As promised, management of Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) announced its 2011 strategy Tuesday. The gist of the plan is as follows:

• Macquarie Power & Infrastructure will remain a trust and convert to a dividend-paying corporation sometime in 2010.
• The current distribution rate will hold until the end of 2009, as management had previously promised. That’s a monthly rate of CAD0.0875 per unit.
• Beginning Jan. 1, 2010, the distribution will be reduced to a monthly rate of CAD0.055 (CAD0.66 per unit on an annualized basis). This level is expected to result in an average payout ratio of 70 to 75 percent of distributable cash the five-year period beginning Jan. 1, 2010.
• The CAD0.055 monthly rate will hold after 2011, when MPT is anticipated to begin paying a 29 percent tax on taxable income.

Trading in shares was suspended immediately following the announcement, and selling picked up until the market close. Management held a conference call at 5 PM to discuss the developments and its strategy. Here’s my take.

First, the selling of Macquarie Power & Infrastructure shares is likely to continue in the near term as investors react to the news of the planned lower dividend rate as well as to other investors’ selling. Management’s strategy and assets are sound, however, so it’s unlikely to continue for long.

Second, after this cut, Macquarie Power & Infrastructure is still trading with a yield of well over 11 percent and at just 93 percent of the book value of its strong asset base. In US dollar terms, the share price is still nearly double the 52-week low it hit in November 2008.

But it’s barely half the level it held up until the credit crunch hit in the second half of 2008. That suggests a lot of potential upside, and not a lot of downside from here. And for three months investors will continue to receive the higher monthly rate of CAD0.0875 per unit.

Third, Macquarie’s moves, although painful now, put it in much better shape for growth in the coming years. As noted above, management anticipates a payout ratio of 70 to 75 percent of distributable cash flow for the five years beginning in 2010. That includes the projected tax increase, as well as major potential maintenance at the Cardinal Power Plant, currently the source of half of the trust’s cash flow.

Based on the conference call today, that seems to be an exceptionally conservative projection as well. Among other things, the numbers also assume a drop in distributions from the Leisureworld investment to plough more cash into that venture.

The lower payout is expected to save CAD20 million in cash outlays in 2010. That’s an amount great enough to allow the buyback of more than half of the outstanding convertible bonds issued by the trust that are due in 2010.

Other options for the cash include a further investment in Cardinal to prepare for a new sales contract in 2014 or a “small to mid-sized acquisition.”

Management professed repeatedly during the conference call its desire “to pursue growth opportunities that will diversify the Fund’s portfolio and extend its cash flow profile.” The fact that it’s targeting only those involved in essential services and with high barriers to entry is a clear sign it intends to continue a conservative approach to cash generation, another reason why the new dividend rate will hold and almost certainly rise after 2011.

The fund also has CAD85 million in available credit facilities to do deals as of June 30, 2009, and its parent, Macquarie Group (Australia: MQG, OTC: MQBKF), is quite familiar with potential targets.

Finally, it’s no secret a distribution cut has been anticipated in Macquarie’s high yield and low share price for some months. The payout ratio has routinely been over 100 percent of distributable cash flow, a level not sustainable long term even if there were to be no 2011 trust tax.

Given that, the reduction for 2010 is actually on the low side of reasonable expectations. Perhaps more important, it underscores management’s commitment to paying sizeable distributions well past Jan. 1, 2011.

Macquarie’s current asset base, including one of the largest wind farms in North America and the reliable Cardinal power plant, is strong. Moves to expand that portfolio have been thwarted over the past couple of years by the drop in share price, poor credit conditions and the lack of sellers of power and infrastructure projects.

But management has also shown itself to be patient in executing its strategy, which should pay off for shareholders in the long term.

As a result, I intend to stick with Macquarie Power & Infrastructure Income Fund, not only through whatever post-dividend-cut selling there is but well past 2011.