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HomeMy WebLinkAboutUtility Monthly 05-13.pdf Please refer to page 13 of this report for detailed disclosure and certification information. INDUSTRY UPDATE Institutional Equity Research May 15, 2013 Utility Monthly Prices: (5/14/13) Industry: Utilities Michael Bates 503.603.3045 mbates@dadco.com Midwestern Utilities Facing Impact of Volatile Weather  Key takeaways from AGA. Last week we met senior management of several utilities under our coverage at the AGA Financial Forum. Initiatives to grow, replace, and upgrade system infrastructure in the current environment of relatively low commodity prices has continued to gain momentum and should support future rate base growth, but we believe high sector valuations should drive investors to be selective.  Looking toward another hot summer? NWS is forecasting above-normal temperatures for much of the continental United States over the next three months. If accurate, the early onset of summer weather during these shoulder months should support 2Q and 3Q electric margins and cash flows. However, utilities may still face a difficult comparison to summer 2012’s record highs.  Temperatures in 2Q’13 have been below average and colder than last year in most regions, which stands in contrast to the current forecast for a hot summer. All else equal, the prolonged heating season should set the stage for solid utility margins (all else equal).  April rainfall was far below average in much of the Northwest, as much of the area saw rainfall that was less than 50% of normal. The Northwest has seen a drier than normal winter carry into a dry spring season, generally offsetting the tremendously wet start we had to the precipitation year. Lower than average precipitation levels could be a headwind for hydro-centric AVA, IDA, and POR, if the trend continues.  Forecasted streamflows in key drainages for hydro-generation in the Pacific Northwest (excluding the Brownlee Reservoir) have been revised upward, halting a streak of downward revisions. The Brownlee Reservoir (in IDACORP’s coverage territory) saw downward revisions again, as levels are now expected to be 59% of normal. D.A. Davidson & Co. 2 Last week we met senior management of several gas and/or multi-utilities under our coverage in connection with the AGA Financial Forum in Naples, Florida. The following bullet points highlight key recurring themes in the conference. Please see our recent reports for in-depth information on specific companies. Commodity Prices. Management and investors generally expect natural gas prices to remain flat-to-up over at least the next few years. Demand from the industrial, transportation, and power sectors should continue to increase, but the build-out of incremental upstream and midstream supply are likely to offset much of the increase in unit pricing. Infrastructure Opportunities. The sustained pressure on commodity prices has accorded many utilities an attractive opportunity to embark on multi-year plans to replace and upgrade aging distribution infrastructure. Rate shock has been partly mitigated as returns on new investment are partially offset in customer bills (often fed in via rate trackers) by a decline in fuel costs. With that said, the sustained low-interest rate environment has consistently led commissioners to grant lower allowed ROEs. Investor sentiment around the industry remains split. The utilities’ recent performance has left P/E multiples well above historical averages and has prompted some to take profits and/or delay taking positions in new ideas. Conversely, the expectations of slow economic growth and low interest rates have bolstered confidence in utility stocks that show above-average potential for earnings and dividend expansion. It is our view that current valuations should prompt a high level of selectivity as investors approach the industry, but we do not anticipate a material sector-specific contraction in multiples in the near term. Raising Capital. Elevated valuation levels