Atlantic Power Corp (TSX: ATP, NYSE: AT) has closed its purchase of the former Capital Power Income Fund LP. The deal boosts the company’s generating capacity by 143 percent to 2,116 megawatts, adds plant operating employees to the payroll for the first time and is immediately accretive to cash flow.

As promised when the deal was first announced, Atlantic is increasing the monthly dividend by 5 percent, effective Nov. 5. The new rate is CAD0.0953 per share per month.

The new Atlantic now has interests in 30 power plants in 11 US states and two Canadian provinces as well as a 52-megawatt biomass project under construction in Georgia and the 84-mile Path 15 power line in California. It also holds the majority interest in Rollcast, a biomass plant developer with several projects under development. Atlantic is now incorporated in British Columbia, headquartered in Boston and has a growing base of individual and institutional shareholders (22.3 percent of ownership) on both sides of the border.

If there was a fly in the ointment on this transforming deal, it’s that Atlantic was forced to finance it under difficult market conditions. The October public offering was successful in raising CAD168 million after underwriters exercised the “overallotment” option. But the offer price of USD13 was somewhat below the USD14.86 per share average price of the stock over the past six months. The debt offered via a private placement two weeks later, meanwhile, raised USD460 million, fully financing the deal. But the senior note due Nov. 15, 2018, carries a rather hefty coupon rate of 9 percent.

In my view, how the company’s numbers are and are not affected by the cost of this financing will be the key catalyst for its stock price in the coming quarters. Management does apparently have a few options for calling the new notes before maturity. But investors are likely to keep a sharp eye on just how much of a burden they are, as well as how much if any the additional 12.65 million shares in circulation will dilute the cash flows that are financing the 8.5 percent-plus dividend.

Given the fear level in the market, management is going to have to prove its case that this deal enhances Atlantic’s profitability as well as its scale. A solid set of numbers this Friday–when the company releases third-quarter results–will certainly help. But as the deal closed a month after the end of quarter, management’s answers to questions during the Nov. 14 conference call are likely to be even more important.

Anytime a company does a deal of this magnitude, there’s plenty of uncertainty. Offsetting that is the fact that the Capital Power assets are complementary to Atlantic’s, and integration efforts have been ongoing for four months. The company has retained 100 percent of operations personnel and plant managers.

With financing costs now locked, management still expects the deal to be accretive to cash flow, an assertion it has firmly backed by following through on the promised dividend increase. And as it has proven year-in, year-out, this is a business where future cash flow is highly transparent and predictable, as all generation is essentially sold under long-term contracts that currently have an average remaining life of 9.1 years.

In the news release accompanying the deal’s announcement, CEO Barry Welch restated his intention of “take advantage of the broadened base of support to deliver additional accretive acquisitions to our shareholders.” That seems to indicate Atlantic will be using its better scale to make more growth-boosting acquisitions.

Probably the best news at this point is the bar of investor expectations looks pretty low with the stock trading near USD13. If management continues to manage its risks as well as it has in the past, it will have no problem beating them handily, and the stock will quickly recover the mid-teens level it held earlier this year.

Atlantic Power remains a buy up to USD16 for those who don’t already own it.

More Good Numbers

Three Canadian Edge Conservative Holdings and one Aggressive Holding announced earnings on Monday. Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) posted another record quarter, as revenue grew 9.1 percent, net operating income margin ticked up to 59.3 percent from 58.7 percent and normalized funds from operations per share rose 2.7 percent to CAD0.388 . That pushed down the payout ratio for the quarter to just 72 percent.

The third quarter is usually a highlight for apartment landlords in Canada, as utility costs are generally far lower. As a result, payout ratios based on normalized funds from operations tend to be higher in other quarters. These results, however, do have quite positive portents for results in the fourth quarter and beyond, for example a 1.4 percent rise in average monthly rents and a rise in occupancy to 98.8 percent. Net operating income–which doesn’t include the impact of acquisitions–rose 3.7 percent.

