Atlantic Power Corp (TSX: ATP, NYSE: AT) accounted for the only dividend cut in the How They Rate coverage universe last month. The stock wasn’t on the Dividend Watch List at the time, and the cut was both surprising and painful.

We’ve provided quite a bit of information on Atlantic’s move over the past week or so. We highlighted the initial news in a March 1 Flash Alert, Atlantic Power Disappoints, Four Other Holdings Don’t. We followed up with more information later that day in the Flash Alert Four Solid Reports and More on Atlantic Power. And on March 6 we released Atlantic Power: What Happened, which highlighted our interview with CEO Barry Welch and our ongoing strategy for this stock.

The actual fourth-quarter and full-year 2012 results were generally in line with previous guidance.

Revenue and cash-flow growth reflected the successful addition of new assets, including the 2011 Capital Power LP merger and last year’s successful opening of the Canadian Hills wind project.

And distributable cash flow covered the payout by roughly 1-to-1, in the middle of the target range set by management at various times last year.

What changed were four things in guidance for 2013 and beyond:

• Conditions got worse in Florida. The company was unable to re-contract the Lake project at a price that made sense to run it. Rather than lose money running it, the company sold for a price that looked good, exiting a very tough illiquid market but sacrificing 2014 cash flow in the process.
• Opaque ongoing negotiations between other power producers and the Ontario Power Authority convinced management it would probably earn less from five plants in the province, the first of which faces a December 2014 contract expiration.
• Weakness in the New York power market continues. Management used current visibility on prices to reduce assumptions for power sales from the Selkirk power plant after September 2014.
• With cash flow likely to be lower in 2014, for the foregoing reasons, a dividend cut was the surest way for Atlantic to garner needed capital for earlier-stage projects, particularly in renewable energy. This expansion is essential for the company to reduce dependence on the near-term wholesale power market and grow the business.

The company stated it has no plans to raise its dividend again in the near future. Instead it will focus additional cash flows on bringing down debt and investing in projects that stabilize results. But the lower rate is stress-tested, even assuming at least two to three more years of weakness in the North American wholesale power market. And Atlantic is benefitting from becoming an operating company with the acquisition of the former Capital Power LP.

The key challenge is dealing with Ontario and New York while finding and executing new renewable energy projects. There’s no doubt this dividend cut marks the biggest failure in the company’s nine-year history. But it’s not a deathblow, and management has a clear path to reaching its growth goals.

These goals are the key to share price recovery. Atlantic is now a hold, pending its progress toward meeting certain benchmarks, which include:

• the successful completion of the sale of the Florida plants at the stated price;
• the successful syndication of the Canadian Hills financing;
• making at least one new project announcement;
• the successful completion of the Path 15 power line sale;
• and reporting a payout ratio in line with guidance.

My view is you’ll eventually see a company with a much larger portfolio of power plants, virtually all operated under long-term contracts. Near-term growth is going to come in large part from renewable energy, which has favorable economics thanks to US government support likely to extend the next four years at least. And Atlantic does have the expertise to carry those through.

Management will have a credibility problem until it executes on its goals. But the company’s bonds have remained steady, which means solvency isn’t a risk. And Canadian Edge readers have certainly seen any number of comeback stories over the years start from even less favorable places.

Atlantic Power, now an Aggressive Holding, is a hold.

Here’s the rest of the Dividend Watch List. Not all members are sells, though the most conservative investors should avoid all of them.

Enerplus Corp (TSX: ERF, NYSE: ERF) is now off the List, thanks to robust fourth-quarter and full-year 2012 earnings. For more on this company, see this month’s Best Buys feature. Buy up to USD15.

EnerVest Energy & Oil Sands Total Return Trust (TSX: EOS, OTC: EOSOF) is also off, as the portfolio is now a dividend producing group of companies no longer paying so much out of capital. But there are still better funds more worthy of your capital. Hold.

AvenEx Energy Corp’s (TSX: AVF, OTC: AVNDF) merger with Pace Oil & Gas Ltd (TSX: PCE, OTC: PACEF) and Charger Energy Corp (TSX: CHX, OTC: SVWYF) to form Spyglass Resources Corp is still on. Management has apparently settled a dispute with dissident shareholders, and all three companies will vote on the amended agreement on March 26.

The problem is the combined entity is still going be a very small company, with approximately 18,000 barrels of oil equivalent per day of production. And there’s no clarity at this time on what the post-deal dividend will be. Sell.

Bonavista Energy Corp’s (TSX: BNP, OTC: BNPUF) primary business is producing natural gas liquids (NGLs), so prices are everything. Unfortunately, as the 28 percent fourth-quarter drop in NGLs prices demonstrates, there are some real headwinds here.

The payout ratio was just 37 percent for the quarter, but that’s largely because of the January dividend cut. My view is this is still a solid franchise, but it’s a worthy holding only for investors who can live with some dividend risk. Hold.

Cathedral Energy Services Ltd’s (TSX: CET, OTC: CETEF) fourth-quarter earnings were much weaker than results earlier in 2012 due to the sharp drop in Canadian drilling activity.

Management is maintaining the dividend and projects a rebound in 2013 due to expansion in Texas and Oklahoma, but it will have to execute. Hold.