across the sector have also driven behavior among management teams, as several firms under our coverage have recently executed or announced plans to tap the equity markets to maintain their capital structures and credit ratings in the midst of elevated capital spending levels. As displayed in Figure 1, temperatures in most regions served by our utility group were significantly colder in April than the same month one year ago, and generally much colder than long-term average levels, which should bolster 2Q gas margins. Great Plains, Otter Tail, Black Hills, NorthWestern and Xcel Energy saw the largest positive deviations from long- term averages, while Northwest Natural and Portland General Electric were left standing as the largest negative deviation. As displayed in Figure 2, the National Weather Service is forecasting average temperatures in the upper Northwest over the next three months, but warmer than normal conditions in most other portions of the continental United States. If accurate, the early onset of summer weather during these shoulder months should support 2Q and 3Q electric margins and cash flows. Hydro power is a substantial electric resource for Avista Corp., IDACORP, Inc. and Portland General Electric Co. As noted in Figures 4 and 5, aggregate precipitation levels in much of the Pacific Northwest have been below long-term averages in the current precipitation year (which began in October 2012). April proved to be an extremely dry month. The past few dry months offset the extremely wet start to the current precipitation year. The Northwest River Forecast Center’s projection calls for below-normal streamflows in all of the six important drainages in the Northwest (Figure 3). Most utility-scale hydro-generation resources can operate at a healthy level with stream flows as low as 80% of normal. AVA and POR’s coverage territory saw streamflow projection tick up slightly in May compared to April, while IDA’s estimate received another downward revision. Current conditions have kept our 2013 hydro-generation outlook near normal for AVA and POR, but the forecast for IDA’s Brownlee Reservoir finds itself at just 59% of the normal runoff. State regulators have implemented rate mechanisms to limit the utilities’ financial exposure to swings in hydrogeneration (summarized below). From our observations and under their current mechanisms, results at POR tend to be the most sensitive to variation in stream flow conditions, while IDA’s earnings are the most insulated.  Idaho - Power Cost Adjustment (PCA) mechanism shares 95% of the swing in costs with ratepayers and 5% with the utility. Key Takeaways rom the AGA Financial Forum Weather Updates April Cooler than 2012, Midwestern States Bear the Brunt Warm Summer Ahead 2013 Precipitation and Streamflows D.A. Davidson & Co. 3  Oregon - Power Cost Adjustment Mechanism (PCAM) provides a 90%/10% refund/surcharge after an asymmetrical deadband (+$30 million/-$15 million) and after applying an annual earnings test.  Washington - Energy Recovery Mechanism (ERM) shares’ annual power supply cost variability after a symmetrical deadband is $0-$4 million. If power costs are $4-$10 million above the amount built into rates, there is 50%-50% sharing between ratepayers and shareholders. If power costs are $4-$10 million below the amount built into rates, there is 75%-25% sharing between ratepayers and shareholders. Above or below $10 million of annual power supply cost variability, 90% of the swing in costs goes to ratepayers and 10% goes to the company. On April 15th, Idaho Power filed its annual PCA (Power Cost Adjustment), including a request for a $140 million rate increase to mitigate headwinds related to weak stream flows into its hydro system (projected to be less than 59% of the historical averages) and lower than expected revenue from surplus power sales. The IPUC has 45 days to review the proposal, for an expected implementation date of June 1, 2013. The requested rate increase should help offset the weak hydrogeneration outlook