As for acquisitions, the company completed CAD289 million in deals over the past 12 months. A successful equity offering last week raised CAD151.7 million to repay the lion’s share of CAD198 million outstanding under its credit line, which was initially used to make the purchases. That, in the words of CEO Thomas Schwartz, “significantly strengthened the balance sheet and positioned ourselves to capitalize on future investments.”

On the property level, the REIT has refinanced CAD173 million in mortgages year to date. The average maturity is 7.3 years and the weighted interest rate just 3.57 percent, well below the rate on its maturing mortgages. Meanwhile, ancillary revenues–including fees for parking, laundry and antennas–rose by 12.7 percent.

Suite turnovers boosted rents a further 1.6 percent per suite during the quarter, accelerating from a 1 percent growth rate a year ago. That includes a 0.8 percent boost in still-lagging Alberta. And operating expenses as a percentage or revenue fell to just 40.7 percent from 41.3 percent a year ago, reflecting a series of efficiency measures to cut utility and insurance costs and geographic diversification into lower tax areas.

Debt-to-capitalization fell to 54.48 percent from 59.82 percent a year ago. The average weighted maturity of property mortgages rose to 5.5 years from 4.6 years, and the average rate on those loans fell to 4.63 percent from 4.91 percent a year ago.

The Canada Mortgage and Housing Corporation insures some 96.4 percent of the portfolio, up from 95.3 percent a year ago. And the REIT has interest rate hedges in place for CAD312 million in mortgages maturing between now and June 2013 at 10-year terms and rates between 3 and 3.62 percent.

The upshot: Both financial and operating policies are at least as conservative and recession-resistant as they were in 2008, when the REIT basically sailed through the worst recession/market crash/credit crunch since the Great Depression. And that’s despite robust growth, as management has taken advantage of market softness to add more high quality properties.

Trading slightly below my target of USD20, Canadian Apartment Properties REIT is ripe for the picking by conservative investors.

EnerCare Inc (TSX: ECI, OTC: CSUWF) blew the doors off its third-quarter results, with a 27 percent jump in revenue on a six-fold boost in submetering revenue. Cash flow surged 13 percent, and net earnings more than doubled.

The payout ratio, meanwhile, fell to just 49 percent and management announced a return to dividend growth with a boost in the monthly rate to CAD0.055 per share.

The dividend increase is relatively slight at 1.9 percent. But it’s the first since the company’s cut-less conversion from income trust to a corporation this year. That signals not only that management is comfortable with its future as a dividend-paying taxable entity, but that it’s confident in the company’s ability to grow profits for the long term–and that it intends to share the wealth with investors.

That’s extraordinary for any company still yielding more than 8 percent. And in my view it’s yet another demonstration of how investors are still over-pricing risk for many companies. It’s also a good reason for those who don’t already own EnerCare to step up to the plate now, while it still sells below my target of USD8.

Turning to the rest of the numbers, the company improved customer retention at its still-core waterheater rental business by 21 percent. Rental income was basically flat for the quarter, even as the company slashed selling, general and administrative expenses for the rental business by a phenomenal 36.1 percent. Loss on disposal of equipment also dropped by a sharp 18 percent, as the company finds more ways to make this enterprise more profitable.

The reduction in the waterheater rental attrition rate is the sixth consecutive quarterly improvement, demonstrating success of efforts to combat it. Those efforts are going to get a major boost in February 2012, when 10-year-old regulatory restrictions on the company’s marketing efforts will expire and allow it to compete on a level playing field with rivals. Those restrictions include policies on returns, contract terms and pricing flexibility that have been a major impediment to keeping customers as well as to growing this business for a decade.

In the words of CEO John Macdonald, the company has “developed a comprehensive strategy to ensure that we secure maximum advantage from the elimination of these restrictions.” That suggests the waterheater business could be in line for a lift not unlike the submetering business has enjoyed since Ontario settled on regulations at the start of 2011. And the operation is already starting to get a lift from recent expansion in Atlantic Canada, which the company is focusing on long-term contracts.

