32
North America Equity Research 08 June 2009 Accounting Issues J.P. Morgan Pension Risk Ratios and the Mysterious Mechanics of Pension Yield Curves Accounting & Valuation - US Dane Mott, CPA, CFA AC (1-212) 622-1443 [email protected] J.P. Morgan Securities Inc. Accounting & Valuation - Europe Sarah Deans (44-20) 7325-1775 [email protected] J.P. Morgan Securities Ltd. See page 30 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research. J.P. Morgan short-term and long-term pension risk ratios for U.S. companies. We calculate short-term and long-term pension risk ratios for a universe of more than 3,200 U.S. companies. Tables 6 and 8 of this report list companies with outlier short-term and long-term pension risk ratios and market caps over $50 million as of June 5, 2009. We last published our pension risk ratios on October 13, 2008. In Appendices I and II, we present the stock performance of October 13th outliers through June 5, 2009. The average stock performance of the October 13, 2008 short-term risk ratio outliers was -19% and the average stock performance of the October 13, 2008 long-term risk ratio outliers was -24%. These results compare to an average return of -4% for the entire universe over that period. Shedding light on pension yield curves. Pension yield curve selection decisions can have a material impact on the size of projected benefit obligations. We have mixed feelings about the use of pension yield curves. On one hand, we believe yield curve-based discount rates are conceptually superior to more simplistic discount rate methodologies such as the use of a single rate based off of a potentially non-representative benchmark such as the Moody’s Aa Index. Where we have problems with yield curves is in the diversity in practice related to how pension service providers go about creating these curves. In our view, this is a glaring area where the SEC or FASB need to provide clear guidance about what they deem to be the best-practice methodology. Absent some minimum standards as to how these yield curves are to be constructed, we fear that competitive forces will result in more and more yield curves being created off of increasingly smaller subsections of upper-yielding segments of the investment grade bond universe and more and more companies may see benefits to applying these higher yield curves even when such a curve may not be appropriate for their plans. Clients can find data for all the companies in this report’s universe at morganmarkets.com as part of our Excel-based Pension Risk Evaluator tool. See our October 30, 2008 Accounting Issues for a detailed summary of the pension funding rules under ERISA and Pension Protection Act. The piece contains numerous examples to explain the mechanics of the funding rules. Our 2009 J.P. Morgan U.S. Pension and OPEB Forecast Model can be used to perform funded status, earnings impact, and directional funding need analysis on specific names. Interested clients should request a copy.

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Page 1: pension research

North America Equity Research 08 June 2009

Accounting Issues

J.P. Morgan Pension Risk Ratios and the Mysterious Mechanics of Pension Yield Curves

Accounting & Valuation - US

Dane Mott, CPA, CFAAC

(1-212) 622-1443 [email protected]

J.P. Morgan Securities Inc.

Accounting & Valuation - Europe Sarah Deans (44-20) 7325-1775 [email protected]

J.P. Morgan Securities Ltd.

See page 30 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.

• J.P. Morgan short-term and long-term pension risk ratios for U.S. companies. We calculate short-term and long-term pension risk ratios for a universe of more than 3,200 U.S. companies. Tables 6 and 8 of this report list companies with outlier short-term and long-term pension risk ratios and market caps over $50 million as of June 5, 2009. We last published our pension risk ratios on October 13, 2008. In Appendices I and II, we present the stock performance of October 13th outliers through June 5, 2009. The average stock performance of the October 13, 2008 short-term risk ratio outliers was -19% and the average stock performance of the October 13, 2008 long-term risk ratio outliers was -24%. These results compare to an average return of -4% for the entire universe over that period.

• Shedding light on pension yield curves. Pension yield curve selection decisions can have a material impact on the size of projected benefit obligations. We have mixed feelings about the use of pension yield curves. On one hand, we believe yield curve-based discount rates are conceptually superior to more simplistic discount rate methodologies such as the use of a single rate based off of a potentially non-representative benchmark such as the Moody’s Aa Index. Where we have problems with yield curves is in the diversity in practice related to how pension service providers go about creating these curves. In our view, this is a glaring area where the SEC or FASB need to provide clear guidance about what they deem to be the best-practice methodology. Absent some minimum standards as to how these yield curves are to be constructed, we fear that competitive forces will result in more and more yield curves being created off of increasingly smaller subsections of upper-yielding segments of the investment grade bond universe and more and more companies may see benefits to applying these higher yield curves even when such a curve may not be appropriate for their plans.

• Clients can find data for all the companies in this report’s universe at morganmarkets.com as part of our Excel-based Pension Risk Evaluator tool.

• See our October 30, 2008 Accounting Issues for a detailed summary of the pension funding rules under ERISA and Pension Protection Act. The piece contains numerous examples to explain the mechanics of the funding rules.

• Our 2009 J.P. Morgan U.S. Pension and OPEB Forecast Model can be used to perform funded status, earnings impact, and directional funding need analysis on specific names. Interested clients should request a copy.

Page 2: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

The Big Picture The Plans of the Companies in the S&P 500 When we discuss pensions with clients, we often begin the conversation with a look at the information presented in Table 1 which we think is helpful in explaining the macro pension environment. The first section of this table shows the aggregate funded status and employer contributions of defined benefit pension plans of companies in the S&P 500 between yearend 1996 and yearend 2008. The bottom half of the table tracks the changes in the S&P 500 Index (our proxy for equity returns) and the Moody Aa Index (our proxy for pension discount rates). While we think the Moody’s Aa Index is a helpful indicator to review to get a broad, directional sense of movements in discount rates, note that later in this report we explain why the Moody’s Aa Index can be a somewhat inarticulate measure of pension discount rates.

Table 1: Pension Plan Performance of the Companies in the S&P 500, 1996-2008 (US$ in billions) Aggregate Funded Status of Defined Benefit Pension Plans of the Companies in the S&P 500 Index:

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Fair Value of Plan Assets 641 773 869 1,014 1,042 940 862 1,046 1,172 1,297 1,469 1,531 1,138Projected Benefit Obligation 595 684 790 794 861 942 1,067 1,205 1,332 1,448 1,511 1,468 1,450Over (Under) Funded Amount 46 88 79 220 181 (1) (205) (159) (160) (151) (42) 63 (312)

Overfunded/(Underfunded) Percentage 8% 13% 10% 28% 21% 0% -19% -13% -12% -10% -3% 4% -22%

Employer Contributions N/A N/A 9 10 14 15 45 69 55 57 48 36 41

December Year-End Trends of the S&P 500 Index and Moody's Aa Index:

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 CurrentS&P 500 Index at December 31 741 970 1,229 1,469 1,320 1,148 880 1,112 1,212 1,248 1,418 1,468 903.25 940.09YOY Change 230 259 240 (149) (172) (268) 232 100 36 170 50 (565) 37 YOY % Change 31% 27% 20% -10% -13% -23% 26% 9% 3% 14% 4% -38% 4%

YOY Trend Movement of S&P 500 Index

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 CurrentMoody's Aa Index at December 31 7.47 6.94 6.65 7.90 7.41 7.08 6.52 6.01 5.66 5.41 5.46 5.80 5.54 6.32 YOY Basis-Point Change (0.53) (0.29) 1.25 (0.49) (0.33) (0.56) (0.51) (0.35) (0.25) 0.05 0.34 (0.26) 0.78

YOY Trend Movement of Moody's Aa Index

Note: S&P 500 constituency as of 5/19/09. Current S&P 500 Index figure is as of 6/05/09, and current Moody's Aa Index figure is as of 6/04/09. Source: Company reports, Compustat, FactSet, Moody’s, Standard and Poor’s, and J.P. Morgan.

As shown in Table 1, yearend 2008 draws a striking resemblance to the situation pension plans were in at yearend 2002. During the tech bubble of the late 1990s, the funded status of the aggregate pension plans of the S&P 500 companies rose dramatically due to three consecutive years of 20%+ equity returns and a large rise in interest rates in 1999. Funding peaked in 1999, but then began a sharp decline between 2000 and 2002. The period between 2000 and 2002 brought about what is often described as a “perfect storm” for pension plans: equity returns collapsed at the same time as interest rates fell. During this period, pension portfolios were severely damaged by losses in equity portfolios and projected benefit obligations rose due to declining interest rates translating to lower discount rates which resulted in higher net present values for pension obligations.

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

In the United States, there is mandatory funding for pension plans1. The Pension Protection Act of 2006 (2006 Act) and the Employee Retirement Income Security Act of 1974 (ERISA) establish the pension funding requirements. In addition, pension plans make pension insurance payments to a government entity called the Pension Benefit Guarantee Corporation (PBGC), which provides an insurance-like function for pension plan beneficiaries similar to the role of FDIC for bank deposits. An unfortunate aspect of these rules is that companies typically must make these mandatory contributions during economic downturns, usually when their pension plans are most underfunded. Mandatory funding rules require that most companies fill funding deficits over a seven-year period. However, note that airlines fund their plans over longer periods due to special accommodations made for the industry in the Pension Protection Act. For more on pension funding rules, request a copy of our October 30, 2008 report, Pension Tension: U.S. Pension Funding Rules Explained. Beginning in 2002, companies began making much larger contributions to their pension plans in response to funding requirements. Between 2002 and 2007, S&P 500 companies injected $310 billion into their pension plans. Many of these contributions were mandatory contributions in compliance with funding rules under ERISA. After six years of large pension contributions, S&P 500 companies were at a 4% overfunded status in aggregate at the end of fiscal 2007. Ultimately, a fully funded plan is a positive for a company because it implies that there should be minimal need for plan funding in the immediate future.

As the 2008 funded status of S&P 500 constituent plans show in Table 1, it took only one year of asset deterioration to undo all of the progress companies made to improve their funded status between yearend 2002 and yearend 2007. Predicting how much cash and stock funding companies will need to contribute to close their funding gaps is very difficult. Future gains or losses on plan assets and changes in discount rates from changes in the interest rate environment will likely play a significant role. If we assume discount rates and asset performance replicate the post-2002 environment, it would seem that contributions of at least $310 billion over the next five to seven years could be a starting point for an estimate of the cash funding needs. Given that the plans will be working themselves out of a 2008 GAAP deficit of $312 billion rather than a smaller 2002 GAAP deficit of $205 billion, it would appear that it is very possible that the funding contributions could very easily be much larger than the “back of the envelope” estimate based on contributions since 2002. Either way, we expect cash contributions to steadily increase over the next several years.

1 Note that, unlike pension plans, other post-retirement benefit plans (OPEBs) such as retiree medical plans are not required to be funded and most companies fund these obligations on a pay-as-you-go basis where funding in any given year equals the payments made to plan beneficiaries during that year. While OPEB issues are significant at some companies, these issues are outside of the scope of this report.

Page 4: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Today, companies are only required to give an estimate of plan contributions for the upcoming year in 10Ks. To date, the best voluntary disclosure we have seen from any company regarding future pension contributions was that of Honeywell (HON) which provided the following statement in the M,D,&A of its 2008 10K filed on February 13, 2009:

Assuming that actual plan returns are consistent with our expected plan return of 9 percent in 2009, interest rates remain constant, and there are no additional changes to U.S. pension funding legislation, we expect that we would be required to make contributions to our U.S. pension plans of approximately $360, $700, $1,000 and $800 million in 2010, 2011, 2012 and 2013, respectively, to satisfy minimum statutory funding requirements.