for IDA. On April 15th, MGE Energy announced that it had submitted a proposal to the PSCW (Public Service Commission of Wisconsin) to freeze base rates for electric and natural gas customers through at least the end of 2014. If approved by the PSCW, the utility will retain $6.2 million of fuel-related savings that were deferred last year, but will forego the opportunity to request a current return on 50% of its carrying costs related to the environmental retrofit of the Columbia Energy Center (MGEE will instead record 100% AFUDC for the remainder of the project). On April 15th, NorthWestern announced a settlement in its natural gas rate case in Montana. The utility has been granted an annual revenue increase of $11.5 million (~11.1%), based on a 9.8% allowed ROE. The results fell slightly below NorthWestern’s original request of a rate increase of $15.7 million (~15.2%) based on an allowed ROE of 10.5%. The MPSC has since given its approval of the rate case. On April 15th, Westar filed an abbreviated retail rate case that calls for a retail electric revenue increase of $31.7 million (+1.7%). Westar did not request a change to its allowed ROE or its equity layer. A final order is expected to be issued within six months. Utility capital expenditures will remain elevated through at least 2015, driven largely by spending for environmental upgrades, distribution system improvements, and transmission expansions. Figure 6 depicts the aggregate capital spending of investor-owned electric utilities from 2005-2014. Figure 7 depicts capex relative to current market capitalization. On May 1st, Black Hills filed a new ERP with the CPUC (Colorado Public Utilities Commission) to address the energy needs for the next seven years of its customers in Southern Colorado. Colorado requires electric utilities to file an ERP every four years. The plan identifies BKH’s need for an additional 100MW of capacity by 2017 in order to cope with demand. The filing includes a proposal to build a new 40MW natural gas turbine at the Pueblo Airport to replace the soon to be retired Clark Station facility. BKH is also seeking approval from the PUC to retire the Pueblo 5 and Pueblo 6 natural gas units, as they are both now over 60 years old. The utility anticipates receiving the remaining 60MW of capacity through competitive bidding. The PUC is expected to make a decision on the ERP in 1Q’14. On April 16th, ITC’s shareholders voted in favor of its acquisition of Entergy’s (ETR - $67.80) electric transmission assets. The deal is still subject to approval of FERC and five state regulatory bodies. We remain skeptical of a late 2013 transaction close date due to the large number of regulatory approvals still outstanding. On April 15th, Xcel Energy filed an update to its Upper Midwest Resource Plan, which includes a proposal to add three gas-fired peaking units to its fleet toward the end of the decade. The announcement represents a potential growth driver for XEL over the long-term, but will not impact earnings for several years. Under the proposal, each of the plants will be built near existing transmission and pipeline infrastructure to minimize construction costs. Regulatory Developments IDACORP, Inc. (IDA - BUY - $55 Target) MGE Energy, Inc. (MGEE - NEUTRAL - $57 Target) NorthWestern Corporation (NWE - NEUTRAL - $45 Target) Westar Energy, Inc. (WR - BUY - $40 Target) Capital Spending Black Hills Corporation (BKH - NEUTRAL - $52 Target) ITC Holdings Corporation (ITC - BUY - $105 Target) Xcel Energy, Inc. (XEL - NEUTRAL - $32 Target) D.A. Davidson & Co. 4 As noted in Figure 8, several utilities under our coverage announced equity offerings in 1Q’13, and we expect to see additional moves to tap the capital markets this year as capital expenditures remain high and utilities seek to maintain their mandated capital structures. Many firms under our coverage have mitigated and/or delayed secondary equity issuances despite a rise in capital spending in recent years, due to the benefits of bonus tax depreciation and NOL