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J A N U A R Y 1 9, 2 0 0 6J A N U A R Y 1 9, 2 0 0 6 I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T SI P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A LS T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Slide 2 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E Economic & interest rate forecasts Note: JPMorgan forecast as of January 6, 2006. Forecasts are for the end of the period Q4/Q4 change Historical 10-year US Treasury yields (%) Avg. 7.13% Source: Bloomberg Economic overview Incoming economic releases for December generally support the view that the economy is currently expanding at a solid pace, while also rebounding from the effects of the hurricanes and related energy price spikes Nonfarm payrolls increased only 108K in December, however the previously released November gain was revised up to 305K Furthermore, it is likely that December hiring was held back by severe weather in various parts of the country, attributing to the jobless rate declining to 4.9% The ISM non-manufacturing survey increased to 59.8 in December, while readings for both new orders and employment reached their highest levels since August The ISM manufacturing survey declined 3.9 points to 54.2, however strong gains in December factory hiring suggest the drop is not a sign of significant weakening JPMorgan expects the Fed to raise rates by 25 bps at the end of this month to 4.5% The minutes from the last December 13 FOMC meeting implied that the removal of policy accommodation was no longer the motivating force for action, and instead further rate hikes will be implemented due to perceived inflation risk JPMorgan forecasts growth to remain strong through the first half of 2006, and expects upcoming inflation indicators to modestly heighten Fed concern Our macroeconomic forecast is thus consistent with the Fed funds peaking at 5.0% by midyear, but acknowledge that the risk around this forecast is to the downside Treasury market overview Treasuries rallied in the first week of the year, with the 10-year yield falling 2 bps to 4.37% While the rally of the prior three weeks was driven by a decline in the markets tightening expectations, the rally flattening implies that forward long-term yields remain lower than the markets forward Fed funds expectations The market is currently close to fully pricing in a rate hike at the January FOMC meeting, followed by a 58% chance of a 25 bp hike at the March meeting and a terminal Fed funds target of 4.68% by midyear Although the curve steepened sharply following the release of the Fed minutes, it is still flatter than it was in mid-December The flattening of the curve has caused the 2s/5s curve to invert, and prior to the release of the Fed minutes, the 2s/10s curve was trading essentially flat The Treasury is expected to issue $99Bn of 10-year equivalents between next week and the end of February, making the current quarter one where the Treasury auctions a record amount of duration risk Latest Fed minutes indicate that current tightening cycle may end soon (as of 1/9/06) 1 I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T SI P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S Slide 3 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E In 2005, equity markets were focused on rising interest rates, higher oil prices and consumer spending Source: Bloomberg as of 12/30/05 1 The Conference Board Oil & Gas equity market conditions (S&P Indices) 275 182 73 434 515 318 83 215 138 Consumer confidence improved going into year-end 2005 after showing its lowest reading since 2003 in October 1 S&P 500 Oil prices in 2005 exceeded 2004 highs and the Fed continued to raise rates at a measured pace Fed fund rate increased to 4.25% on 12/13/05 13 th consecutive increase since June 2004 Fed funds rate 6/30/04 first Fed fund increase since 1/3/01 10/26oil hits 2004 high $55.17 8/30oil hits 2005 high $69.81 Crude oil Year-end 2004: $43.45 Year-end 2005: $61.04 10,7181,2482,205 373 U.S. equity market conditions 2 I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T SI P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S Slide 4 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E Overall equity issuance remained strong in 2005 supported by continued mutual fund inflows 1 JPMorgan Equity Capital Markets Dept. and Dealogic 2 AMG data as of 12/30/05 U.S. equity issuance 1 U.S. Oil & Gas equity issuance 1 Equity mutual fund flows by investment style ($bn) 2 Mutual fund flows, all equities ($bn) 2 261311537692911 43427579182515228193438112 3 I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T SI P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S Slide 5 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E Pricing dynamics in the U.S. IPO market continued to improve IPO pricing statistics vs. the filing range Commentary on IPO activity Source: Equidesk as of 12/30/05; excludes closed-end funds 2004 witnessed a remarkable rebound in IPO issuance, which carried over to 2005 In 2005, 20% of IPOs priced above, 