More disclosures along the lines of those provided by Honeywell by the universe of companies with pension plans would be very helpful. Without enhanced disclosures, investors will continue to make estimates based on limited levels of public disclosure of funding information. We believe that poor levels of information in this area create unnecessary modeling risk for analysts. Ideally, companies would provide users with sensitivity analyses showing their potential funding amounts in different asset return and discount rate scenarios for the next five to seven years.

The Plans of the U.S. Universe While analyzing the plans of the companies in the S&P 500 provides a good benchmark for analyzing the performance of pension plans of the largest companies in the United States, we find it helpful to define our universe more broadly given many of the companies where pension issues could be the most severe are outside of the index.

We started with a universe of all the companies in the Russell 3,000 as of May 19, 2009. In addition, we screened the FactSet U.S. universe using Compustat and Bloomberg and added any public companies disclosing pension obligations regardless of whether they were qualified or non-qualified pension plans. In total, our universe includes 3,204 companies (1,447 of these companies have defined benefit pension plans). If all of these plans were aggregated into a single plan, it would have $1.338 trillion in plan assets, a projected benefit obligation of $1.730 trillion, and a 23% underfunded status of $393 billion (the 23% underfunded status is comparable to the 22% underfunded status of the S&P 500 companies at yearend). Between 1998 and 2008, these companies have injected $465 billion into their pensions in the form of contributions ($361 billion of those contributions have come since the beginning of 2002).

We calculated the funded status (plan assets minus projected benefit obligations) for each of the 1,447 companies in our universe with pension plans. In Table 2, we present a distribution of these results. While in aggregate the plans of the universe were underfunded by 23%, the average funded status was -32% and the mode (excluding the companies that only have unfunded non-qualified plans) and median funded status were both -34%.

Page 5: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 2. Distribution of Most Recently Disclosed Funded Status Percentages Across the U.S. Universe

0

10

20

30

40

50

60

70

80

90

100

110

120

130

-100

%-9

9% to

-98%

-97%

to -9

6%-9

5% to

-94%

-93%

to -9

2%-9

1% to

-90%

-89%

to -8

8%-8

7% to

-86%

-85%

to -8

4%-8

3% to

-82%

-81%

to -8

0%-7

9% to

-78%

-77%

to -7

6%-7

5% to

-74%

-73%

to -7

2%-7

1% to

-70%

-69%

to -6

8%-6

7% to

-66%

-65%

to -6

4%-6

3% to

-62%

-61%

to -6

0%-5

9% to

-58%

-57%

to -5

6%-5

5% to

-54%

-53%

to -5

2%-5

1% to

-50%

-49%

to -4

8%-4

7% to

-46%

-45%

to -4

4%-4

3% to

-42%

-41%

to -4

0%-3

9% to

-38%

-37%

to -3

6%-3

5% to

-34%

-33%

to -3

2%-3

1% to

-30%

-29%

to -2

8%-2

7% to

-26%

-25%

to -2

4%-2

3% to

-22%

-21%

to -2

0%-1

9% to

-18%

-17%

to -1

6%-1

5% to

-14%

-13%

to -1

2%-1

1% to

-10%

-9%

to -8

%-7

% to

-6%

-5%

to -4

%-3

% to

-2%

-1%

to 0

%1%

to 2

%3%

to 4

%5%

to 6

%7%

to 8

%9%

to 1

0%11

% to

15%

16%

to 2

0%21

% to

25%

26%

to 3

0%31

% to

35%

36%

to 4

0%≥

41%

8% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 0% 1% 1% 0% 1% 2% 1% 2% 3% 2% 3% 3% 5% 5% 4% 6% 4% 4% 5% 3% 3% 3% 3% 3% 2% 2% 2% 2% 2% 1% 2% 1% 1% 1% 1% 0% 0% 1% 0% 0% 1% 0% 0% 0%

Pension Funding Percentage and Percent of Companies in Distribution at Each Range

# of

Com

pani

Source: Company reports, Bloomberg, Compustat, FactSet, and J.P. Morgan estimates.

Page 6: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Pension Risk Ratios Given mandatory funding rules, one central issue for investors to focus on is a company’s ability to meet funding requirements. While it can be difficult to estimate the amount of a company’s specific funding requirements, it is rather easy to identify companies with the highest probability of having difficulty meeting funding requirements.

For a number of years we have been publishing pension risk ratios for a large universe of companies. In this section we update those ratios.

Methodology Our short-term and long-term pension risk ratios are shown in Table 3. Investors should keep in mind that these ratios only take single-employer defined benefit pension plans2 into consideration.

Table 3: J.P. Morgan Pension Risk Ratios

PBO - PLAN ASSETSCURRENT MARKET CAPITALIZATION

PBOCURRENT MARKET CAPITALIZATION

J.P. MORGAN SHORT-TERM PENSION RISK RATIO =

J.P. MORGAN LONG-TERM PENSION RISK RATIO =

Source: J.P. Morgan.

The short-term pension risk ratio identifies companies that might find it challenging to meet the obligations associated with the current underfunding levels of their plans.

The long-term pension-risk ratio identifies companies that have the most significant defined-benefit exposure regardless of their current funding levels.

With our risk ratios, the larger the ratio, the greater the firm’s relative pension risk. The larger the obligations relative to the size of the company, the more susceptible the company is to associated problems arising from defined benefit volatility. Companies with the highest of these ratios may be in situations where “the tail wags the dog.” For companies with pension exposure so large that it is nearly as large as or larger than the value of its operating business units, the most important variables in the company’s performance in a given year might be pension asset performance and changes in discount rates.

2 For example, these ratios and the analysis in this report do not take into consideration multi-employer pension plans. A multi-employer pension plan is a plan covering workers of more than one employer. Often, multi-employer pension plans are set up under collective bargaining agreements made between unions and companies. The disclosure requirements for multi-employer plans under U.S. GAAP are minimal. Companies must disclose the amount of contributions made for each income-statement year presented in the financials. Contributions are recorded as pension cost.

Page 7: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Given that pension plans are like a series of bond obligations that are continuously being marked to market and are typically ineffectively hedged with volatile assets, we believe the size of the obligations relative to the market value of the company’s equity represents the best simple and commonly available measure of long-term defined benefit risk exposure.

We last published pension risk ratio analysis for the U.S. pension universe on October 13, 2008. In Appendices I and II, we present the stock performance of October 13th outliers through June 5, 2009. The average stock performance of the October 13, 2008 short-term risk ratio outliers was -19% and the average stock performance of the October 13, 2008 long-term risk ratio outliers was -24%. These results compare to an average return of -4% for the entire universe over that period3. A number of these companies have entered bankruptcy over the past eight months.

Special Considerations Note that while market cap figures are current, pension data is from most recent 10K disclosures and is somewhat static. In Table 4, we present the returns of the S&P 500 Index since the last measurement dates as a proxy for potential equity return performance over the undisclosed period. We discuss asset allocations later in this report. At yearend 2008, the average equity allocation on plan assets for companies in our universe was 51%.

Table 4: Pension Plan Performance of the Companies in the S&P 500, 1996-2008 (US$ in billions) Last Pension

Measurement Date

S&P 500 Index Beginning of

the Period

06/05/09 S&P 500

Index

Performance over the

Period4/30/2008 1,385.59 940.09 -32%5/31/2008 1,400.38 940.09 -33%6/30/2008 1,280.00 940.09 -27%7/31/2008 1,267.38 940.09 -26%8/31/2008 1,296.50 940.09 -27%9/30/2008 1,166.36 940.09 -19%

10/31/2008 968.75 940.09 -3%11/30/2008 896.24 940.09 5%12/31/2008 903.25 940.09 4%

1/30/2009 825.88 940.09 14%2/27/2009 735.09 940.09 28%3/31/2009 797.87 940.09 18%

Source: Bloomberg and J.P. Morgan estimates.

Another fact to consider is that companies aggregate their defined-benefit pension plans for purposes of disclosing their funded status in footnotes. If a company has one or more overfunded plan(s), the excess assets in these plans are offsetting the excess obligations in other plans for accounting purposes. Note that it is very difficult in practice for a company to use the assets of one plan to settle the obligations of another plan.

3 All average returns were calculated excluding stocks in the universe with market caps under $50 million since the published tables in the October 13, 2008 report excluded companies below that market cap level.

Page 8: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

It is also important to recognize that some companies have foreign pension plans. These plans are not under the funding rules of ERISA and the Pension Protection Act of 2006. The funding rules for these plans will vary from country to country and add an additional level of unpredictability to the cash flow analysis of plans.

Also note that there are qualified and non-qualified pension plan classifications. Most non-qualified plans are typically completely unfunded for tax reasons. Whenever possible, we have included non-qualified plans in the calculation of the obligations. While we understand why they are unfunded, the strategic reason for not funding the plan does not change the fact that these plans represent obligations that eventually will need to be funded (just not under the accelerated time table required for qualified plans under ERISA and the Pension Protection Act). The same principle applies regardless of qualified or non-qualified status—as the obligation gets larger relative to the size of the company’s operating business, funding becomes more difficult to accomplish.

Lastly, when analyzing the pension risk of aerospace and defense companies, it is important to keep in mind that this industry represents a special situation. The U.S. government, under its Cost Accounting Standards, considers pension funding to be an allowable cost. Pension funding is reimbursed in many government contracts, either directly for cost-plus contracts or as forecasted in a fixed-price contract. Therefore, in a sense, the government is taking on a portion of the companies’ employee benefit risk and employee benefit liability. Given that U.S. GAAP financial statements do not provide disclosure as to how much of these companies’ pension obligations are government-related and reimbursable, it is difficult to assign an accurate pension-risk ratio to these companies. The same issue exists for utility companies to some extent since many can pass on funding costs to utility customers through higher rates.

Short-Term Pension Risk Ratio Analysis Table 5 shows the distribution of short-term pension risk ratios among the 1,447 companies in our universe with pension plans. As this distribution shows, at least when we are concerned about ability to fund, we should focus our attention on a relatively small portion of the universe. From our perspective, immediate funding issues are most critical for the 4% of companies (64) in the universe with short-term pension risk ratios of 1.00 or higher. For these companies, pension obligations are at least equal to the company’s most recent market capitalization. If we extend our outlier scope further to the 0.50 short-term risk ratio threshold, 7% (108 companies) of the universe meet these criteria.

In Table 6, we present 112 companies with market caps of $50 million or greater and short-term pension risk ratios of 0.25 or greater.

Long-Term Pension Risk Ratio Analysis Table 7 shows the distribution of long-term pension risk ratios among the 1,447 companies in our universe with pension plans. If, like with the short-term risk ratio, we focus on the portion of the universe with a ratio of 1.00 or larger, we find 169 companies representing 12% of the universe meet these criteria.

In Table 8, we present 89 companies with market caps of $50 million or greater and long-term pension risk ratios of 1.00 or greater.

Page 9: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 5. Distribution of Short-Term Pension Risk Ratios Among Companies in the U.S. Universe with Pension Plans

0

25

50

75

100

125

150

175

200

≤ -.0

1 -

0

.01

0.0

2 0

.03

0.0

4 0

.05

0.0

6 0

.07

0.0

8 0

.09

0.1

0 0

.11

0.1

2 0

.13

0.1

4 0

.15

0.1

6 0

.17

0.1

8 0

.19

0.2

0 0

.21

0.2

2 0

.23

0.2

4 0

.25

0.2

6 0

.27

0.2

8 0

.29

0.3

0 0

.31

0.3

2 0

.33

0.3

4 0

.35

0.3

6 0

.37

0.3

8 0

.39

0.4

0 0

.41

0.4

2 0

.43

0.4

4 0

.45

0.4

6 0

.47

0.4

8 0

.49

0.5

0 0.