As for debt, management now expects to be able to refinance CAD60 million maturing on Apr.30, 2012, with cash on hand. Cash has grown from CAD16.8 million to CAD69.3 million since the beginning of 2011, entirely due to robust cash flows after capital spending. And it’s moving ahead on refinancing the CAD240 million notes maturing in March 2013. The latter currently have a yield-to-maturity of around 3 percent, versus a 5.25 percent coupon rate. That suggests the company will be able to cut interest expense, possibly substantially.

Management has also substantially improved the terms of its short-term credit facility, slashing “stand-by” fees by 60 percent and extending the term to 2014. The entire facility remains undrawn.

Assuming it follows through on these plans, EnerCare will earn another point in my CE Safety Rating System to 4 in the coming months. Meanwhile, EnerCare is a solid buy up to my target of USD8 for those who don’t already own it.

RioCan REIT (TSX: REI-U, OTC: RIOCF) reported a 6 percent boost in its third-quarter funds from operations (FFO) per unit, on a 14 percent increase in operating FFO. The difference is due to successful equity issues to finance future growth and control debt, including 10.1 million units issued since the beginning of the third quarter for a total of CAD251.5 million.

The results take the third quarter payout ratio down to just 93 percent, continuing the sharp decline in recent quarters, as cash flows build from acquisitions and other expansion. That eventually will afford a return to dividend growth for RioCan, though management’s focus for its abundant cash now is clearly to take advantage of weakness in North America to lock in future growth.

Year to date, for example, the company has acquired interests in 25 more properties–nine in the US–for CAD620 million. That includes four properties closed since the end of the third quarter for an aggregate price of CAD157 million. And there’s an additional CAD257 million of properties now under firm contract but subject to conditions not yet waived.

The economics of REIT acquisitions are such that the negative impact on profit from equity and debt issues–as well as acquisition and integration costs–is always felt before the positive impact of higher cash flows. The lag in RioCan’s case is often lengthened by the fact that management usually raises capital in anticipation of future expansion, in order to take advantage of favorable market conditions. That sometimes leaves the REIT with considerable un-deployed cash on its books, which earns little in this environment.

This profit lag from acquisitions has kept RioCan’s payout ratio on the high side, really since the financial crisis broke in 2008. That’s the main reason why we’ve seen no distribution growth since October 2007, when the payout was raised to the current CAD0.115 per month from the previous CAD0.1125. It’s also meant that RioCan’s payout ratio has routinely and grossly overstated the risk to its distribution. And it’s why a return to distribution growth at some point in the future–possibly as soon as early 2012–should have a major catalyzing impact to push the stock higher.

Meanwhile, the operating metrics of RioCan’s portfolio of shopping centers could scarcely be stronger. Same-store and same-property net operating income during the quarter–which excludes the impact of acquisitions–rose another 1.3 percent in the Canadian portfolio, as the company boosted occupancy, lease renewals and rents while controlling costs. The US portfolio’s net operating income rose 2.3 percent sequentially against the second-quarter 2011 tally.

Canadian properties were 97.5 percent occupied, while the US portfolio was 97.8 percent filled. Overall occupancy rose to 97.5 percent from 97.1 percent a year ago, and 89 percent of expiring leases were renewed at an average rent increase of 7.2 percent. National and anchor tenants are 86 percent of revenue–the most creditworthy of all tenants–and no individual renter accounted for more than 4.8 percent of the portfolio.

In short, despite dramatic expansion since the 2008 crash, RioCan has maintained its historically high portfolio quality standards. And coupled with very conservative financial policies–including routinely raising capital before doing deals–it’s why the REIT continues to deserve the highest CE Safety Rating, just as it has since the very first issue of Canadian Edge.

Now trading below my target of USD25, RioCan REIT is a strong buy for anyone who doesn’t already own it.