49% within and 31% below the filing range (vs. 2004: 19% above, 46% within and 35% below) 63% of 2005 IPOs are currently trading above issue price vs. 70% of 2004 IPOs 9 Oil & Gas companies raised $2.1bn in equity capital via IPOs in 2005 2006 is expected to yield the most O&G IPOs in recent years 2005 IPO sector issuance Diversified 30% ($10.8bn) Financial 18% ($6.6bn) Real Estate 5% ($1.9bn) Healthcare 6% ($2.3bn) Energy 7% ($2.6bn) TMT 27% ($9.9 bn) Consumer/Retail 7% ($2.6bn) 193 IPOs$36.7 bn Historical IPO volume and trading performance (2003-2005) Avg. Full Year Performance ($bn) 4 I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T SI P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S Slide 6 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E Recent Oil & Gas new issuance has rewarded investors Recent Oil & Gas equity offerings >$50mm Source: Equidesk as of 12/30/05 ; Oil & Gas offerings Note: Green shading indicates JPMorgan bookrun transactions; Yellow shading indicates JPMorgan co-managed transactions 1 Bid / Last trade 2 Last trade / Re-offer Commentary on new issuance activity Total issuance levels for equity and equity-linked securities in the Oil & Gas space have increased over time $3.3bn in 2002, $9.6bn in 2003, $12.3bn in 2004, and $14.2bn in 2005 Recent equity issuance primarily driven by M&A activity and to finance accelerated capital spending Most offerings have drawn strong investor demand Most issuers have demonstrated strong aftermarket performance Historical O&G issuance volumes ($bn) 3 E Q U I T Y M A R K E T U P D A T EE Q U I T Y M A R K E T U P D A T E Slide 7 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E Mid/Large cap E&P Refining & Marketing U.S. Oil & Gas equity and equity-linked issuance displayed continued forward momentum in 2005 Source: ECM Analytics as of 12/30/05 U.S. Oil & Gas equity & equity-linked issuance Integrated Small cap E&P Services & Equipment Proceeds raised ($bn) 4 E Q U I T Y M A R K E T U P D A T EE Q U I T Y M A R K E T U P D A T E Slide 8 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E November 2005 $84,103,500 Sole Bookrunner Follow-on Offering December 2004 $300,000,000 Sole Bookrunner Follow-on Offering Source: Equidesk as of 12/30/05 Apportioned credit to each bookrunner Recent JPMorgan bookrun Oil & Gas equity and equity-linked transactions January 2005 $65,000,000 Placement Agent 6.00% Conv. Sr. Notes due 2012 March 2005 $2,528,750,000 Joint Bookrunner Secondary Offering September 2004 $231,000,000 Joint Bookrunner Equity and Equity- linked financing June 2005 $114,000,000 Joint Bookrunner Follow-on Offering June 2004 $149,000,000 Joint Bookrunner Follow-on Offering December 2004 $108,000,000 Joint Bookrunner Follow-on Offering February 2004 $416,400,000 Sole Bookrunner Follow-on Offering August 2005 $187,450,000 Joint Bookrunner Follow-on Offering August 2005 $189,120,000 Joint Bookrunner Follow-on Offering The top 5 underwriters have bookrun a majority of the issuance in the last two years September 2005 $599,696,000 Joint Bookrunner Follow-on Offering September 2005 $288,305,000 Joint Bookrunner Follow-on Offering May 2004 $122,700,000 Joint Bookrunner Follow-on Offering U.S. Oil & Gas equity and equity-linked 2004 U.S. Oil & Gas equity and equity-linked 2005 November 2005 $142,058,840 Sole Bookrunner Initial Public Offering December 2005 $277,827,744 Sole Bookrunner Block Trade 5 E Q U I T Y M A R K E T U P D A T EE Q U I T Y M A R K E T U P D A T E Slide 9 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E Market recap High yield market 2005 recap and outlook High yield market data 2005 was a mixed year for high yield The year began with strong carryover momentum from 2004 Yields were at their all-time lows of 6.99%; Returns were outperforming almost all other asset classes; Issuers, in a frenzy to take advantage of market conditions, had just made 4Q04 one of the busiest quarters in the history of the market However, O&G was a relatively strong performer The markets paltry yields and spreads in 2005 left it little cushion for bad news and it had only one way to go when bad news hit GM / Ford; 8 Fed rate hikes for 200 bps; Oil and its effect on inflation and discretionary spending; Several high-profile bankruptcies; Convergence trades gone awry at several hedge funds Yields ended the year 117 bps higher at 8.16%, leaving investors with a sub-coupon 3% return Hedge funds, central to the 2003-2004 bull market, largely withdrew from participating in new issues not only was high yield no longer the market du jour, but the flat yield curve left them unable to employ the carry trades that had served them so well in 2003 and 2004 Retail investors pulled $9 billion from the market, with outflows three weeks out of every four New issue volumes were down 30% vs. 2004, mainly as refinancing volumes plummeted due to fewer opportunities and the higher cost of capital Portfolio managers, unable to count on rate-driven capital gains for returns, became much more selective, a trait that did not bode well for leverage levels, dividend