No, Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) didn’t announce a dividend cut today. Management did, however, pretty much telegraph one for next year, as it slashed its revenue and cash flow forecast.

As recently as its third-quarter conference call (Nov. 15), the owner of power and water assets had forecast a payout ratio in a range of 85 to 90 percent for 2012. That, CFO Michael Smerdon affirmed, was enough to “sustain our current dividend of 66 cents per share on an annualized basis thought 2014.”

This morning, however, the company revised its expected 2012 payout ratio upwards to 120 to 130 percent. That was part of an “updated outlook” that includes:

• a regulatory filing by TransCanada Corp (TSX: TRP, NYSE: TRP) to raise rates for transporting natural gas to fuel the Cardinal power plant;
• a change in accounting at the recently acquired Bristol Water unit and a higher estimate of capital expenditures that combined would reduce cash flow to the parent by CAD8 million;
• a combined CAD2 million rise in operating costs at Cardinal, the Erie Shores Wind Farm, the company’s hydro power facilities and the Whitecourt plant.
• Apparently previously unexpected recapitalization costs at the Swedish district heating unit that will shave CAD3 million;
• an unspecified amount of higher financing costs for 2012, presumably related to the refinancing of CAD57.5 million still outstanding on a CAD182.5 million credit tranche that matures Jun. 29, 2012.

Clearly these are all substantial reasons for expecting lower cash flow and hence a higher payout ratio for 2012. And management has couched them as “near-term challenges” to its goal of “building significant long-term value.” The higher capital spending at Bristol, for example, should boost earnings going forward, as its recovery is guaranteed by regulation. Meanwhile, the recap of the Swedish facilities is expected to strengthen the balance sheet by CAD50 million to CAD60 million.

Management still expects cash flow to rise substantially in 2013 and 2014 to a level that would more than cover the current dividend level at that time. The payout ratio in 2011 is also pretty flat with prior expectations.

However, none of the above changes in outlook were indicated as real possibilities by management in the third-quarter call. In fact, the only risk pointed out there was the possibility that the negotiations over a new contract for the Cardinal power plant could yield a less-than-optimal result, a possibility management also said was unlikely.

Cardinal may indeed be the subtext for this dividend warning, with management now less certain of a favorable outcome. Until there’s more clarity, however, there’s no reason for anyone to put more money into Capstone, though its 18 percent-plus yield will no doubt tempt some.

With the stock down so much today, it’s not a good day for selling. Rather, I expect the company to smooth some big investors’ feathers the next few days, and the price to stabilize and probably rebound a bit. Despite today’s plunge, this doesn’t appear to be a Yellow Media Inc (TSX: YLO, OTC: YLWPF) type of meltdown, as Capstone simply doesn’t have the same degree of financial pressures. Rather, the question is simply how much cash flow will drop and how much the dividend will be cut.

Part of my reason for sticking with Capstone was the fact that just making guidance and getting a decent deal on Cardinal would trigger a big run up in the stock. That seems a lot less likely now. But my decision on whether to stay with Capstone now or swap for something else will depend on what I hear the next couple days.

I’ll have my analysis in the December Canadian Edge, which will be published Friday, Dec. 9. Until then, Capstone Infrastructure Corp is a hold.