51 to

0.5

50.

56 to

0.6

0.61

to 0

.65

0.66

to 0

.70.

71 to

0.7

50.

76 to

0.8

0.81

to 0

.85

0.86

to 0

.90.

91 to

0.9

50.

96 to

1≥

1.01

5%13%14%11%8% 6% 4% 3% 3% 3% 2% 3% 2% 1% 2% 1% 1% 1% 1% 1% 1% 0% 0% 0% 0% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 4%

Short-term Pension Risk Ratio and the % of Total Universe

# of

Com

pani

Source: Company reports, Bloomberg, Compustat, FactSet, and J.P. Morgan estimates.

Page 10: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 6. U.S. Companies with Market Capitalizations on June 5, 2009 Greater than $50 Million and Short-Term Pension Risk Ratios of 0.25 or Greater Pension Risk Ratios Most Recently Disclosed Aggregate Debt and Equity Ratings

Most Recent Fiscal

Yearend

Market Capitalization

on

Short-term Pension Risk Ratio

Long-term Pension Risk Ratio

Pension Plan Assets

Pension Projected

Benefit Obligations

Funded Status

% Funded

Most Recent Total

Debt Composite Debt Rating

Ave. Equity Analyst Rating

Total # of Equity

AnalystsJ.P. Morgan Equity

Analyst

J.P. Morgan Equity Rating

Short Interest (% of float)

2009 Expected Pension

ContributionTicker Company Name 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/09MEG Media General Inc 12/2008 63.6 3.28 6.57 209.0 417.6 (208.5) -50% 730 N/A 2.000 4 23.5 16.7 AMR AMR Corp 12/2008 1,405.9 2.97 7.74 6,714.0 10,884.0 (4,170.0) -38% 10,311 CCC+ 3.583 12 Baker Jamie OW 10.7 N/ALEA Lear Corp 12/2008 91.5 2.78 8.51 523.8 778.5 (254.7) -33% 3,523 D 2.500 12 Patel Himanshu N 7.8 50.0 DAN Dana Holding Corp 12/2008 131.1 2.52 16.33 1,811.0 2,141.0 (330.0) -15% 1,228 B- 3.000 2 Patel Himanshu N 1.8 13.0 UIS Unisys Corp 12/2008 596.2 2.23 10.50 4,929.6 6,261.2 (1,331.6) -21% 1,060 C 3.000 4 0.7 90.0 YRCW YRC Worldwide Inc 12/2008 165.2 2.18 5.82 601.5 961.8 (360.3) -37% 1,232 CCC- 2.400 10 Wadewitz Thomas N 22.2 13.8 SR Standard Register Co/The 12/2008 113.8 2.10 4.10 228.0 466.4 (238.4) -51% 42 N/A 3.000 2 10.0 25.0 ATSG Air Transport Services Group Inc 12/2008 139.1 1.92 4.55 366.6 633.8 (267.2) -42% 455 N/A 3.000 1 0.1 36.4 AXL American Axle & Manufacturing Holdings I 12/2008 142.0 1.79 3.98 310.7 565.2 (254.5) -45% 1,095 CCC 2.750 8 Patel Himanshu N 15.1 20.0 SSP EW Scripps Co 12/2008 112.6 1.65 4.25 292.1 478.0 (185.9) -39% 73 N/A 3.333 6 Quadrani Alexia N 6.9 3.3 DAL Delta Air Lines Inc 12/2008 5,509.6 1.57 2.89 7,295.0 15,929.0 (8,634.0) -54% 16,596 B 4.889 9 Baker Jamie OW 4.3 275.0 PNX Phoenix Cos Inc/The 12/2008 238.1 1.29 2.79 357.8 665.5 (307.7) -46% 452 B+ 2.600 5 Bhullar Jamminder UW 4.4 N/ACAL Continental Airlines Inc 12/2008 1,292.1 1.10 1.92 1,057.0 2,482.0 (1,425.0) -57% 5,938 B- 3.583 12 Baker Jamie OW 13.9 125.0 BC Brunswick Corp/DE 12/2008 423.2 1.02 2.57 655.5 1,088.0 (432.5) -40% 731 B- 2.778 9 10.6 3.9 BLC Belo Corp 12/2008 191.7 1.00 2.58 302.9 495.4 (192.5) -39% 1,078 BB- 3.750 4 Meltz Michael N 2.0 N/AFOE Ferro Corp 12/2008 182.6 0.95 2.77 332.1 505.6 (173.5) -34% 665 CCC+ 3.857 7 7.0 20.2 NYT New York Times Co/The 12/2008 928.6 0.94 2.01 994.8 1,865.4 (870.6) -47% 1,281 B 2.143 7 Quadrani Alexia N 13.3 N/AXRM Xerium Technologies Inc 12/2008 71.8 0.94 1.59 47.1 114.4 (67.3) -59% 609 B- 2.333 3 1.4 8.7 GT Goodyear Tire & Rubber Co/The 12/2008 2,954.8 0.93 2.43 4,430.0 7,178.0 (2,748.0) -38% 5,526 B+ 3.667 9 Patel Himanshu OW 6.3 400.0 GCI Gannett Co Inc 12/2008 985.5 0.90 3.11 2,168.6 3,060.3 (891.7) -29% 4,295 BB 3.667 9 Quadrani Alexia N 21.7 14.1 BONT Bon-Ton Stores Inc 1/2009 84.6 0.86 2.20 113.7 186.4 (72.7) -39% 1,192 B- 3.000 2 16.4 6.4 MGI MoneyGram International Inc 12/2008 130.4 0.86 1.59 95.6 207.5 (111.9) -54% 979 B+ 4.000 4 0.8 3.0 ALK Alaska Air Group Inc 12/2008 570.5 0.84 1.98 650.0 1,130.9 (480.9) -43% 1,784 B 3.600 10 Baker Jamie OW 6.1 50.5 SOA Solutia Inc 12/2008 570.5 0.83 1.93 629.0 1,101.0 (472.0) -43% 1,349 B 5.000 2 3.6 42.0 REV Revlon Inc (Cl A) 12/2008 274.1 0.79 2.04 342.3 560.1 (217.8) -39% 1,292 N/A 3.000 2 2.9 26.0 BZ Boise Inc 12/2008 188.5 0.79 2.10 248.1 396.7 (148.6) -37% 1,044 BB- 5.000 1 3.5 4.1 HDNG Hardinge Inc 12/2008 60.4 0.78 3.02 135.3 182.4 (47.1) -26% 12 N/A 2.000 2 0.4 5.9 POL PolyOne Corp 12/2008 302.1 0.76 1.66 271.9 501.2 (229.3) -46% 450 B- 3.500 8 4.0 10.6 FDML Federal Mogul Corp 12/2008 1,002.0 0.74 1.32 580.9 1,320.2 (739.3) -56% 2,866 B+ 5.000 2 0.4 25.3 AKS AK Steel Holding Corp 12/2008 1,802.0 0.73 1.95 2,201.6 3,517.5 (1,315.9) -37% 610 BB- 3.000 12 Gambardella Michael OW 5.4 155.0 TEN Tenneco Inc 12/2008 344.0 0.72 1.77 361.0 610.0 (249.0) -41% 1,587 B- 3.500 8 Patel Himanshu N 3.8 24.0 CRD.B Crawford & Co 12/2008 263.4 0.70 2.04 354.5 537.7 (183.3) -34% 193 BB- 5.000 2 10.1 15.1 NCR NCR Corp 12/2008 1,762.0 0.68 2.76 3,675.0 4,872.0 (1,197.0) -25% 308 BBB- 3.571 7 Coster Paul N 2.7 120.0 FBN Furniture Brands International Inc 12/2008 202.3 0.68 2.08 284.4 421.7 (137.3) -33% 145 N/A 2.333 3 7.7 N/AOMX OfficeMax Inc 12/2008 649.2 0.67 1.97 841.2 1,276.2 (435.0) -34% 1,812 B 3.333 12 Horvers Christopher N 3.0 6.7 F Ford Motor Co 12/2008 18,273.9 0.65 3.54 52,863.0 64,743.0 (11,880.0) -18% 145,586 CCC 2.857 14 Patel Himanshu N 4.9 1,500.0 TSTY Tasty Baking Co 12/2008 53.1 0.59 1.52 49.4 80.5 (31.1) -39% 74 N/A 5.000 1 0.1 3.2 JRN Journal Communications Inc 12/2008 81.2 0.58 1.70 90.8 138.1 (47.3) -34% 216 N/A 3.000 4 3.0 0.3 GRA WR Grace & Co 12/2008 1,032.6 0.57 1.34 786.5 1,379.8 (593.3) -43% 13 N/A 1.000 1 5.0 51.0 HA Hawaiian Holdings Inc 12/2008 293.6 0.53 1.08 160.5 316.7 (156.2) -49% 253 N/A 4.750 4 2.6 2.6 AIG American International Group Inc 12/2008 4,412.9 0.53 1.32 3,498.0 5,825.0 (2,327.0) -40% 190,672 BBB+ 3.000 10 Bhullar Jamminder - 9.6 600.0 IP International Paper Co 12/2008 6,317.2 0.51 1.49 6,194.0 9,443.0 (3,249.0) -34% 11,495 BBB 3.571 14 Shank Hueston Claudia N 3.3 24.0 NP Neenah Paper Inc 12/2008 140.5 0.51 1.52 142.9 214.2 (71.3) -33% 341 B+ 3.500 2 3.4 10.7 TXT Textron Inc 12/2008 3,002.6 0.50 1.69 3,574.0 5,088.0 (1,514.0) -30% 10,829 BB+ 3.308 13 Tusa, Jr Stephen OW 7.1 55.0 HUN Huntsman Corp 12/2008 1,473.9 0.49 1.81 1,940.0 2,663.0 (723.0) -27% 3,779 B 2.714 7 Zekauskas Jeffrey N 4.6 143.0 X United States Steel Corp 12/2008 4,133.5 0.48 2.32 7,587.0 9,572.0 (1,985.0) -21% 3,124 BB+ 3.000 15 Gambardella Michael OW 13.5 N/ATVL LIN TV Corp 12/2008 103.3 0.47 1.07 61.5 110.2 (48.7) -44% 686 B 3.500 4 9.1 0.4 FNM Federal National Mortgage Association 12/2008 806.4 0.47 1.19 579.0 959.0 (380.0) -40% 854,013 AAA 2.000 2 5.2 6.0 WHR Whirlpool Corp 12/2008 3,245.6 0.47 1.20 2,368.0 3,889.0 (1,521.0) -39% 3,033 BBB- 2.667 6 Rehaut Michael UW 12.7 93.0 TKR Timken Co 12/2008 1,810.1 0.47 1.44 1,757.8 2,600.9 (843.1) -32% 630 BBB- 4.333 6 1.6 90.0 ARM ArvinMeritor Inc 9/2008 249.8 0.46 6.62 1,539.0 1,654.0 (115.0) -7% 1,517 CCC 2.714 7 Patel Himanshu N 4.3 28.0 MLP Maui Land & Pineapple Co Inc 12/2008 65.7 0.43 0.91 31.7 59.7 (28.0) -47% 90 N/A 1.000 1 9.4 2.5 CTB Cooper Tire & Rubber Co 12/2008 631.4 0.43 1.58 725.9 994.5 (268.6) -27% 632 B 3.286 7 Patel Himanshu OW 13.6 50.0 KAMN Kaman Corp 12/2008 444.8 0.42 1.18 334.1 523.0 (188.9) -36% 107 BBB- 4.000 7 2.4 16.6 FRP Fairpoint Communications Inc 12/2008 90.4 0.42 2.46 184.3 222.4 (38.1) -17% 2,518 CCC+ 2.667 6 5.4 - ABD ACCO Brands Corp 12/2008 183.3 0.42 1.94 277.6 354.8 (77.2) -22% 740 B+ 2.200 5 1.8 15.2 PTV Pactiv Corp 12/2008 2,876.7 0.42 1.29 2,506.0 3,707.0 (1,201.0) -32% 1,345 BBB 4.273 11 Shank Hueston Claudia OW 1.9 N/AWLB Westmoreland Coal Co 12/2008 95.2 0.41 0.84 40.8 80.0 (39.2) -49% 262 N/A N/A - 3.9 11.3 FFG FBL Financial Group Inc 12/2008 253.9 0.41 1.09 172.7 275.6 (102.9) -37% 371 N/A 3.000 2 10.2 9.0 LVB Steinway Musical Instruments 12/2008 93.4 0.40 0.88 44.8 82.6 (37.8) -46% 177 B 4.500 2 3.2 2.2 TLB Talbots Inc 1/2009 270.2 0.40 0.67 73.1 180.6 (107.5) -60% 477 N/A 3.222 9 Tunick Brian N 31.2 9.7 GPK Graphic Packaging Holding Co 12/2008 818.8 0.39 0.99 489.0 812.1 (323.1) -40% 3,227 B 3.000 1 4.9 67.0 XIDE Exide Technologies 3/2008 509.5 0.38 1.26 450.5 643.2 (192.7) -30% 687 B 3.500 4 3.9 41.8 IPSU Imperial Sugar Co 9/2008 146.3 0.38 1.31 136.0 191.0 (54.9) -29% 30 N/A 3.000 2 3.8 9.0 CBM Cambrex Corp 12/2008 118.9 0.37 0.68 37.3 80.9 (43.6) -54% 127 N/A 3.667 3 1.7 1.2 Source: Company reports, Compustat, FactSet, Bloomberg, Moody’s, Fitch, Standard and Poor’s, and J.P. Morgan estimates.