recaps, CCC-rated credits, and deals for smaller issuers Market outlook With refinancing volumes down substantially, M&A activity became the key driver of supply in 2005 Mega LBOs were the trend of the year: Sungard, Intelsat, Hertz, Tim Hellas, Wind Telecom and Neiman Marcus were each larger than any LBO in 2004 M&A deals will continue to dominate supply over $30 billion of financing is known to be coming, the largest pipeline in memory Looking ahead, the critical variables for 2006 are: How far will the Fed go before it stops raising rates How well the market can digest the new issue pipeline JPMorgan forecasts that the fed funds rate and 10-yr will reach 5.0% and 5.35% by May With these assumptions, JPMorgan strategist Peter Acciavatti forecasts 3-4% returns for high yield in 2006, a level that implies capital erosion as current spreads are insufficient to absorb the expected increase in rates Overall volumes in 2006 are expected to be down 0 Slide 10 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E JPMorgan High Yield Index Putting todays yields into perspective (as of 1/9/06) The JPMorgan HY Index is currently trading at a YTW of 8.03% - 243 bps inside of its long-term average of 10.46% Over the last 19 years, yields have been lower only 22% of the time The JPMorgan HY Index is currently trading at a STW of 368 bps, which is 203 bps inside of its long-term average of 571 bps O&G related issues generally traded 100 - 200 bps inside of the average during 2005 JPM HY Index Avg. YTW = 10.46% JPM HY Index Avg. STW = 571 bps 1 Slide 11 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E Source: JPMorgan New issues by industry The high yield market continues to see deals issued across a wide range of industries O & G sector led new issues in 2005 New issues by rating Single B deals continue to represent the majority of new issues Paper/Packaging 5% Metals & Mining 4% 2 Slide 12 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E 2005 high yield - oil & gas highlights ($ millions, except bond prices) JPMorgan Oil & Gas High Yield Indices (YTW %) 3 Oil & gas high yield supply ($ billions) 8.16% 6.63% 6.76% 6.28% Slide 13 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E Market commentary Current high yield market conditions (at 1/9/06) Weekly high yield mutual fund flows ($ millions) Mutual fund flowsJPM High Yield Index (YTW) Weekly high yield new issue volume ($ millions) Note: Friday to Thursday; includes crossovers Note: Week-only reporters. Includes distributions US Treasury yields (%) The high yield market is in strong shape as we start the new year A typical January effect saw a robust first week of trading as the market ended higher on each day The JPM HY index tightened 13 bps in the first week of January and currently yields 8.03% Approximately $6bn in deals on the forward calendar The JPM HY E&P index remains consistent with YE2005 levels The technical landscape remains balanced With no deals pricing over the last two weeks, investors are sitting on decent cash balances simply from clipping coupons and are eager to put money to work Q1 is shaping up to be very active driven by large M&A financings - R.H. Donnelley's merger with Dex, NRGs buyout of Texas Genco and Ineos acquisition of Innovene Investor sentiment is firm yet watchful Demand remains strong for well capitalized credits, but selective and yield sensitive for lower rated/aggressive credits E&Ps and Energy are among most favored by investors currently Overhanging uncertainties over the Feds future monetary tightening policy are keeping underlying yields tenuous New issue volumes are another critical variable likely to impact secondary momentum Market fundamentals should provide good support Corporate earnings and economic growth are expected to remain strong Default rates and distressed debt levels, though rising, are still well below historical averages Dec 2004: 5-10 yr: 61 bps Dec 2005: 5-10 yr: 4 bps 4 Slide 14 I P A A P R I V A T E C A P I T A L C O N F E R E N C EI P A A P R I V A T E C A P I T A L C O N F E R E N C E JPMorgan is the undisputed leader in leveraged finance Source: Thomson Financial 2005 Global High Yield league table 2005 IFR Awards Market leadership JPMorgan maintained its leading market positions: #1 Global High Yield Bonds #1 U.S. High Yield Bonds #1 Syndicated Loans #1 Leveraged Loans #1 LBO financings #1 Corporate Acquisition financings Market Awards awarded by IFR: U.S. High Yield Bond House of the Year European High Yield Bond House of the Year Global Loan House of the Year U.S. Loan House of the Year Deal Awards awarded by IFR: U.S. High Yield Bond of the Year - SunGard U.S. Loan of the Year SunGard U.S. Leveraged Loan of the Year SunGard JPMorgan finished 2005 as the #1 bookrunner in both High Yield Bonds and Leveraged Loans This marks the first time that a firm has finished #1 in both markets 2005 Leveraged Loan league table Source: Thomson Financial 2005 US High Yield league table US High Yield Bond House European High Yield Bond House US Loan House Source: Thomson Financial Global Loan House 7