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Session39

The“Buyside”Perspective–AnAnalyst’sViewofFinancialDisclosureWaydeBendus,

VicePresident,DeutscheBankSession39

The“Buyside”PeWhyarepensionsstillarelevantconcernforthestreet?Underlyinggrowthinpensionbenefitliabilitieshasbeenapproximately4.25%,beforeconsiderationforchangesindiscountratesFundedpositionshaveverylikelydeterioratedin2004Despitetherecentriseinshort-termrates,long-termrateshavestabilizedoverthepastyearLaborunionsareaggressiveprotectorsofbenefits,eveninhighlydistressedindustriesHeathcareandwageinflationhavebeenfaroutpacingoverallinflation,increasingtheburdenofOPEBliabilitiesBenefitpayoutsaregrowingandhaveasignificantimpactonplanassetlevelsbleedratehavebeenasignificantoffsettorecentassetreturnsandemployercontributionsManycompanieshaveyettoaddressunderfundedpensionsonaglobalbasisdifferingrulesonfundingrequirementsPotentialchangesinaccountingandERISArulescouldimpacthowcompaniesmanagetheirpensionplansAssetallocationishighlygearedtowardsequityinvestments,whichwillresultinsignificantvolatilityinfundingpositionsWhyarepensionsstillarelev2AverageS&P500pensionplanPensionplanassetsimprovedduetoonaverage19%marketreturnsandhigheremployercontributionsin2003PensionliabilitiesincreasedduetoaccumulationofnewbenefitsandlowerdiscountratesSource:DB,Companyreports,FactSetAveragePBOandFVA

fortheS&P500AverageFunding

fortheS&P500AverageAssumptionUsed

fortheS&P500AverageS&P500pensionplanPe3AverageS&P500pensionplan(cont’d)Aggregatepensionfundingimprovedmoderatelyin2003toapproximately87%from82%in2002Underfundedplansimprovedto82%from78%TheaggregatedunderfundedpositionfortheS&P500wasapproximately$170bnunderfundedplanswereapproximately$192bnSource: DB,Companyreports,FactSetAggregateandUnderFunded

FundingPositionfortheS&P500YearoverYearChangeinDistributionofFundingLevelsfortheS&P500AggregateandUnderFunded

FundingLevelfortheS&P500AverageS&P500pensionplan(4GM–CaseStudyGM’sUSpensionplanswerefullyfundedfollowingits$18.6bndebtfinancedfundingNon-USplanswereunderfundedby$7.5bnOPEBsrepresentedaverylargeliabilityandgrewbyover$20.9bnin2003GM–CaseStudyGM’sUSpension5GM–CaseStudy(cont’d)(1)USplansonlyAssetreturnsandemployercontributionsonpensionplanstotaled$33.2bnyettheunderfundedstatuswasonlyreducedby$18.0bnLowerdiscountratesandhigherbenefitpayoutserodedasignificantportionofthegainsHighbenefitpayouts,stronglaborunionsandrisingbenefitcosts,inamarketenvironmentthatisproducinglimitedreturns,willverylikelytaketheirtollonequityvaluationsforcompanieslikeGMoverthelongertermGM–CaseStudy(cont’d)(1)U6FundingStrategiesFundingStrategies7Fundingwithcompanystock–ValuationanalysisAssumptions:Sharesoutstanding: 100mmCurrentStkPrice: $50CurrentEPS: $5.00Expectedreturn: 8.50%TaxRate: 40.0%Costoffunds: 0.00%Contribution: $100mmValuationanalysis:PensionContribution: __________ExpectedReturn: __________EBIT __________InterestCost __________PBT __________BookTaxes __________NetIncome __________TotalNewShares: __________TotalNewNetIncome: __________NewEPS: __________NewStockPrice: __________Fundingwithcompanystock–V8Fundingwithcash–ValuationanalysisAssumptions:Sharesoutstanding: 100mmCurrentStkPrice: $50CurrentEPS: $5.00Expectedreturn: 8.50%TaxRate: 40.0%Costoffunds: 6.00%Contribution: $100mmValuationanalysis:PensionContribution: __________ExpectedReturn: __________EBIT __________InterestCost __________PBT __________BookTaxes __________NetIncome __________TotalSharesout: __________TotalNewNetIncome: __________NewEPS: __________NewStockPrice: __________Fundingwithcash–Valuation9Fundingwithcompanystock–ValuationanalysisAssumptions:Sharesoutstanding: 100mmCurrentStkPrice: $50CurrentEPS: $5.00Expectedreturn: 8.50%TaxRate: 40.0%Costoffunds: 0.00%Contribution: $100mmValuationanalysis:PensionContribution: __________ExpectedReturn: __________EBIT __________InterestCost __________PBT __________BookTaxes __________NetIncome __________TotalNewShares: __________TotalNewNetIncome: __________NewEPS: __________NewStockPrice: __________$100.00mm8.508.500.008.50-3.405.10mm102.0mm$505.1mm$4.95$49.50Fundingwithcompanystock–V10Fundingwithcash–ValuationanalysisAssumptions:Sharesoutstanding: 100mmCurrentStkPrice: $50CurrentEPS: $5.00Expectedreturn: 8.50%TaxRate: 40.0%Costoffunds: 6.00%Contribution: $100mmValuationanalysis:PensionContribution: __________ExpectedReturn: __________EBIT __________InterestCost __________PBT __________BookTaxes __________NetIncome __________TotalSharesout: __________TotalNewNetIncome: __________NewEPS: __________NewStockPrice: __________$100.00mm8.508.50-6.002.50-1.001.50mm100.0mm$501.5mm$5.02$50.15Fundingwithcash–Valuation11Session39