Page 11: pension research

11

North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 6. U.S. Companies with Market Capitalizations on June 5, 2009 Greater than $50 Million and Short-Term Pension Risk Ratios of 0.25 or Greater (Continued) Pension Risk Ratios Most Recently Disclosed Aggregate Debt and Equity Ratings

Most Recent Fiscal

Yearend

Market Capitalization

on

Short-term Pension Risk Ratio

Long-term Pension Risk Ratio

Pension Plan Assets

Pension Projected

Benefit Obligations

Funded Status

% Funded

Most Recent Total

Debt Composite Debt Rating

Ave. Equity Analyst Rating

Total # of Equity

AnalystsJ.P. Morgan Equity

Analyst

J.P. Morgan Equity Rating

Short Interest (% of float)

2009 Expected Pension

ContributionTicker Company Name 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/09ED Consolidated Edison Inc 12/2008 9,747.0 0.36 0.96 5,836.0 9,383.0 (3,547.0) -38% 10,699 A- 2.857 14 Smith Andrew UW 4.8 290.0 LMT Lockheed Martin Corp 12/2008 32,860.8 0.36 0.93 18,539.0 30,421.0 (11,882.0) -39% 3,805 A- 4.217 23 Nadol Joseph N 1.0 - CNW Con-way Inc 12/2008 1,504.9 0.36 0.85 745.0 1,283.5 (538.5) -42% 933 BBB- 3.571 14 Wadewitz Thomas N 10.8 23.8 GRB Gerber Scientific Inc 4/2008 81.8 0.36 1.36 82.2 111.2 (29.1) -26% 75 N/A 3.000 3 1.5 6.6 LSR Life Sciences Research Inc 12/2008 96.9 0.35 1.31 93.2 127.0 (33.9) -27% 74 N/A 5.000 1 1.4 3.9 KRO Kronos Worldwide Inc 12/2008 361.8 0.35 1.08 263.8 389.4 (125.6) -32% 657 N/A N/A - 13.9 18.0 BNE Bowne & Co Inc 12/2008 184.9 0.34 0.76 76.9 140.4 (63.5) -45% 116 B 3.000 2 3.3 7.9 IEP Icahn Enterprises LP 12/2008 2,172.2 0.34 0.61 581.0 1,320.0 (739.0) -56% 5,688 BBB- N/A - N/A 25.0 CMS CMS Energy Corp 12/2008 2,660.4 0.34 0.61 724.0 1,619.0 (895.0) -55% 6,968 BB+ 4.667 12 Smith Andrew OW 11.4 300.0 USU USEC Inc 12/2008 684.2 0.33 1.14 558.8 782.8 (224.0) -29% 575 B- 3.500 4 19.1 23.6 BPOP Popular Inc 12/2008 750.2 0.32 0.84 389.6 627.7 (238.1) -38% 6,311 BBB- 2.200 5 8.1 N/AGETI GenTek Inc 12/2008 244.6 0.32 0.93 150.1 227.4 (77.3) -34% 213 B+ 3.000 1 2.6 4.0 CFX Colfax Corp 12/2008 385.4 0.31 0.81 192.9 313.3 (120.5) -38% 96 N/A 4.143 7 2.8 3.2 CLW Clearwater Paper Corp 12/2008 295.1 0.31 0.85 159.1 250.4 (91.2) -36% 140 BB- 3.000 1 2.5 N/ABDK Black & Decker Corp 12/2008 1,924.0 0.31 0.80 950.0 1,543.7 (593.7) -38% 1,724 BBB 2.818 11 Rehaut Michael N 7.1 45.0 RTN Raytheon Co 12/2008 17,737.9 0.31 0.92 10,907.0 16,361.0 (5,454.0) -33% 2,297 A- 4.200 20 Nadol Joseph OW 1.9 1,110.0 LDSH Ladish Co Inc 12/2008 225.3 0.30 0.91 136.5 204.0 (67.6) -33% 108 N/A 4.333 6 5.8 8.3 R Ryder System Inc 12/2008 1,685.1 0.30 0.88 975.5 1,477.5 (501.9) -34% 2,847 BBB+ 3.286 7 5.7 100.0 SHS Sauer-Danfoss Inc 12/2008 285.3 0.30 0.77 135.6 220.5 (84.9) -39% 552 N/A 3.667 3 3.7 N/ACE Celanese Corp 12/2008 3,040.9 0.30 1.01 2,170.0 3,073.0 (903.0) -29% 3,469 N/A 4.455 11 2.3 40.0 M Macy's Inc 1/2009 5,410.7 0.30 0.56 1,438.0 3,043.0 (1,605.0) -53% 8,854 BB+ 3.667 18 Grom Charles N 6.6 370.0 WBC WABCO Holdings Inc 12/2008 1,075.2 0.30 0.40 110.6 428.6 (318.0) -74% 173 N/A 4.250 4 Tusa, Jr Stephen N 1.2 N/ACI Cigna Corp 12/2008 6,294.2 0.29 0.65 2,248.0 4,101.0 (1,853.0) -45% 2,463 BBB 4.053 19 Rex John N 2.0 - ROC Rockwood Holdings Inc 12/2008 1,269.7 0.29 0.47 228.7 600.4 (371.7) -62% 2,586 N/A 4.250 8 Kueck Silke OW 2.9 9.5 BCO Brink's Co/The 12/2008 1,298.1 0.29 0.74 588.0 965.6 (377.6) -39% 232 BBB 4.444 9 1.8 13.6 JBT John Bean Technologies Corp 12/2008 396.1 0.29 0.64 139.1 252.9 (113.8) -45% 165 N/A 4.250 4 1.2 16.5 CYT Cytec Industries Inc 12/2008 1,032.7 0.29 0.83 563.9 859.2 (295.3) -34% 832 BBB 3.286 7 5.3 37.5 MXM Maxxam Inc 12/2008 56.5 0.28 0.59 17.5 33.6 (16.1) -48% 212 N/A N/A - 4.2 0.3 LDL Lydall Inc 12/2008 62.0 0.28 0.70 25.9 43.3 (17.4) -40% 7 N/A N/A - 1.6 0.9 ARJ Arch Chemicals Inc 12/2008 727.3 0.28 0.78 366.0 569.6 (203.6) -36% 374 N/A 4.000 6 4.9 N/AAIN Albany International Corp 12/2008 433.6 0.28 0.76 207.9 328.6 (120.7) -37% 552 N/A 3.750 4 5.6 8.1 CBB Cincinnati Bell Inc 12/2008 627.4 0.28 0.75 300.5 473.7 (173.2) -37% 1,985 B+ 3.200 10 7.1 6.0 AOS AO Smith Corp 12/2008 959.1 0.27 0.82 519.1 782.8 (263.7) -34% 352 N/A 3.000 7 9.9 35.0 AA Alcoa Inc 12/2008 10,415.0 0.27 1.03 7,908.0 10,765.0 (2,857.0) -27% 10,205 BBB- 3.118 17 Gambardella Michael OW 7.2 140.0 FRE Federal Home Loan Mortgage Corp 12/2008 492.6 0.27 1.18 446.0 581.0 (135.0) -23% 909,511 AAA 2.000 2 10.3 N/ANAV Navistar International Corp 10/2008 2,859.2 0.27 1.06 2,268.0 3,031.0 (763.0) -25% 5,405 BB- 4.455 11 Duignan Ann OW 1.8 44.0 GAP Great Atlantic & Pacific Tea Co 2/2009 259.5 0.26 1.57 339.6 408.1 (68.6) -17% 1,438 B 3.889 9 21.0 7.0 CBS CBS Corp 12/2008 5,995.1 0.26 0.82 3,354.4 4,905.8 (1,551.4) -32% 7,131 BBB- 3.462 26 Meltz Michael OW 5.5 50.0 CVO Cenveo Inc 12/2008 272.5 0.25 0.62 98.2 167.7 (69.5) -41% 1,261 B+ 4.000 3 6.5 N/ADRCO Dynamics Research Corp 12/2008 88.5 0.25 0.79 47.1 69.7 (22.6) -32% 36 N/A 3.000 5 0.1 N/ACAT Caterpillar Inc 12/2008 22,877.0 0.25 0.64 8,920.0 14,712.0 (5,792.0) -39% 34,891 A 3.182 22 Duignan Ann OW 6.4 1,000.0 SVU SUPERVALU Inc 2/2009 3,621.0 0.25 0.53 1,008.0 1,922.0 (914.0) -48% 8,484 BB- 3.429 14 Grom Charles N 4.7 74.0 UIL UIL Holdings Corp 12/2008 540.8 0.25 0.64 211.7 348.1 (136.4) -39% 790 BBB- 4.333 6 4.8 6.0 SURW SureWest Communications 12/2008 125.0 0.25 0.95 87.1 118.6 (31.5) -27% 240 N/A 3.400 5 1.1 - XRX Xerox Corp 12/2008 6,269.7 0.25 1.35 6,923.0 8,495.0 (1,572.0) -19% 8,547 BBB 3.889 9 Moskowitz Mark N 1.2 108.0 VLCY Voyager Learning Co 12/2008 67.2 0.25 0.25 - 16.8 (16.8) -100% 0 N/A N/A - N/A 6.6 VSH Vishay Intertechnology Inc 12/2008 1,173.5 0.25 0.43 210.7 500.3 (289.7) -58% 362 BB- 4.667 6 0.7 36.7

Universe: The universe includes all companies in the Russell 3000 as of May 19, 2009. In addition, we screened the larger FactSet U.S. common stock universe and added companies with projected benefit obligations that are not in the Russell 3000 universe to our universe. Note: Screens are based on data from database services. While we have taken efforts to verify the quality of the data, databases can and often do have errors that we may not have been able to correct.