Chorus Aviation Inc (TSX: CHR/B, OTC: CHRVF) announced another solid quarter for dividend coverage, with a payout ratio of 63 percent. But any positive carryover was immediately dispelled by news that Air Canada (TSX: AC/A, OTC: AIDIF) was treating the recent arbitration decision as a reason not to give relief on fleet aging costs.

The CEO has since warned he’s no longer confident in guidance that the dividend is sustainable and that the battle with Air Canada could “get ugly.” Sell.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF) announced a 2.7 percent drop in fourth-quarter revenue combined with higher costs, triggering a 15.8 percent decline in cash flow. That swung funds from operations (FFO) well below year-earlier levels, though they were up slightly from the third quarter.

The good news FFO covers the reduced dividend by a 1.3-to-1 margin, or a 77 percent payout ratio. But there’s still the matter of disposing of the diagnostic imaging division and controlling costs. Hold.

Data Group Inc’s (TSX: DGI, OTC: DGPIF) fourth-quarter results appeared sufficient to cover the reduced dividend rate, which is effective with the April quarterly payment. And adjusted cash flow was actually 5.1 percent higher, indicating business is still profitable.

The company’s accounting, however, hasn’t gotten any easier to decipher, and we’re still taking about a print business trying to go digital. Hold.

Extendicare Inc’s (TSX: EXE, OTC: EXETF) ability to navigate the morass of the US health care system continues to amaze me.

As we pointed out in the March 1 Flash Alert Four Solid Reports and More on Atlantic Power, the company actually managed to improve dividend coverage in the fourth quarter by strategically cutting costs to offset Medicare rate uncertainty.

Management has apparently even prepared the company for the impact of sequestration, mainly the 2 percent cut in Medicare payments that kicked in March 1.

I like the company but I want to see some numbers post-sequestration before taking it off the Dividend Watch List. Buy under USD8.

FP Newspapers Inc (TSX: FP, OTC: FPNUF) reports on March 14 and, given the high level of insider ownership, I’ll be surprised if there’s a dividend cut.

Equally, however, it’s hard to see how they keep paying at the current rate indefinitely with a shrinking business. Sell.

Freehold Royalties Ltd’s (TSX: FRU, OTC: FRHLF) fourth-quarter revenue was up 1 percent, and cash flow from operating activities was actually 7 percent higher on a per-share basis.

That provided another quarter of relatively narrow dividend coverage; the payout ratio was 72.4 percent. But it was enough for management to maintain the current rate of CAD0.14 per month.

The positive surprise was average daily production from the company’s lands rose 22 percent, offsetting a 17 percent drop in realized selling prices. The key for the dividend in 2013 is those figures staying roughly in balance.

That seems more likely after these results, but with the payout ratio so high there’s little margin for error. Hold.

GMP Capital Inc (TSX: GMP, GMPXF) at last turned the corner in the fourth quarter, swinging to an earnings gain and cutting the payout ratio to 29 percent.

The company is holding market share in its financial niches. But I don’t want to take it off the List until we see the impact of recent asset sales. Hold.

IBI Group Inc (TSX: IBG, OTC: IBIBF) won several prestigious awards for its work over the past month.

The important thing for investors, however, is the release of fourth-quarter and full-year 2012 results on March 21. We expect positive news and will have a Flash Alert after results are released. Buy under USD8.

Labrador Iron Ore Royalty Corp (TSX: LIF, OTC: LIFZF) has maintained the regular quarterly cash dividend of CAD0.25 and the CAD0.125 “special cash” portion for at least another quarter. That’s despite a steep drop in second-half 2012 cash flow due to sharply lower iron ore prices.

The payout ratio was 79 percent but that could rise further if weakened conditions persist in 2013. Hold.

Manitoba Telecom Services Inc (TSX: MBT, OTC: MOBAF), like all small players in the communications sector, is suspect in an age where capital is king.

The rise in the fourth-quarter payout ratio to 77 percent and decline in wireless revenue are disturbing trends for this company, which cut its dividend most recently in August 2010. Sell.

New Flyer Industries Inc (TSX: NFI, OTC: NFYED) announces results on March 20 and should produce enough cash flow to bring the payout ratio below the third-quarter figure of 107 percent.

Also positive is the purchase of the after-parts operation of Daimler Buses. But this business is going through some very tough times now. Hold.

Northland Power Inc (TSX: NPI, OTC: NPIFF), by management’s reckoning, won’t earn anything close to its current dividend until 2014. That’s the same calculation that triggered dividend cuts at Atlantic Power and Just Energy Group Inc (TSX: JE, NYSE: JE) this earnings season.

I like the business mix, but there’s clearly no pricing in dividend risk in this stock. Hold.

Poseidon Concepts Corp (TSX: PSN, OTC: POOSF) stock has been has been suspended on the Toronto Stock Exchange, and the Special Committee has sacked management. Get out the next time you have a chance to. Sell.

Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF) no longer trades at a big premium to net asset value, mainly because the market price has plummeted.

Barring a sudden and massive rally for small to intermediate-sized Canadian mining stocks, the huge dividend is going to basically pay down the value of the fund, unless it’s slashed first. Sell.

Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSSF), per usual practice, won’t report its earnings until almost the end of the current quarter, with an estimated date of March 21.

Weakness in the Canadian dollar may help, but the real variable is volatile coffee prices. Sell.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF) actually came in with some decent production numbers, and the small oil and gas producer trades below a conservative valuation of its net asset value of CAD7.75 per share.