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Rushing to protect itself from any potential takeover suitors, Atlantic Power Corp. hastily installed a shareholder rights plan late Thursday after the company slashed its dividend and reported weak results.
The move by the power producer is a page out of Just Energy Group Inc.'s playbook, which rushed to put a poison pill in place after also cutting its dividend and reporting bad earnings.
At Atlantic Power, the dividend was slashed about 65 per cent, and the stock is down 30 per cent Friday. Since peaking in early November, the shares have lost just over half their value.
The culprit: a deteriorating earnings outlook. The company's dividend was already in risky territory, accounting for 100 per cent of distributable cash in 2012, and softer expected earnings made it simply unsustainable. The new dividend, 40 cents per share annually, amounts to payout ratio that the company believes will fall between 65 per cent to 75 per cent in 2013.
But the cut is a bit of a head scratcher. It was only 18 months ago that Atlantic actually raised its dividend. So what happened?
Management blamed it on two major changes, one of which relates to its Canadian operations.
At this point, Atlantic has no update on the status of its Tunis project in Ontario, which is up for renewal in 2014. "That process is running significantly behind the government's timetable and is by design not at all transparent," chief executive officer Barry Welch said on a conference call Friday.
On top of that, the company said it's also costing more to transport power from Ontario, and that's eating into its margins.
Florida assets sales will also eat into future earnings. After Atlantic Power discovered that it did not win a bid to build a major power plant in Florida, the company decided to sell its three assets in the state. Selling these assets cuts into future cash flows that would have helped to sustain the dividend.
Despite the grim outlook, management tried to assure investors that there is growth potential, particularly through acquiring both operating and mid-to-late stage development projects.
However, just in case, they've put a poison pill in place because the company's incredibly cheap. However, they insist it isn't the result of a known takeover bid or proposal.
(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)
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Tim Kiladze