The following footnotes relate to datasets above:(a) Market Cap is FactSet Compustat Market Cap as of market close on Friday, June 5, 2009.(b) J.P. Morgan Short-term Pension Risk Ratio = Most Recently Disclosed Pension Projected Benefit Obligation - Pension Plan Assets / Current Market Cap J.P. Morgan Long-term Pension Risk Ratio = Most Recently Disclosed Projected Benefit Obligation / Current Market Cap Ratios are intended to isolate companies in the universe with the most dramatic pension exposure relative to their market capitalizations. (c) Pension plan assets, projected benefit obligations, and most recent total debt, and 2009 expected pension contributions are primarily from Compustat. Short interest is from FactSet. FactSet Compustat figures were compared against Bloomberg figures. Discrepencies between the two sources were compared.

The average equity analyst rating and number of equity analysts covering the stock are Bloomberg computations. Bloomberg converts analyst ratings to buy (5), hold (3), and sell (1) and then computes an average. (e) Additional data is provided for these companies beyond the information displayed here in the Excel-based tool accompanying this report.

(d) Debt and equity ratings and analyst information are as of market close on Friday, June 5, 2009. Aggregate debt and equity ratings and analyst information and are from Bloomberg. J.P. Morgan analyst information is internally sourced. We arrived at our composite debt rating by averaging the debt ratings of Fitch's, Moody's, and S&P's ratings. Their comparable debt rating scales are in the Excel-based tool that accompanies this report.

Source: Company reports, Compustat, FactSet, Bloomberg, Moody’s, Fitch, Standard and Poor’s, and J.P. Morgan estimates.

Page 12: pension research

12

North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 7. Distribution of Long-Term Pension Risk Ratios Among Companies in the U.S. Universe with Pension Plans

0

10

20

30

40

50

60

70

80

90

100

-

0.0

1 0

.02

0.0

3 0

.04

0.0

5 0

.06

0.0

7 0

.08

0.0

9 0

.10

0.1

1 0

.12

0.1

3 0

.14

0.1

5 0

.16

0.1

7 0

.18

0.1

9 0

.20

0.2

1 0

.22

0.2

3 0

.24

0.2

5 0

.26

0.2

7 0

.28

0.2

9 0

.30

0.3

1 0

.32

0.3

3 0

.34

0.3

5 0

.36

0.3

7 0

.38

0.3

9 0

.40

0.4

1 0

.42

0.4

3 0

.44

0.4

5 0

.46

0.4

7 0

.48

0.4

9 0

.50

0.51

to 0

.55

0.56

to 0

.60

0.61

to 0

.65

0.66

to 0

.70

0.71

to 0

.75

0.76

to 0

.80

0.81

to 0

.85

0.86

to 0

.90

0.91

to 0

.95

0.96

to 1

.00

1.01

to 2

.00

2.01

to 3

.00

3.01

to 4

.00

4.01

to 5

.00

5.01

to 6

.00

6.01

to 7

.00

7.01

to 8

.00

8.01

to 9

.00

9.01

to 1

0.00

≥ 10

.01

5%7%5%5%4%3%3%4%3%3%3%2%2%2%2%2%2%1%1%2%2%1%1%1%1%1%1%1%1%1%1%0%1%1%1%1%1%0%0%1%1%0%1%0%0%0%0%0%0%0%0%1%1%1%1%1%1%1%0%0%0%5%2%1%0%0%0%0%0%0%3%

Long-term Pension Risk Ratio and the % of Total Universe

# of

Com

pani

Source: Company reports, Bloomberg, Compustat, FactSet, and J.P. Morgan estimates.

Page 13: pension research

13

North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 8. U.S. Companies with Market Capitalizations on June 5, 2009 Greater than $50 Million and Long-Term Pension Risk Ratios of 1.00 or Greater Pension Risk Ratios Most Recently Disclosed Aggregate Debt and Equity Ratings (f)

Most Recent Fiscal

Yearend

Market Capitalization

on

Short-term Pension Risk Ratio

Long-term Pension Risk Ratio

Pension Plan Assets

Pension Projected

Benefit Obligations

Funded Status

% Funded

Most Recent Total

Debt Composite Debt Rating

Ave. Equity Analyst Rating

Total # of Equity

AnalystsJ.P. Morgan Equity

Analyst

J.P. Morgan Equity Rating

Short Interest (% of float)

2009 Expected Pension

ContributionTicker Company Name 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/09DAN Dana Holding Corp 12/2008 131.1 2.52 16.33 1,811.0 2,141.0 (330.0) -15% 1,228 B- 3.000 2 Patel Himanshu N 1.8 13.0 GY GenCorp Inc 11/2008 127.0 (0.48) 11.66 1,543.3 1,481.7 61.6 4% 440 CCC+ 2.333 3 8.4 - WAMUQ Washington Mutual Inc 12/2007 162.0 (3.14) 10.66 2,235.0 1,727.0 508.0 29% 89,242 N/A N/A - N/A 80.0 UIS Unisys Corp 12/2008 596.2 2.23 10.50 4,929.6 6,261.2 (1,331.6) -21% 1,060 C 3.000 4 0.7 90.0 EK Eastman Kodak Co 12/2008 726.3 0.22 10.49 7,459.0 7,619.0 (160.0) -2% 1,306 B- 1.000 5 13.2 130.0 LEA Lear Corp 12/2008 91.5 2.78 8.51 523.8 778.5 (254.7) -33% 3,523 D 2.500 12 Patel Himanshu N 7.8 50.0 AMR AMR Corp 12/2008 1,405.9 2.97 7.74 6,714.0 10,884.0 (4,170.0) -38% 10,311 CCC+ 3.583 12 Baker Jamie OW 10.7 N/AARM ArvinMeritor Inc 9/2008 249.8 0.46 6.62 1,539.0 1,654.0 (115.0) -7% 1,517 CCC 2.714 7 Patel Himanshu N 4.3 28.0 MEG Media General Inc 12/2008 63.6 3.28 6.57 209.0 417.6 (208.5) -50% 730 N/A 2.000 4 23.5 16.7 YRCW YRC Worldwide Inc 12/2008 165.2 2.18 5.82 601.5 961.8 (360.3) -37% 1,232 CCC- 2.400 10 Wadewitz Thomas N 22.2 13.8 TRW TRW Automotive Holdings Corp 12/2008 940.4 0.00 5.72 5,375.0 5,376.0 (1.0) 0% 2,958 B 3.222 9 Patel Himanshu N 2.5 85.0 ATSG Air Transport Services Group Inc 12/2008 139.1 1.92 4.55 366.6 633.8 (267.2) -42% 455 N/A 3.000 1 0.1 36.4 SSP EW Scripps Co 12/2008 112.6 1.65 4.25 292.1 478.0 (185.9) -39% 73 N/A 3.333 6 Quadrani Alexia N 6.9 3.3 SR Standard Register Co/The 12/2008 113.8 2.10 4.10 228.0 466.4 (238.4) -51% 42 N/A 3.000 2 10.0 25.0 AXL American Axle & Manufacturing Holdings I 12/2008 142.0 1.79 3.98 310.7 565.2 (254.5) -45% 1,095 CCC 2.750 8 Patel Himanshu N 15.1 20.0 F Ford Motor Co 12/2008 18,273.9 0.65 3.54 52,863.0 64,743.0 (11,880.0) -18% 145,586 CCC 2.857 14 Patel Himanshu N 4.9 1,500.0 ES EnergySolutions Inc 12/2008 717.9 (0.13) 3.30 2,459.8 2,366.3 93.5 4% 557 N/A 4.167 12 Levine Scott OW 1.9 49.9 GCI Gannett Co Inc 12/2008 985.5 0.90 3.11 2,168.6 3,060.3 (891.7) -29% 4,295 BB 3.667 9 Quadrani Alexia N 21.7 14.1 HDNG Hardinge Inc 12/2008 60.4 0.78 3.02 135.3 182.4 (47.1) -26% 12 N/A 2.000 2 0.4 5.9 DAL Delta Air Lines Inc 12/2008 5,509.6 1.57 2.89 7,295.0 15,929.0 (8,634.0) -54% 16,596 B 4.889 9 Baker Jamie OW 4.3 275.0 PNX Phoenix Cos Inc/The 12/2008 238.1 1.29 2.79 357.8 665.5 (307.7) -46% 452 B+ 2.600 5 Bhullar Jamminder UW 4.4 N/AFOE Ferro Corp 12/2008 182.6 0.95 2.77 332.1 505.6 (173.5) -34% 665 CCC+ 3.857 7 7.0 20.2 NCR NCR Corp 12/2008 1,762.0 0.68 2.76 3,675.0 4,872.0 (1,197.0) -25% 308 BBB- 3.571 7 Coster Paul N 2.7 120.0 BLC Belo Corp 12/2008 191.7 1.00 2.58 302.9 495.4 (192.5) -39% 1,078 BB- 3.750 4 Meltz Michael N 2.0 N/ABC Brunswick Corp/DE 12/2008 423.2 1.02 2.57 655.5 1,088.0 (432.5) -40% 731 B- 2.778 9 10.6 3.9 FRP Fairpoint Communications Inc 12/2008 90.4 0.42 2.46 184.3 222.4 (38.1) -17% 2,518 CCC+ 2.667 6 5.4 - GT Goodyear Tire & Rubber Co/The 12/2008 2,954.8 0.93 2.43 4,430.0 7,178.0 (2,748.0) -38% 5,526 B+ 3.667 9 Patel Himanshu OW 6.3 400.0 X United States Steel Corp 12/2008 4,133.5 0.48 2.32 7,587.0 9,572.0 (1,985.0) -21% 3,124 BB+ 3.000 15 Gambardella Michael OW 13.5 N/AIOSP Innospec Inc 12/2008 256.4 0.05 2.23 557.4 571.2 (13.8) -2% 73 N/A 5.000 2 Zekauskas Jeffrey OW 1.7 5.8 BONT Bon-Ton Stores Inc 1/2009 84.6 0.86 2.20 113.7 186.4 (72.7) -39% 1,192 B- 3.000 2 16.4 6.4 BZ Boise Inc 12/2008 188.5 0.79 2.10 248.1 396.7 (148.6) -37% 1,044 BB- 5.000 1 3.5 4.1 SCX LS Starrett Co (Cl A) 6/2008 52.4 (0.59) 2.09 140.8 109.8 31.0 28% 21 N/A N/A - 0.2 0.6 FBN Furniture Brands International Inc 12/2008 202.3 0.68 2.08 284.4 421.7 (137.3) -33% 145 N/A 2.333 3 7.7 N/AREV Revlon Inc (Cl A) 12/2008 274.1 0.79 2.04 342.3 560.1 (217.8) -39% 1,292 N/A 3.000 2 2.9 26.0 CRD.B Crawford & Co 12/2008 263.4 0.70 2.04 354.5 537.7 (183.3) -34% 193 BB- 5.000 2 10.1 15.1 NYT New York Times Co/The 12/2008 928.6 0.94 2.01 994.8 1,865.4 (870.6) -47% 1,281 B 2.143 7 Quadrani Alexia N 13.3 N/AALK Alaska Air Group Inc 12/2008 570.5 0.84 1.98 650.0 1,130.9 (480.9) -43% 1,784 B 3.600 10 Baker Jamie OW 6.1 50.5 OMX OfficeMax Inc 12/2008 649.2 0.67 1.97 841.2 1,276.2 (435.0) -34% 1,812 B 3.333 12 Horvers Christopher N 3.0 6.7 AKS AK Steel Holding Corp 12/2008 1,802.0 0.73 1.95 2,201.6 3,517.5 (1,315.9) -37% 610 BB- 3.000 12 Gambardella Michael OW 5.4 155.0 ABD ACCO Brands Corp 12/2008 183.3 0.42 1.94 277.6 354.8 (77.2) -22% 740 B+ 2.200 5 1.8 15.2 SOA Solutia Inc 12/2008 570.5 0.83 1.93 629.0 1,101.0 (472.0) -43% 1,349 B 5.000 2 3.6 42.0 CAL Continental Airlines Inc 12/2008 1,292.1 1.10 1.92 1,057.0 2,482.0 (1,425.0) -57% 5,938 B- 3.583 12 Baker Jamie OW 13.9 125.0 AWI Armstrong World Industries Inc 12/2008 1,146.8 0.20 1.82 1,857.7 2,084.9 (227.2) -11% 494 BB 3.500 4 4.9 21.6 HUN Huntsman Corp 12/2008 1,473.9 0.49 1.81 1,940.0 2,663.0 (723.0) -27% 3,779 B 2.714 7 Zekauskas Jeffrey N 4.6 143.0 TEN Tenneco Inc 12/2008 344.0 0.72 1.77 361.0 610.0 (249.0) -41% 1,587 B- 3.500 8 Patel Himanshu N 3.8 24.0 SXI Standex International Corp 6/2008 131.6 0.05 1.72 220.8 227.0 (6.2) -3% 110 N/A 3.000 1 1.6 - JRN Journal Communications Inc 12/2008 81.2 0.58 1.70 90.8 138.1 (47.3) -34% 216 N/A 3.000 4 3.0 0.3 TXT Textron Inc 12/2008 3,002.6 0.50 1.69 3,574.0 5,088.0 (1,514.0) -30% 10,829 BB+ 3.308 13 Tusa, Jr Stephen OW 7.1 55.0 OMN OMNOVA Solutions Inc 11/2008 120.5 0.11 1.68 189.4 202.2 (12.8) -6% 174 B 4.000 4 0.1 - POL PolyOne Corp 12/2008 302.1 0.76 1.66 271.9 501.2 (229.3) -46% 450 B- 3.500 8 4.0 10.6 OLN Olin Corp 12/2008 1,055.5 0.06 1.61 1,642.3 1,700.5 (58.2) -3% 253 BB+ 4.143 7 4.6 - XRM Xerium Technologies Inc 12/2008 71.8 0.94 1.59 47.1 114.4 (67.3) -59% 609 B- 2.333 3 1.4 8.7 MGI MoneyGram International Inc 12/2008 130.4 0.86 1.59 95.6 207.5 (111.9) -54% 979 B+ 4.000 4 0.8 3.0 CTB Cooper Tire & Rubber Co 12/2008 631.4 0.43 1.58 725.9 994.5 (268.6) -27% 632 B 3.286 7 Patel Himanshu OW 13.6 50.0 GAP Great Atlantic & Pacific Tea Co 2/2009 259.5 0.26 1.57 339.6 408.1 (68.6) -17% 1,438 B 3.889 9 21.0 7.0 NP Neenah Paper Inc 12/2008 140.5 0.51 1.52 142.9 214.2 (71.3) -33% 341 B+ 3.500 2 3.4 10.7 MOD Modine Manufacturing Co 3/2008 149.4 0.24 1.52 190.8 227.3 (36.4) -16% 249 N/A 2.333 3 2.0 N/ATSTY Tasty Baking Co 12/2008 53.1 0.59 1.52 49.4 80.5 (31.1) -39% 74 N/A 5.000 1 0.1 3.2 IP International Paper Co 12/2008 6,317.2 0.51 1.49 6,194.0 9,443.0 (3,249.0) -34% 11,495 BBB 3.571 14 Shank Hueston Claudia N 3.3 24.0 TWIN Twin Disc Inc 6/2008 82.8 0.13 1.48 111.9 122.5 (10.6) -9% 58 N/A 3.000 3 1.9 0.3 TKR Timken Co 12/2008 1,810.1 0.47 1.44 1,757.8 2,600.9 (843.1) -32% 630 BBB- 4.333 6 1.6 90.0 UFS Domtar Corp 12/2008 788.8 0.10 1.42 1,045.0 1,121.0 (76.0) -7% 2,265 BB 3.625 16 Shank Hueston Claudia OW 3.6 45.0 NOC Northrop Grumman Corp 12/2008 15,642.8 0.23 1.42 18,501.0 22,147.0 (3,646.0) -16% 3,941 BBB+ 3.762 21 Nadol Joseph OW 0.9 626.0 BA Boeing Co 12/2008 35,262.6 0.24 1.39 40,597.0 49,017.0 (8,420.0) -17% 9,272 A+ 3.370 27 Nadol Joseph N 2.7 500.0 GRB Gerber Scientific Inc 4/2008 81.8 0.36 1.36 82.2 111.2 (29.1) -26% 75 N/A 3.000 3 1.5 6.6 Source: Company reports, Compustat, FactSet, Bloomberg, Moody’s, Fitch, Standard and Poor’s, and J.P. Morgan estimates.