carryforwards. Please refer to our recent reports for company-specific capex and financing forecasts. Equities in the sector currently trade at ~16x expected 2013 earnings, well above the average forward P/E (13.7x) over the last ten years. Equities in the sector have performed particularly well since 2008-2009, due to the prolonged low-interest rate environment, continuing global financial/economic concerns, and a sector-wide ramp in infrastructure investment. Industry multiples have seen a period of steady expansion during this period, as more investors have maintained a defensive, yield-oriented bias. Utility shares currently trade at a ~20% premium P/E valuation relative to the S&P 500, which is materially above the 10% average premium accorded to the group over the last 5 years. The sector carries an average dividend yield of 3.6%, slightly above the 5-year average comparing favorably to the average yield on S&P 500 equities and 10-year U.S. Treasuries as shown in Figure 12. As shown in Figure 13, utilities under our coverage have had an impressive start to 2013, posting a median total return of 20.6% year-to-date (which compares to +14.3% from the S&P 500 and +17.6% from the XLU. Shares of BKH have posted the strongest performance year- to-date, rising 35.8%. MDU posted the strongest performance within our coverage list over the last month, rising 9.3%. Over the course of the last month, only two stocks under our coverage (OTTR and ITC) have posted negative returns. Financing Outlook aluation & Performance Current Sector Valuations Stock Performance D.A. Davidson & Co. 5 Figure 1: Heating Degree Day Data (HDD) –April and 2Q’13 QTD Source: National Weather Service’s Climate Prediction Center April % Dev % Dev 2Q'13 % Dev % Dev HDD v. Avg v. 2012 Total v. Avg v. 2012 Duluth, MN 908 15% 36% 908 15% 36% Cedar Rapids, IA 561 17% 36% 561 17% 36% Madison, WI 628 9% 24% 628 9% 24% Spokane, WA 553 -1% 14% 553 -1% 14% Colorado Springs, CO 655 14% 78% 655 14% 78% Lincoln, NE 562 32% 94% 562 32% 94% Rapid City, SD 838 41% 94% 838 41% 94% Kansas City, MO 459 39% 117% 459 39% 117% Boise, ID 440 -2% 36% 440 -2% 36% Pocatello, ID 618 6% 29% 618 6% 29% Tri Cities, WA 368 -1% 9% 368 -1% 9% Boise, ID 440 -2% 36% 440 -2% 36% Bismarck, ND 906 37% 72% 906 37% 72% Madison, WI 628 9% 24% 628 9% 24% Great Falls, MT 742 13% 53% 742 13% 53% Sioux Falls, SD 769 35% 88% 769 35% 88% Portland, OR 363 -9% 5% 363 -9% 5% Jamestown, ND 1000 50% 80% 1000 50% 80% Fergus Falls, MN 908 15% 36% 908 15% 36% Portland, OR 363 -9% 5% 363 -9% 5% Salt Lake City, UT 450 0% 31% 450 0% 31% Chicago, IL 541 5% 27% 541 5% 27% Green Bay, WI 714 12% 29% 714 12% 29% Rochester, MN 736 21% 57% 736 21% 57% Tucson, AZ 27 -64% -45% 27 -64% -45% Milwaukee, WI 641 5% 16% 641 5% 16% Topeka, KS 440 31% 157% 440 31% 157% Denver, CO 687 31% 103% 687 31% 103% Minneapolis, MN 716 28% 62% 716 28% 62% Eau Claire, WI 801 33% 53% 801 33% 53% Westar Energy WR Xcel Energy XEL Otter Tail OTTR Portland General Electric POR Questar STR Integrys Energy Group TEG UNS Energy UNS Wisconsin Energy WEC Great Plains Energy GXP IDACORP IDA MDU Resources Group MDU MGE Energy MGEE NorthWestern NWE Northwest Natural Gas NWN Stock Location ALLETE ALE Alliant Energy LNT Avista AVA Black Hills BKH D.A. Davidson & Co. 6 Figure 2: May ’13 – July ‘13 Temperature Forecast Source: National Weather Service Climate Prediction Center Figure 3: Streamflow Projections for Key Hydro Locations Source: National Weather Service Northwest River Forecast Center % of Forecast Average Normal Coeur d'Alene Lake Inflow APR-SEP 2,333 2,468 95% Cabinet Gorge Dam APR-SEP 10,702 11,376 94% IDACORP IDA Brownlee Reservoir Inflow APR-SEP 4,056 6,853 59% Clackamas River APR-SEP 676 732 92% Deschutes River APR-SEP 1,778 1,916 93% The Dalles APR-SEP 87,330 92,704 94% Stock Location Time Period Runoff Forecast - KAF Avista AVA Portland General Electric POR D.A. Davidson & Co. 7 Figure 4: Accumulated Northwestern Precipitation October 2012 – April 2013 Source: National Weather Service