Utility Atlantic Power is abandoning an only-in-Canada corporate structure in a bid to build a larger shareholder following in the U.S. market.
The owner of 14 U.S. power plants, Atlantic Power is one of the U.S. companies that used the income trust template to go public back on the Toronto Stock Exchange in 2004, raising $320-million. The decision to go public in Canada reflected the premium that domestic investors were willing to pay for companies that channelled cash to investors in a tax-efficient manner. Atlantic Power went public by selling what's known as income participating securities, or IPSs, and sold $320-million of units.
As a U.S. company, Atlantic Power will avoid the onerous tax regime that Canadian income trusts will encounter in 2011. However, its IPS structure is something of a corporate orphan, and is now seen as overly complex. So late Tuesday, Atlantic Power announced plans to convert to a traditional common share structure, and list on the New York Stock Exchange.
UBS Securities and BMO Nesbitt Burns advised on the planned metamorphosis, and BMO Nesbitt Burns gave Atlantic Power's board a favourable fairness opinion on the conversion.
Atlantic Power's single largest unitholder, the Caisse de dépôt et placement du Québec, plans to vote its 19 per cent stake in favour of conversion, as do officers and directors in the utility, which has plants in nine U.S. states, and a California transmission grid. The utility said income-seeking domestic investors will sail through these changes, and RBC Dominion Securities analysts concurred with this view.
"The conversion will not impact the current $1.09 per unit distribution, as the company has sufficient operating losses to shield meaningful cash taxes for roughly five years," said RBC Dominion in a report on Wednesday. "Further, management's previous guidance that cash flow is sufficient to maintain the distribution into 2015 remains unchanged."
RBC Dominion raised its target price on units to $9.25 from $8.50 on news of the planned conversion, which will be put to a vote on Nov. 24.
As part of the conversion, Atlantic Power will pay $15-million to bring what's now an external management contract into the fold. The executives who stand to receive this payment for joining the company will be paid out over three years.
Andrew Willis