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 8. U.S. Companies with Market Capitalizations on June 5, 2009 Greater than $50 Million and Long-Term Pension Risk Ratios of 1.00 or Greater (Continued) Pension Risk Ratios Most Recently Disclosed Aggregate Debt and Equity Ratings (f)

Most Recent Fiscal

Yearend

Market Capitalization

on

Short-term Pension Risk Ratio

Long-term Pension Risk Ratio

Pension Plan Assets

Pension Projected Benefit

Obligations Funded Status

% Funded

Most Recent Total

Debt Composite Debt Rating

Ave. Equity Analyst Rating

Total # of Equity

AnalystsJ.P. Morgan Equity

Analyst

J.P. Morgan Equity Rating

Short Interest (% of float)

2009 Expected Pension

ContributionTicker Company Name 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/2009 6/5/09XRX Xerox Corp 12/2008 6,269.7 0.25 1.35 6,923.0 8,495.0 (1,572.0) -19% 8,547 BBB 3.889 9 Moskowitz Mark N 1.2 108.0 GRA WR Grace & Co 12/2008 1,032.6 0.57 1.34 786.5 1,379.8 (593.3) -43% 13 N/A 1.000 1 5.0 51.0 AIG American International Group Inc 12/2008 4,412.9 0.53 1.32 3,498.0 5,825.0 (2,327.0) -40% 190,672 BBB+ 3.000 10 Bhullar Jamminder - 9.6 600.0 FDML Federal Mogul Corp 12/2008 1,002.0 0.74 1.32 580.9 1,320.2 (739.3) -56% 2,866 B+ 5.000 2 0.4 25.3 LSR Life Sciences Research Inc 12/2008 96.9 0.35 1.31 93.2 127.0 (33.9) -27% 74 N/A 5.000 1 1.4 3.9 IPSU Imperial Sugar Co 9/2008 146.3 0.38 1.31 136.0 191.0 (54.9) -29% 30 N/A 3.000 2 3.8 9.0 PTV Pactiv Corp 12/2008 2,876.7 0.42 1.29 2,506.0 3,707.0 (1,201.0) -32% 1,345 BBB 4.273 11 Shank Hueston Claudia OW 1.9 N/AXIDE Exide Technologies 3/2008 509.5 0.38 1.26 450.5 643.2 (192.7) -30% 687 B 3.500 4 3.9 41.8 WHR Whirlpool Corp 12/2008 3,245.6 0.47 1.20 2,368.0 3,889.0 (1,521.0) -39% 3,033 BBB- 2.667 6 Rehaut Michael UW 12.7 93.0 FNM Federal National Mortgage Association 12/2008 806.4 0.47 1.19 579.0 959.0 (380.0) -40% 854,013 AAA 2.000 2 5.2 6.0 FRE Federal Home Loan Mortgage Corp 12/2008 492.6 0.27 1.18 446.0 581.0 (135.0) -23% 909,511 AAA 2.000 2 10.3 N/AKAMN Kaman Corp 12/2008 444.8 0.42 1.18 334.1 523.0 (188.9) -36% 107 BBB- 4.000 7 2.4 16.6 TECUA Tecumseh Products Co 12/2008 172.6 (0.35) 1.16 262.0 200.9 61.1 30% 38 N/A 4.000 2 6.0 0.2 USU USEC Inc 12/2008 684.2 0.33 1.14 558.8 782.8 (224.0) -29% 575 B- 3.500 4 19.1 23.6 Q Qwest Communications International Inc 12/2008 7,203.9 0.11 1.11 7,217.0 7,995.0 (778.0) -10% 13,342 BB 3.500 20 McCormack Michael OW 4.4 N/AFFG FBL Financial Group Inc 12/2008 253.9 0.41 1.09 172.7 275.6 (102.9) -37% 371 N/A 3.000 2 10.2 9.0 HA Hawaiian Holdings Inc 12/2008 293.6 0.53 1.08 160.5 316.7 (156.2) -49% 253 N/A 4.750 4 2.6 2.6 KRO Kronos Worldwide Inc 12/2008 361.8 0.35 1.08 263.8 389.4 (125.6) -32% 657 N/A N/A - 13.9 18.0 BGG Briggs & Stratton Corp 6/2008 849.3 (0.06) 1.07 964.1 912.0 52.1 6% 490 BB- 2.200 5 22.1 - TVL LIN TV Corp 12/2008 103.3 0.47 1.07 61.5 110.2 (48.7) -44% 686 B 3.500 4 9.1 0.4 NAV Navistar International Corp 10/2008 2,859.2 0.27 1.06 2,268.0 3,031.0 (763.0) -25% 5,405 BB- 4.455 11 Duignan Ann OW 1.8 44.0 AA Alcoa Inc 12/2008 10,415.0 0.27 1.03 7,908.0 10,765.0 (2,857.0) -27% 10,205 BBB- 3.118 17 Gambardella Michael OW 7.2 140.0 CE Celanese Corp 12/2008 3,040.9 0.30 1.01 2,170.0 3,073.0 (903.0) -29% 3,469 N/A 4.455 11 2.3 40.0 CTS CTS Corp 12/2008 205.2 (0.04) 1.00 213.4 206.0 7.4 4% 86 N/A 3.667 3 1.9 1.7

Universe: The universe includes all companies in the Russell 3000 as of May 19, 2009. In addition, we screened the larger FactSet U.S. common stock universe and added companies with projected benefit obligations that are not in the Russell 3000 universe to our universe. Note: Screens are based on data from database services. While we have taken efforts to verify the quality of the data, databases can and often do have errors that we may not have been able to correct.

The following footnotes relate to datasets above:(a) Market Cap is FactSet Compustat Market Cap as of market close on Friday, June 5, 2009.(b) J.P. Morgan Short-term Pension Risk Ratio = Most Recently Disclosed Pension Projected Benefit Obligation - Pension Plan Assets / Current Market Cap J.P. Morgan Long-term Pension Risk Ratio = Most Recently Disclosed Projected Benefit Obligation / Current Market Cap Ratios are intended to isolate companies in the universe with the most dramatic pension exposure relative to their market capitalizations. (c) Pension plan assets, projected benefit obligations, and most recent total debt, and 2009 expected pension contributions are primarily from Compustat. Short interest is from FactSet. FactSet Compustat figures were compared against Bloomberg figures. Discrepencies between the two sources were compared.

