payment at the CAD0.09583 monthly rate on March 28.

The stock, which has tumbled from north of CAD15 on the Toronto Securities Exchange (TSX) and USD15 on the New York Stock Exchange as recently as November 2012 to CAD10.26 and USD9.97, respectively, on Feb. 28, is likely to suffer another steep decline today, March 1, as the market digests this drastic dividend cut as well as what appears to be a subtle but significant strategic shift.

That’s on top of the slide from north of CAD12 in mid-February that was made worse when analyst Nelson Ng of RBC Capital Markets predicted in a Feb. 19 research note that Atlantic Power would have to cut its dividend by at least 30 percent to preserve cash for acquisitions.

Atlantic Power’s new payout policy obscures what were solid fourth-quarter and full-year 2012 operating numbers. And it blots the uniformly solid results reported by four other CE Portfolio Holdings on Thursday, including AltaGas Ltd (TSX: ALA, OTC: ATGFF), Artis REIT (TSX: AX-U, OTC: ARESF), EnerCare Inc (TSX: ECI, OTC: CSUWF) and Extendicare Inc (TSX: EXE, OTC: EXETF).

The Atlantic Power shift is without question one of the most disappointing outcomes of an earnings announcement during our time running Canadian Edge, which dates to July 2004. Atlantic Power has been a member of the CE Portfolio since October 2006, during which time we’ve experienced ups and downs.

At the same time, it drives home some hard lessons, among them that it doesn’t pay to load up on any one stock, no matter how high the yield, no matter how solid the underlying business appears. The corollary of this is that a diversified–and balanced–portfolio is the surest way to build wealth for the long term.

While Atlantic Power is locked in a downward spiral, EnerCare, for example was announcing a dividend increase, to CAD0.057 per share per month from CAD0.056. And Aggressive Holdings Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) and IBI Group Inc (TSX: IBG, OTC: IBIBF) were both posting solid rallies–IBI surging by 20 percent on Thursday–off post earnings-announcement lows.

But we’ve seen nothing like this from a company that maintained and grew its payout rate before, during and after the Great Financial Crisis as well as through its conversion from income trust to corporation. It did this by consistently adding assets that generated cash flow from contracts with solid counterparties.

The present scenario recalls in some ways the dramatic “outlook update” made by Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) in late 2011, when management of that company notified the market of a steep reduction in its 2012 revenue and cash flow forecasts due to rising costs and what proved to be just the emergence of problems related to its key Cardinal power plant asset.

Capstone didn’t cut its dividend on Dec. 6, 2011. But it did reduce its annualized payout from CAD0.66 per share, or 0.055 per month, to CAD0.30 per share, or 0.075 per quarter, in August 2012.

Capstone’s share price dove from above CAD6 in late November 2011 to CAD3.26 by Dec. 13, 2011. Atlantic Power is likely to see a similar swoon in the aftermath of its dividend cut announcement, on the order of 30 percent to 50 percent.

Atlantic Power is clearly entering a period of transition, which got underway with the January 2013 announcement of the sale of three Florida-based gas-fired power plants for net proceeds of approximately USD111 million.

As Mr. Ng of RBC Capital Markets suggested, Atlantic Power management is preserving cash in the interest of adding assets that will support longer-term growth and dividend sustainability.

Management noted in its statement announcing results and the new payout policy that it and the board had recently met to discuss “providing shareholders with an attractive total return, with a view to appropriately balance the income and growth components of total return to enhance long-term value.”

Crucially, management pointed out that “the mix of growth opportunities, and therefore allocation of the Company’s resources, has shifted towards earlier-stage construction and development projects, including some at a greenfield stage.” There is a longer lag time between capital investment, however, and the point at which such earlier stage developments generate cash flow that can in turn be distributed to shareholders.

Complicating management’s cash flow projections even further is the fact that negotiations with the government of the Canadian province of Ontario over the renewal of Atlantic Power’s Tunis project’s contract have no clear timeline for conclusion. Management described the outcome as “uncertain” and noted that “recent signals are increasingly challenging.”

The company’s other Ontario projects are also under pressure, with margins shrinking due to lower flows through a TransCanada Corp (TSX: TRP, NYSE: TRP) pipeline.

The Florida plant sales, the anticipated sale of the Path 15 transmission line in California, lower demand in New York that will impact the re-contracting of the Selkirk project as well as “the impact on cash needs of a greater share of the Company’s growth investments (relative to the mix of investments in the past) requiring cash upfront while cash returns from these investments could lag by 12 to 24 months” have also forced management’s hand.

The latter factor is the key element in Atlantic Power announcing a new target range for its payout ratio of 65 percent to 75 percent, whereas the 2012 payout ratio was 100 percent, within management’s guidance range of 96 percent to 102 percent.

There is also the consideration of significant debt maturities in 2014 and 2015.

Atlantic Power forecast Project Adjusted EBITDA in the range of USD250 million to USD275 million for 2013, up from USD226 million in 2012 due primarily to a full year of contributions from Canadian Hills and Meadow Creek and nine months contribution from Piedmont.

Management expects 2013 distributable cash of CAD85 million to USD100 million, down from USD132 million in 2012 due to the decrease in cash flow from discontinued operations, primarily the Florida Assets, partially offset by a full year of contributions from new projects.

As previously noted, the new target payout ratio for 2013 is 65 percent to 75 percent, down from 100 percent for 2012. On a pro forma basis, reflecting the lower dividend for a full year and excluding cash from discontinued operations, the actual 2013 payout Ratio is expected to be approximately 100 percent, based on the midpoint of cash flow guidance.  Management expects the 2014 payout ratio to be 75 percent to 85 percent.

Management also announced the adoption of a “shareholder rights plan,” which indicates it too anticipates a sharp decline in the share price that could attract opportunistic potential acquirers.

As for what were actually solid operating results, management reported that 2012 cash flow from operating activities was USD167.1 million, up from USD55.9 million in 2011. Distributable cash for the year was up to USD131.6 million from USD79 million.

Management attributed the increases to contributions from the 18 projects acquired as part of the Capital Power Income LP acquisition in November 2011 and improved distributions from several other projects.

Atlantic Power received USD275 million in cash distributions from projects, which exceeded guidance of USD255 million to USD265 million.

Of course the major takeaway from the company’s announcement is the new payout policy and the dividend cut effective with the March distribution, which will be made April 30.

Atlantic Power management will hosted its fourth-quarter and full-year 2012 earnings conference call today at 8:30 am ET. We were on the call and will have further commentary later today.

As we note above, four more Canadian Edge Portfolio Holdings announced fourth-quarter and full-year 2012 earnings numbers. And the news from this quartet was uniformly positive. We’ll include an update of these numbers and analysis in a Flash Alert this afternoon, along with notes from the Atlantic Power conference call.

For now, Atlantic Power is a hold.

What’s likely to happen today is a lot of panic selling. Another stock in the CE How They Rate coverage universe, Superior Plus Corp (TSX: SPB, OTC: SUUIF), halved its monthly distribution in late 2011 and fell from above CAD12 to below CAD6 within weeks.

Superior Plus closed at CAD11.06 on the TSX on Thursday, Feb. 28, rewarding investors who were patient enough to wait out the carnage. We’re not predicting that Superior’s experience will be Atlantic’s. But Atlantic management has a track record of acquiring and managing solid assets for the long-term benefit of shareholders. Timing issues are working against it right now, and perception issues will plague the stock, particularly today. We’ll be sharply attuned to management’s live commentary this morning.