From the Aggressive Portfolio, Vermilion Energy Inc (TSX: VET, OTC: VEMTF) produced 34,676 barrels of oil equivalent in the third quarter, slightly less than second-quarter output but 11 percent above year-earlier volumes. The company is on track to meet its target exit production rate for 2011 of roughly 37,000 barrels of oil equivalent per day.

Funds from operations per share came in at CAD1.29, down slightly from the second quarter’s CAD1.32 due to the lower production volumes and a dip in realized selling prices. Funds from operations were up 22.9 percent from year-earlier levels and produced a payout ratio of just 44.2 percent. Capital expenditures came in at CAD134.8 million, up 26 percent over the past year, as the company continued to execute on new projects in Europe, Australia and North America. Capital spending plus dividends–including the Corrib project–was 151 percent of funds from operations.

The Corrib project has now met its last regulatory hurdles, having reached a settlement for all remaining legal challenges. That puts this transforming project closer to adding real volumes, with the next step completing preparation of the tunneling site for work to begin by mid-2012. Meanwhile, the company continues to ramp up its light oil output in Canada’s Cardium play with the successful construction of a now-operational 15,000 barrels-per-day oil processing facility. French, Netherlands and Australian production is expected to bring steady gains.

Full-year capital spending for 2011 is expected to hit CAD500 million, an 8 percent boost from the company’s initial budget and largely the result of CAD70 million in land purchases. Management has yet to set a 2012 target, preferring instead to get a better read on future commodity pricing and its ability to raise capital. That’s the kind of conservatism that’s always set Vermilion apart from sector rivals, and it’s why the company is the only oil and gas producer to rate 5 or higher under the CE Safety Rating System.

Looking ahead, the company continues to utilize technology developments to keep costs low. Geographic diversification has allowed it to take advantage of much higher natural gas prices in Europe and Asia. The Corrib project is now not projected to produce cash flows until 2014 at the earliest. But management is sticking with its growth plans through 2015 and is working on a plan to 2020 as well, thanks to favorable developments elsewhere.

I’ve received a couple questions from readers this year about the impact on Vermilion of France’s banning of hydraulic fracturing to produce oil and gas. The answer, as management has stated repeatedly, is “none” on current operations. And to the extent the country’s new policies do impact future investment decisions the company has plenty of alternative locations in which to put capital.

Management’s current forecast is to hit 50,000 barrels a day of production by mid-decade, based on current inventory of projects alone. That kind of growth will require making prudent capital and drilling decisions, but the company has a track record that should settle even the most skittish. Vermilion Energy remains a buy up to USD50 for those who don’t already own it.

Third-Quarter Earnings Dates

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Oct. 27 Flash Alert
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 8 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 11 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Nov. 8 (estimate)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPUF)–Nov. 9 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Nov. 8 Flash Alert
• Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–Nov. 14 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Nov. 10 (confirmed)
• Colabor Inc (TSX: GCL, OTC: COLFF)–Oct. 18 Flash Alert, November Portfolio Update
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Nov. 8 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Nov. 8 Flash Alert
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–Nov. 8 (confirmed)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–Nov. 10 (confirmed)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Nov. 9 (confirmed)
• Just Energy Group Inc (TSX: JE, OTC: JUSTF)–Nov. 8 (tentative)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–November Portfolio Update
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Nov. 8 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–Nov. 9 (confirmed)
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–Nov. 9 (confirmed)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Nov. 8 Flash Alert
• TransForce Inc (TSX: TFI, OTC: TFIFF)–November Portfolio Update

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–Oct. 27 Flash Alert, November Portfolio Update
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Nov. 14 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–November Portfolio Update
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)– Nov. 9 (confirmed)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–November Portfolio Update
• Enerplus Corp (TSX: ERF, NYSE: ERF)–Nov. 10 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–November High Yield of the Month
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–November Portfolio Update
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–November High Yield of the Month
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Nov. 9 (estimate)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–November Portfolio Update
• Student Transportation Inc (TSX: STB, OTC: STUXF)–Nov. 11 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–Nov. 8 Flash Alert