The“Buyside”Perspective–AnAnalyst’sViewofFinancialDisclosureWaydeBendus,

VicePresident,DeutscheBankSession39

The“Buyside”PeWhyarepensionsstillarelevantconcernforthestreet?Underlyinggrowthinpensionbenefitliabilitieshasbeenapproximately4.25%,beforeconsiderationforchangesindiscountratesFundedpositionshaveverylikelydeterioratedin2004Despitetherecentriseinshort-termrates,long-termrateshavestabilizedoverthepastyearLaborunionsareaggressiveprotectorsofbenefits,eveninhighlydistressedindustriesHeathcareandwageinflationhavebeenfaroutpacingoverallinflation,increasingtheburdenofOPEBliabilitiesBenefitpayoutsaregrowingandhaveasignificantimpactonplanassetlevelsbleedratehavebeenasignificantoffsettorecentassetreturnsandemployercontributionsManycompanieshaveyettoaddressunderfundedpensionsonaglobalbasisdifferingrulesonfundingrequirementsPotentialchangesinaccountingandERISArulescouldimpacthowcompaniesmanagetheirpensionplansAssetallocationishighlygearedtowardsequityinvestments,whichwillresultinsignificantvolatilityinfundingpositionsWhyarepensionsstillarelev13AverageS&P500pensionplanPensionplanassetsimprovedduetoonaverage19%marketreturnsandhigheremployercontributionsin2003PensionliabilitiesincreasedduetoaccumulationofnewbenefitsandlowerdiscountratesSource:DB,Companyreports,FactSetAveragePBOandFVA

fortheS&P500AverageFunding

fortheS&P500AverageAssumptionUsed

fortheS&P500AverageS&P500pensionplanPe14AverageS&P500pensionplan(cont’d)Aggregatepensionfundingimprovedmoderatelyin2003toapproximately87%from82%in2002Underfundedplansimprovedto82%from78%TheaggregatedunderfundedpositionfortheS&P500wasapproximately$170bnunderfundedplanswereapproximately$192bnSource: DB,Companyreports,FactSetAggregateandUnderFunded

FundingPositionfortheS&P500YearoverYearChangeinDistributionofFundingLevelsfortheS&P500AggregateandUnderFunded

FundingLevelfortheS&P500AverageS&P500pensionplan(15GM–CaseStudyGM’sUSpensionplanswerefullyfundedfollowingits$18.6bndebtfinancedfundingNon-USplanswereunderfundedby$7.5bnOPEBsrepresentedaverylargeliabilityandgrewbyover$20.9bnin2003GM–CaseStudyGM’sUSpension16GM–CaseStudy(cont’d)(1)USplansonlyAssetreturnsandemployercontributionsonpensionplanstotaled$33.2bnyettheunderfundedstatuswasonlyreducedby$18.0bnLowerdiscountratesandhigherbenefitpayoutserodedasignificantportionofthegainsHighbenefitpayouts,stronglaborunionsandrisingbenefitcosts,inamarketenvironmentthatisproducinglimitedreturns,willverylikelytaketheirtollonequityvaluationsforcompanieslikeGMoverthelongertermGM–CaseStudy(cont’d)(1)U17FundingStrategiesFundingStrategies18Fundingwithcompanystock–ValuationanalysisAssumptions:Sharesoutstanding: 100mmCurrentStkPrice: $50CurrentEPS: $5.00Expectedreturn: 8.50%TaxRate: 40.0%Costoffunds: 0.00%Contribution: $100mmValuationanalysis:PensionContribution: __________ExpectedReturn: __________EBIT __________InterestCost __________PBT __________BookTaxes __________NetIncome __________TotalNewShares: __________TotalNewNetIncome: __________NewEPS: __________NewStockPrice: __________Fundingwithcompanystock–V19Fundingwithcash–ValuationanalysisAssumptions:Sharesoutstanding: 100mmCurrentStkPrice: $50CurrentEPS: $5.00Expectedreturn: 8.50%TaxRate: 40.0%Costoffunds: 6.00%Contribution: $100mmValuationanalysis:PensionContribution: __________ExpectedReturn: __________EBIT __________InterestCost __________PBT __________BookTaxes __________NetIncome __________TotalSharesout: __________TotalNewNetIncome: __________NewEPS: __________NewStockPrice: __________Fundingwithcash–Valuation20Fundingwithcompanystock–ValuationanalysisAssumptions:Sharesoutstanding: 100mmCurrentStkPrice: $50CurrentEPS: $5.00Expectedreturn: 8.50%TaxRate: 40.0%Costoffunds: 0.00%Contribution: $