A Powerful Dividend

10/13/2006 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

For several years, income expert Roger Conrad has had tremendous success with his income trust recommendations. In his recent missive to subscribers, he offers up an investment that pays a fabulous dividend plus huge growth potential in rapidly expanding markets.

"Canadian essential service trusts combine fundamental strengths with paying distributions from pre-tax cash flow, rather than post-tax earnings. The result is an unmatched combination of high yield, safety, and modest long-term capital appreciation.

"Atlantic Power Income Fund's (ATPWF OTC) bailiwick is electric power. It pays generous dividends and its stability is a perfect antidote to the volatility of commodity-producing trusts.

"Atlantic Power yields 10% monthly. The trust's DBRS stability rating of STA-3 (low) is relatively moderate for the electric power sector, reflecting in part its smaller size and recent pattern of making aggressive acquisitions, including its latest, the purchase of 100% of Trans-Elect NTD Holdings Path 15 LLC, which in turn owns 100% of the Path 15 power line connecting electricity markets in northern and southern California. The line is essential to the power-starved state, faces no real competition and operates under a 30-year contract. Because Path 15 is a virtual monopoly, the Federal Energy Regulatory Commission (FERC) regulates returns.

"FERC is expected to rule during the next few weeks on a pre-existing rate case that could reduce the allowed return by as much as US $2.3 million, in a worst case. Happily, Atlantic has kept US $24 million of the US $85.5 million-purchase price in escrow until the issue is settled. However this turns out, Path 15 should be a stable source of income for Atlantic and a solid balance for its power generation portfolio. Expected initial cash flow from the purchase enabled the trust to boost its dividend 2.9%, the second boost since its November 2004 launch.

"Atlantic has interests in 14 power plants in high-growth US markets and a stake in one in Jamaica. The vast majority of Atlantic's output is sold under long-term contracts, typically with built-in capacity payments and fuel cost recovery. The result is steady cash flow, augmented with new asset purchases. Sales could also get a kick up when several existing contracts start to come due during the next few years, as excess power supplies continue to be soaked up nationwide. That spells more increases in the dividends ahead.

"As Atlantic is an income deposit security (IDS) traded in Toronto, rather than a conventional trust, the dividend is part equity and debt, which confuses brokers and taxation authorities. You'll have to keep on top of your broker to make sure you get full credit for the dividend. Buy Atlantic Power Income Fund up to US $10."

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