Northwest River Forecast Center Figure 5: Accumulated Northwestern Precipitation – April 2013 Source: National Weather Service Northwest River Forecast Center D.A. Davidson & Co. 8 Figure 6: Utility Capital Spending 2005-2014 Source: SNL Energy Figure 7: Projected Capex % of MC 2013-2015 Source: D.A. Davidson & Co. estimates, company reports 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E WECMGEE STR IDA AVA LNT MDUNWN HE GXP OTTR ITC XEL NWE WR BKH ALE TEG UNS POR 0% 10% 20% 30% 40% 50% 60% 70% 80% D.A. Davidson & Co. 9 Figure 8: Announced Equity Issuances * D.A. Davidson & Co. makes a market in this security Source: D.A. Davidson & Co. estimates, company reports Figure 9: Utility Forward P/E Source: Capital IQ Figure 10: Utility Forward P/E Relative to S&P 500 Source: Capital IQ Symbol Announced Issuance Structure Timing Proceeds $m Shares (m) % Dilution ALE* 8/3/12 Equity Issuance Program 2013 $40 0.9 2.0% AVA* 12/31/12 Sales Agency Agreement 2013 $47 1.8 3.1% HE* 3/18/13 Forward Equity Sale 2013-2014 $163 6.1 6.2% LNT* 3/14/13 Preferred Stock 3/14/13 $200 8.0 7.2% NWE* 12/31/12 Equity Distribution Agreement 2013 $70 2.0 4.6% WR* 12/31/12 Forward Equity Sale 2013-2014 $50 1.8 1.1% XEL* 3/5/13 At the Market Offering 2013 $400 13.0 2.6% D.A. Davidson & Co. 10 Figure 11: Utility Dividend Yields Source: Capital IQ Figure 12: Utility Dividend Yields Relative to S&P 500 and 10-Year Treasuries Source: Capital IQ D.A. Davidson & Co. 11 Figure 13: D.A. Davidson Utility Coverage – 2013 Stock Performance YTD Source: Capital IQ Figure 14: D.A. Davidson Utility Coverage – 1-Month Performance Source: Capital IQ NWN, 4.0% MGEE, 11.6% HE, 13.0% IDA, 13.2% S&P 500, 14.3% ITC, 17.4% XLU, 17.6% XEL, 17.8% UNS, 19.0% TEG, 19.2% POR, 20.0% GXP, 20.2% Median, 20.6% WEC, 21.0% AVA, 21.1% WR, 21.8% LNT, 23.3% NWE, 23.8% OTTR, 25.1% ALE, 26.4% MDU, 26.6% STR, 28.7% BKH, 35.8% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% ITC, ‐2.1% OTTR, ‐1.0% IDA, 0.6% HE, 1.6% MGEE, 1.8% NWN, 1.9% UNS, 2.1% XLU, 2.1% STR, 2.4% WEC, 2.4% XEL, 2.5% Median, 2.6% TEG, 2.8% WR, 3.1% GXP, 3.2% ALE, 3.5% S&P 500, 4.3% NWE, 4.4% LNT, 5.2% POR, 5.8% AVA, 5.9% BKH, 9.0% MDU, 9.3% ‐4.0%‐2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% D.A. Davidson & Co. 12 Figure 15: D.A. Davidson & Co. Utilities Coverage 1D.A. Davidson & Co. makes a market in this security. 2Results exclude the impact of nonrecurring items and discontinued operations. Source: D.A. Davidson & Co. estimates, company reports, and Capital IQ Price MC EV ROE ROA 5/14/13 ($B) ($B) 2012 2013e 2014e 2012 2013e 2014e 2012 2013e 2014e (ttm) (ttm) ALE1,2 ALLETE Inc. B $50.37 $58.00 $2.0 $2.9 3.8% 68% $2.58 $2.78 $3.06 19.5 18.1 16.5 11.2 10.1 8.5 7.1% 2.7% 45% GXP1,2 Great Plains Energy Inc. N $24.07 $25.00 $3.6 $7.5 3.7%60% $1.35 $1.55 $1.61 17.8 15.5 15.0 9.3 8.6 8.4 6.7% 2.3% 53% IDA1 IDACORP Inc. B $48.91 $55.00 $2.4 $4.0 3.2% 49% $3.37 $3.33 $3.40 14.5 14.7 14.4 10.5 9.6 9.4 7.2% 2.4% 48% ITC1,2 ITC Holdings Corp. B $87.94 $105.00 $4.6 $7.9 1.7% 34% $4.14 $4.95 $5.80 21.2 17.8 15.2 13.7 11.4 10.0 13.1% 3.3% 70% POR1 Portland General Electric Co. B $31.85 $36.00 $2.4 $4.0 3.4% 52% $1.87 $1.95 $2.05 17.0 16.3 15.5 7.3 7.4 7.0 7.4% 2.3% 48% UNS1 UNS Energy Corp. N $49.85 $52.00 $2.0 $3.8 3.5% 66% $2.30 $2.70 $3.30 21.7 18.5 15.1 9.0 8.2 7.5 9.0% 2.2% 63% WR1,2 Westar Energy Inc. B $33.42 $40.00 $4.2 $7.7 4.1% 64%$2.15 $2.15 $2.27 15.5 15.5 14.7 9.3 8.9 8.5 9.4% 2.9% 54% Group Average $3.0 $5.4 3.3% 56% 18.2 16.6 15.2 10.0 9.2 8.5 8.6% 2.6% 54% Multi-Utilities Price MC EV ROE ROA 5/14/13 ($B) ($B) 2012 2013e 2014e 2012 2013e 2014e 2012 2013e 2014e (ttm) (ttm) AVA1 Avista Corp. N $28.61 $28.00 $1.7 $3.1 4.3% 67% $1.32 $1.80 $1.85 21.7 15.9 15.5 9.0 8.2 8.0 6.8% 2.0% 52% LNT1,2 Alliant Energy Corp. B $51.83 $60.00 $5.7 $9.2 3.6% 62%$3.05 $3.17 $3.27 17.0 16.4 15.8 10.4 9.8 9.1 8.6% 2.5% 50% MGEE1,2 MGE Energy Inc. N $55.47 $57.00 $1.3 $1.6 2.9% 55% $2.79 $3.02 $3.09 19.9 18.4 18.0 9.6 9.4 9.0 12.0% 4.5% 39% NWE1,2 NorthWestern Corp. N $42.29 $45.00 $1.6 $2.7 3.6% 61% $2.37 $2.55 $2.64 17.8 16.6 16.0 10.2 9.3 8.6 9.2% 2.6% 54% TEG1,2 Integrys Energy Group Inc. N $60.04 $63.00 $4.7 $7.6 4.6%79% $3.26 $3.47 $3.65 18.4 17.3 16.4 10.6 10.9 10.0 11.5% 3.4% 48% WEC1,2 Wisconsin Energy Corp. N $42.99 $45.00 $9.8 $15.0 3.2% 55%$2.35 $2.45 $2.55 18.3 17.6 16.8 10.9 10.4 10.0 12.8% 3.8% 55% XEL1,2 Xcel Energy Inc. N $29.97 $32.00 $14.9 $25.9 3.6% 59% $1.83 $1.88 $1.95 16.4 15.9 15.3 9.3 8.9 8.3 9.9% 3.1% 55% Group Average $5.7 $9.3 3.7% 63% 18.5 16.9 16.3 10.0 9.6 9.0 10.1% 3.1% 50% Diversified Utilities Price MC EV ROE ROA 5/14/13 ($B) ($B) 2012 2013e 2014e 2012 2013e 2014e 2012 2013e 2014e (ttm) (ttm) BKH1,2 Black Hills Corp. N $49.30 $52.00 $2.2 $3.5 3.1% 66% $2.09 $2.43 $2.55 23.6 20.3 19.3 9.1 8.8 8.3 7.2% 2.4% 52% HE1 Hawaiian Electric Industries Inc N $27.61 $28.00 $2.7 $4.2 4.5% 73% $1.68 $1.62 $1.73 16.4 17.1 16.0 9.2 8.9 8.4 8.1% 1.3% 52% MDU1,2 MDU Resources Group Inc. B $26.65 $30.00 $5.0 $6.8 2.6% 50%$1.15 $1.40 $1.55 23.2 19.0 17.2 10.6 7.9 7.8 8.9% 3.5% 41% OTTR1,2 Otter Tail Corp. N $29.33 $30.00 $1.1 $1.5 4.0% 88% $1.31 $1.41 $1.55 22.3 20.8 18.9 10.5 9.6 8.7 7.7% 2.6% 45% Group Average $2.7 $4.0 3.6% 69% 21.4 19.3 17.8 9.8 8.8 8.3 8.0% 2.4% 48% Gas Utilities Price MC EV ROE ROA 5/14/13 ($B) ($B) 2012 2013e 2014e 2012 2013e 2014e 2012 2013e 2014e (ttm) (ttm) NWN1,2 Northwest Natural Gas Co. N $45.14 $45.00 $1.2 $2.0 4.1%79% $2.31 $2.26 $2.42 19.5 20.0 18.6 9.0 9.1 8.8 8.2% 2.2% 52% STR1,2 Questar Corp. N $25.25 $26.00 $4.4 $5.8 2.9% 59% $1.19 $1.18 $1.29 21.2 21.4 19.6 10.3 10.2 9.7 19.0% 5.5% 55% Group Average $2.8 $3.9 3.5% 69% 20.3 20.7 19.1 9.6 9.7 9.2 13.6% 3.9% 54% Industry Average $19.7 $34.5 3.6% 60% 18.0 16.9 16.1 10.0 9.3 8.8 8.7% 2.3% 55% P/E EV / EBITDA EPS P/E EV / EBITDA Debt / Capital Debt / Capital Debt / Capital Debt / Capital Rating Price Target Symbol Company Name Rating Price Target Payout 2013eSymbol EPSDividend Yield Payout 2013e Dividend YieldCompany Name EV / EBITDA EPS P/E EV / EBITDASymbol Company Name Rating Price Target Symbol Company Name Rating Price Target EPS P/E Dividend Yield Payout 2013e Dividend Yield Payout 2013e D.A. Davidson & Co. Two Centerpointe Drive, Suite 400  Lake Oswego, Oregon 97035  (503) 603-3000  (800) 755-7848  www.dadavidson.com Copyright D.A. Davidson & Co., 2013. All rights reserved. 13 Required Disclosures D.A. Davidson & Co. expects to receive, or intends to seek, compensation for investment banking services from the companies mentioned in this report in the next three months. D.A. Davidson & Co. is a full service investment firm that provides both brokerage and investment banking services. Michael Bates, the research analyst principally responsible for the preparation of this report, will receive compensation that is based upon (among other factors) D.A. Davidson & Co.’s investment banking revenue. However, D.A. Davidson & Co.’s analysts are not directly compensated for involvement in specific investment banking transactions. I, Michael Bates, attest that (i) all the views expressed in this research report accurately reflect my personal views about the common stock of the subject company, and (ii) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Ratings Information D.A. Davidson & Co.’s Institutional Research Rating Scale (maintained since 7/9/02): Buy, Neutral, Underperform D.A. Davidson & Co. Institutional Research Ratings Buy Neutral Underperform Risk adjusted return potential azbycx Over 15% total return expected on a risk adjusted basis over next 12-18 months >0-15% return potential on a risk adjusted basis over next 12-18 months Likely to remain flat or lose value on a risk adjusted basis over next 12-18 months Distribution of Ratings (as of 3/31/2013) Buy Hold Sell Corresponding Institutional Research Ratings Buy Neutral Underperform and Distribution 52% 44% 4% Distribution of companies from whom D.A. Davidson & Co. has received compensation for investment banking services in last 12 mos. 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