The average equity analyst rating and number of equity analysts covering the stock are Bloomberg computations. Bloomberg converts analyst ratings to buy (5), hold (3), and sell (1) and then computes an average. (e) Additional data is provided for these companies beyond the information displayed here in the Excel-based tool accompanying this report.

(d) Debt and equity ratings and analyst information are as of market close on Friday, June 5, 2009. Aggregate debt and equity ratings and analyst information and are from Bloomberg. J.P. Morgan analyst information is internally sourced. We arrived at our composite debt rating by averaging the debt ratings of Fitch's, Moody's, and S&P's ratings. Their comparable debt rating scales are in the Excel-based tool that accompanies this report.

Source: Company reports, Compustat, FactSet, Bloomberg, Moody’s, Fitch, Standard and Poor’s, and J.P. Morgan estimates.

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Discount Rates We isolated companies in the U.S. pension universe with disclosed measurement dates between December 26, 2008 and January 3, 2009. In Table 9, we present the distribution of discount rates for the 962 companies meeting these criteria and disclosed a single discount rate assumption as opposed to a range of discount rates. In a 1993 letter to the FASB’s Emerging Issues Task Force, the U.S. Securities and Exchange staff stated that the discount rate used to value pension obligations should reflect the current level of interest rates on high-quality bonds, such as those receiving a rating of Aa or higher from Moody’s Investor Service that match the maturity of the retirement benefit obligation.

Table 9. Distribution of Discount Rate Assumptions for Portion of U.S. Company Universe with Measurement Dates between December 26, 2008 and January 3, 2009

0255075

100125150175200225250275300325350

≤3.0

0%

3.01

% to

3.2

5%

3.26

% to

3.5

0%

3.51

% to

3.7

5%

3.76

% to

4.0

0%

4.01

% to

4.2

5%

4.26

% to

4.5

0%

4.51

% to

4.7

5%

4.76

% to

5.0

0%

5.01

% to

5.2

5%

5.26

% to

5.5

0%

5.51

% to

5.7

5%

5.76

% to

6.0

0%

6.01

% to

6.2

5%

6.26

% to

6.5

0%

6.51

% to

6.7

5%

6.76

% to

7.0

0%

7.01

% to

7.2

5%

7.26

% to

7.5

0%

7.51

% to

7.7

5%

7.76

% to

8.0

0%

8.01

% to

8.2

5%

8.26

% to

8.5

0%

8.51

% to

8.7

5%

8.76

% to

9.0

0%

≥9.0

1%

1% 0% 0% 0% 0% 0% 0% 0% 1% 1% 2% 8% 19% 34% 20% 7% 5% 1% 1% 0% 0% 0% 0% 0% 0% 0%

PBO Discount Rate

# of

Com

panie

s

Source: Company reports, Compustat, FactSet, and J.P. Morgan estimates.

The Moody’s Aa Index rate was 5.54% at December 31, 2008 (5.62% annualized4). The mean discount rate used by companies in our universe was 6.16% for December yearend companies. Of the 962 companies reviewed, 895 companies (93%) used discount rate assumptions higher than the annualized Moody’s Aa Index rate on December 31. One natural question is how can there be such a large dispersion of

4 The Moody’s index, like most fixed-income yields, is quoted on a “bond-equivalent” basis. In other words, a yield of 5.54% actually implies coupons of 2.77% payable semi-annually. In order to convert to an “effective annual yield,” which is appropriate for discounting pension obligations, we take (1+.0554/2) ^ 2 - 1, to get 5.62%.

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

discount rates when all companies, regardless of their individual debt ratings, are to use discount rates that are comparable to investment grade bond rates.

A large portion of companies with pension plans use pension yield curves produced by various pension service providers to set their pension discount rates. As shown in Table 10, the average and median discount rate used by our U.S. pension universe tended to track very closely with the Moody’s Aa Index up until October 2007. The behavior prior to November 2007 is consistent with the historical relationships we have seen in past studies—that is, the mean discount rates used by U.S. companies were usually within 25 to 50 basis points of the Moody’s Aa Index rate. The relationship between the Moody’s Aa Index and pension yield curves substantially widened beginning in November 2007.

Table 10. Mean and Median Discount Rates by Measurement Date for Companies in the U.S. Universe Compared to the Moody’s Aa Index

5.25

5.5

5.75

6

6.25

6.5

6.75

7

7.25

7.5

61 8 21 192 44 31 862 21 15 37 15 12 56 9 21 173 41 26 915 21 14 36 15 15 61 9 21 72 21 6 962 33 8 9

Measurement Date and # of Companies Utilizing Measurement Date within 10 Days of that Date

Disc

oun

Moody's Aa Mean Median

Source: Company reports, Compustat, FactSet, and J.P. Morgan estimates.

Page 17: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Another central reason for the dispersion between the Moody’s Aa Index and pension yield curves can be traced to the constituencies of their universes. For example, the Moody’s Aa Index is a small universe of bonds and, as far as we know, does not contain or contains very few instruments issued by companies in the financial sector. There is nothing in accounting guidance on the computation of discount rates that indicates that financial sector bonds must be excluded from the universe. The financial sector represents a significant percentage of the universe of investment grade bonds, and not surprisingly, the yields of bonds issued by financial sector constituents widened in 2008. At December 31, 2008, companies in the financial sector represented approximately 85% of the Aa environment. Given that the financial sector represents such a substantial portion of the investment grade universe, it would appear that most yield curve providers would find it difficult not to include financial sector bonds in their yield curves at some substantial level. Therefore, when the wider yields for bonds from the financial sector are included, it is not surprising that the curves would generate results that are higher than a curve excluding the higher-yielding financial sector. This difference in how universes are defined, coupled with the divergence in yield between financial and non-financial issues, is a key reason for the disparity between pension discount rates created using yield curves and the Moody’s Aa Index.

Discount Rates Based on Pension Yield Curves There are a variety of pension yield curves created by various pension plan service providers. In addition, it appears that some companies go about creating their own yield curves. It is important to note that there can be a large dispersion in rates along these various curves. In an ideal world, all companies would use the same yield curve when measuring their U.S. pension plans because such a curve would enhance comparability between plans and across companies. Such is the situation for funding purposes under the Pension Protection Act where the government releases the applicable monthly discount rates that are to be used by U.S. pension plans to measure their funding obligations (though the government does offer plan sponsors a limited number of choices between smoothed and market discount rates so even funding discount rates are not universally calculated on an apples-to-apples basis). In time, we hope that a yield curve will emerge as the standard for U.S. GAAP purposes either from the government or another provider. Any standard yield curve should be fully transparent about how its universe is constituted, the specific bonds contained within its universe, and describe the statistical method used to plot the curve. Ideally, this information would be provided on the curve provider’s website and would be open to public review. The use of one universal yield curve would remove a substantial level of risk from pension analysis, since analysts currently spend time questioning the validity of discount rate assumptions. While a single, robust standard U.S. GAAP yield curve may or may not materialize, in the immediate future there is an urgent need in our view for the various yield curve providers to develop uniform practices to reduce the enormous range of discount rates that may be permissible for companies under their alternative frameworks.

In reviewing company disclosures, some of the yield curves we have seen mentioned include:

• The AON Yield Curve;

• The Citigroup Pension Discount Curve;

Page 18: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

• The Citigroup Pension Above Median Discount Curve;

• The Hewitt Bond Universe Yield Curve;

• The Hewitt Top Quartile Yield Curve;

• The Hewitt Above Median Yield Curve;

• The Mercer Yield Curve;

• The Ryan ALM, Inc. Curve;

• The Ryan ALM 45/95 curve; and

• The Towers Perrin cash flow matching bond model.

The underlying concept of a pension yield curve is straightforward. Information on Aa (or, sometimes, higher-rated) bonds across a full range of maturities are compiled to create a universe. The pension service providers then assign spot rates to various maturities to build a yield curve. At times there will be a wide range of yields for bonds at the same maturity points (some bonds might be mispriced or misrated), therefore, some yield curve providers will make refinement to their universe to correct for exposure to these issues. For example, based on our review of disclosures, at least one provider only includes bonds within the 10th to 90th percentiles of their universe in their yield curve calculations. When calculating a yield curve, a provider also may want to consider other filtering criteria to remove outliers. For example, a yield curve provider would likely want to remove callable bonds or bonds below a minimum issuance size. In addition, given that most bonds have coupons and the yield curve is intended to reflect zero-coupon rates, methods such as the bootstrap method are necessary to convert coupon-bond yields into zero-coupon yields. It should also be noted that after a universe has been set, in some cases no bonds will exist at particular maturities, so spot rates will be assigned to those time periods based on interpolation or extrapolation of information available for shorter- and longer-duration bonds. In setting the yield curve, some providers will apply a regression curve to the bond data.

Despite all of these complex underlying calculations, companies typically disclose one discount rate assumption in their pension footnote. When a pension yield curve is used, the process of arriving at that single discount rate disclosure can be somewhat involved. First, estimates are made about when benefit cash flows (expected benefit payments) are likely to occur in the future. The timing and amount of the estimated future cash flows are then matched against spot rates from the pension discount rate curve to determine an overall net present value. The “effective discount rate” is the single rate that produces the same net present value of benefits produced using the full curve spot rates. This discount rate can be conceptualized as the rate of return from a portfolio of zero-coupon, investment grade debt securities that would provide the needed future cash flows at the appropriate times to pay pension obligations when they become due if the portfolio was theoretically purchased at the pension measurement date.

There are numerous other reasons for the differences between service provider-produced pension yield curves. For example, some bonds might only be rated Aa or higher by one of the major rating services or might be on watch by one or more of the rating agencies for a potential downgrade. Should such a bond be included in the universe? Different yield curve providers will likely come to different conclusions.

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Another issue is that some pension yield curve providers offer multiple yield curves. In reviewing disclosures, the most often cited example is Citigroup which has the Citigroup Pension Discount Curve and the Citigroup Pension Above Median Discount Curve. The Citigroup Pension Above Median Discount Curve universe only includes bonds with yields above the median bond yield of the bonds from the Citigroup Pension Discount Curve universe in calculating its yield curve. The implication of creating a curve only using the 50% of the bonds with the highest yields for the above the median curve is that if we had two identical pension plans and one used the Citigroup Pension Above Median Discount Curve and the other used the Citigroup Pension Discount Curve, the plan using the Citigroup Pension Above Median Discount Curve would have a lower disclosed projected benefit obligation than the identical plan that used the Citigroup Pension Discount Curve because the Citigroup Pension Above Median Discount Curve will always be higher than its Citigroup Pension Discount Curve. It would seem to us that the larger the plan, the more questionable the decision to use an above the median curve since there may not be enough cash flow generated by the bonds in the above the median universe to theoretically replicate the expected future cash flows of the pension plan. Another issue is that the aggregate cash flows for all the pension plans referencing the bond universe to set rates is likely larger than the referenced bond universe by several multiples, so if plans actually were participating in these markets and buying bonds to match with expected cash flows, these supply and demand characteristics could potentially change the yields on this bond universe in a dramatic manner. This raises concerns as to the overall conceptual validity of curves based on narrow subsections of the universe.

Admittedly, we have mixed feelings about the use of pension yield curves. On one hand, we believe yield curve-based discount rates are conceptually superior to more simplistic discount rate methodologies such as the use of a single rate based off of a potentially non-representative benchmark such as the Moody’s Aa Index. Where we have problems with yield curves is in the diversity in practice related to how pension service providers go about creating these curves. In our view, this is a glaring area where the SEC or FASB need to provide clear guidance about what they deem to be the best-practice methodology. Absent some minimum standards as to how these yield curves are to be constructed, we fear that competitive forces will result in more and more yield curves being created off of increasingly smaller subsections of upper-yielding segments of the investment grade bond universe and more and more companies may see benefits to applying these higher yield curves even when such a curve may not be appropriate for their plans. In our view, a yield curve should be objective and standardized. Much like FAS 157 provides guidance as to when a valuation should be considered a Level 1, Level 2, or Level 3 valuation, we feel it is necessary to define if and when it is appropriate to move from a broad-universe curve to a universe-subsection curve. Otherwise, relative comparisons between companies will have reduced meaning and some level of comparability will be destroyed. One trend that we have noticed in recent disclosures is that it has been very common for companies to switch from one yield curve to another yield curve from year to year. This seems inappropriate, in our opinion, unless there are good arguments for switching and companies are prepared to articulate those reasons in disclosures to investors. If companies are not using comparable yield curves, analysts cannot compare the size of U.S. GAAP pension obligations across firms on an apples-to-apples basis.

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Other Complications Related to Yield Curve-Based Discount Rates The demographic characteristics of pension plan participants can vary by sector, industry, company, and plan. Further, some pension plans may have been established many decades ago, while others could have been established more recently. Some companies may have made efforts to curtail or eliminate their pension plans going forward, while other companies may currently have no intention to move away from these plans. All of these factors influence the stream of future expected cash flows to be paid out to retirees and ultimately have an impact on the expected duration of the overall pension liability. A plan that was closed long ago to new participants would likely have a shorter duration of pension liabilities than a new plan at a company with a young employee base. These factors and others impact the timing and amount of future cash flows and ultimately play a significant role in the process of assigning an appropriate overall discount rate based on a yield curve. When yield curves are very steep, we would expect to see greater differences in discount rates when we compare plans with short durations to plans with long durations. When yield curves are relatively flat, the weighted-average discount rates between such companies should be more similar.

An additional factor that contributes to the wide range of discount rates we see disclosed by companies is the presence of international pension plans. While some companies disaggregate their plans into U.S. and non-U.S. plans in their footnote disclosure, others do not. The implication is that the discount rates presented by companies are not always exclusively based on U.S. interest rates. Blended rates reduce discount rate comparability. It should also be noted that the discount rate setting process in foreign countries is likely to be more subjective than in the United States since there are fewer bonds available for inclusion in an investment grade bond universe in less mature fixed income markets—this reality introduces much more judgment into the process for setting foreign discount rates.

Discount Rates for Funding Purposes As mentioned earlier, it is important to note that the yield curve comparability issue is primarily a GAAP issue. For funding purposes, the funding yield curve and segment rates are published at http://www.irs.gov/retirement/article/0,,id= 123231,00.html. The modified yield curve consists of three segments: less than five years; five to 20 years; and more than 20 years.

The Treasury Department is responsible for determining the appropriate interest rate for each segment, based on “the average, for the 24-month period ending with the month preceding such month, of monthly yields on investment grade corporate bonds with varying maturities and that are in the top three quality levels available.” Alternatively, companies are permitted to forgo the use of the 24-month average and use the actual corporate bond yield curve for the most recent month to compute their minimum required contribution. A company can revoke this election only with the consent of the Secretary of Treasury. Companies may also elect a stability period where they may choose a yield curve up to five months prior to the valuation date.

For more detailed discussion of pension funding rules, see our October 30, 2008 piece, “Pension Tension: U.S. Pension Funding Rules Explained.”

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Expected Return on Plan Assets In Table 11, we show the mean, median, and mode expected return on plan assets for our universe. All three measures have stayed relatively stable over the past three years.

Table 11. Mean, Median, and Mode Statistics for Expected Return on Plan Assets Assumptions of U.S. Companies’ Universe, 2006-2008

2008 2007 2006Mean 7.68 7.73 7.77 Median 8.00 8.00 8.00 Mode 8.00 8.00 8.00

Source: Company reports, Compustat, FactSet, and J.P. Morgan estimates.

In Table 12, we present the distribution of 2008 expected return on plan asset assumptions for companies in our universe.

Table 12. Distribution of 2008 Expected Return on Plan Asset Assumptions of U.S. Companies’ Universe

0255075

100125150

175200225250275300

≤5%

5.01

% to

6.0

0%

6.01

% to

6.2

5%

6.26

% to

6.5

0%

6.51

% to

6.7

5%

6.76

% to

7.0

0%

7.01

% to

7.2

5%

7.26

% to

7.5

0%

7.51

% to

7.7

5%

7.76

% to

8.0

0%

8.01

% to

8.2

5%

8.26

% to

8.5

0%

8.51

% to

8.7

5%

8.76

% to

9.0

0%

≥9.0

1

6.3% 3.8% 0.9% 2.4% 1.7% 5.3% 2.3% 8.4% 4.7% 24.1% 10.2% 19.6% 4.8% 5.2% 0.4%

Ex pected Return on Plan Assets and % of Population in Each Ex pected Return Range

# of

Com

panie

s

Source: Company reports, Compustat, FactSet, and J.P. Morgan estimates.

Page 22: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Asset Allocations In Table13, we present the aggregate asset allocations for our U.S. pension universe for 2007 and 2008. Equity allocations decreased 8% from 2007’s average allocation of 59% to 2008’s average allocation of 51%. The average fixed income allocation rose 7% from 33% in 2007 to 40% in 2008.

Table 13. Aggregate Pension Asset Allocations for U.S. Company Universe

Asset Class % Allocation 2008 2007 ChangeEquities 51% 59% -8%Fixed Income 40% 33% 7%Real Estate 1% 1% 0%Other 8% 6% 1%Total 100.0% 100.0% 0.0%

Source: Company reports, Compustat, FactSet, and J.P. Morgan estimates.

Given the poor equity performance of pension plans during 2008 and the effort of some companies to strategically rebalance their plans in the face of economic uncertainty, it is not surprising that there was a substantial change in asset allocations from 2007 to 2008. We also would assume that a large reason for this change is explained by plans choosing not to rebalance after the poor performance of 2008; thus, an equity allocation that may have represented 60% or 65% of plan assets might now only represent 45% if steps have not been taken to rebalance asset allocations.

The 2008 asset allocation and expected return assumptions disclosed by companies yield an interesting relationship. While the mean equity allocation assumption across the universe plunged 8% versus the mean 2007 assumption, the mean long-term expected return on plan assets decreased by only 5 basis points across the universe versus the mean 2007 assumption. The implication is that we would expect to either see asset allocations in future periods restored more along the lines of the 2007 mean assumptions, or expected return assumptions should start to be adjusted down in future periods.

In Table 14, we present the distribution of disclosed equity allocations across our universe5. In 2007, only 17% of the companies in our universe disclosed an equity allocation of 50% or less. At yearend 2008, 39% of the companies in our universe disclosed an equity allocation of 50% or less—an increase of 22% of the universe.

In Table 15, we present the distribution of disclosed fixed income allocations across our universe6. In 2007, only 7% of the companies in our universe disclosed a fixed income allocation of 50% or greater. At yearend 2008, 19% of the companies in our universe disclosed an equity allocation of 50% or more—an increase of 12% of the universe.

5 To measure the year-over-year changes in asset allocations appropriately, we only included the 1,095 companies in which asset allocations were available for both 2007 and 2008 in our universe for Tables 14 and 15. 6 To measure the year-over-year changes in asset allocations appropriately, we only included the 1,095 companies in which asset allocations were available for both 2007 and 2008 in our universe for Tables 14 and 15.

Page 23: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

To the extent a company’s pension plan obligations are small relative to its operating businesses and any potential funding needs can easily be met with excess free cash flow, we have no real opinion on their asset allocation. Theory would suggest that over the long term equities should outperform other asset classes and this can reduce the cash funding needs to plans over the long term. Such companies would seem to be in a position to take on the low or moderate amount of asset-liability mismatch risk associated with high equity allocations.

To the extent the size of the pension plans is large relative to the size of a company’s operating businesses, we believe it is most appropriate for it to employ liability-driven investing (LDI) strategies7. The 2008 performance of pension plans underscores this point. Companies with high short-term and long-term pension risk ratios are likely to find it difficult to meet their funding requirements when there are extreme negative market movements. These companies’ managements may find that their performance as business operators may be of secondary importance because the most important factors in evaluating their stocks may be the performance of their pension plan assets and the directional movement of the discount rate environment.

7 In a liability-driven investing strategy, the obligation becomes the benchmark portfolio that the investment manager is attempting to meet rather than some unrelated asset class benchmark such as the S&P 500.

Page 24: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 14. Distribution of Equity Allocations of U.S. Companies’ Pension Plans

0

25

50

75

100

125

150

175

200

225

≤5%

6% to

10%

11%

to 1

5%

16%

to 2

0%

21%

to 2

5%

26%

to 3

0%

31%

to 3

5%

36%

to 4

0%

41%

to 4

5%

46%

to 5

0%

51%

to 5

5%

56%

to 6

0%

61%

to 6

5%

66%

to 7

0%

71%

to 7

5%

76%

to 8

0%

81%

to 8

5%

86%

to 9

0%

91%

to 9

5%

96%

to 1

00%

% Equity Allocation

# of

Com

panie

s

2008 2007

Equity Allocation 2008 2007 Change 2008 2007 Change≤5% 3.5% 2.5% 1.0% 3.5% 2.5% 1.0%

6% to 10% 1.4% 0.5% 0.8% 4.8% 3.0% 1.8%11% to 15% 0.8% 0.7% 0.1% 5.7% 3.7% 1.9%16% to 20% 0.9% 0.5% 0.5% 6.6% 4.2% 2.4%21% to 25% 1.5% 0.9% 0.5% 8.0% 5.1% 2.9%26% to 30% 1.8% 0.8% 1.0% 9.9% 5.9% 3.9%31% to 35% 3.1% 1.3% 1.8% 13.0% 7.2% 5.8%36% to 40% 5.8% 1.7% 4.1% 18.8% 8.9% 9.9%41% to 45% 8.0% 3.1% 4.9% 26.8% 12.1% 14.8%46% to 50% 12.1% 4.5% 7.6% 38.9% 16.5% 22.4%51% to 55% 15.1% 7.4% 7.7% 54.0% 23.9% 30.0%56% to 60% 16.5% 19.1% -2.6% 70.5% 43.0% 27.5%61% to 65% 13.6% 19.0% -5.4% 84.1% 62.0% 22.1%66% to 70% 9.8% 18.9% -9.1% 93.9% 80.9% 13.0%71% to 75% 2.7% 11.0% -8.2% 96.6% 91.9% 4.7%76% to 80% 1.8% 4.2% -2.4% 98.4% 96.1% 2.4%81% to 85% 0.5% 1.6% -1.2% 98.9% 97.7% 1.2%86% to 90% 0.0% 0.4% -0.4% 98.9% 98.1% 0.8%91% to 95% 0.4% 0.4% 0.0% 99.3% 98.4% 0.8%

96% to 100% 0.7% 1.6% -0.8% 100.0% 100.0% 0.0%100.0% 100.0%

Distribution of Equity Allocations Across Universe

Cumulative Distribution of Equity Allocations Across Universe

Source: Company reports, Compustat, FactSet, and J.P. Morgan estimates.

Page 25: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Table 15. Distribution of Debt Allocations of U.S. Companies’ Pension Plans

0

25

50

75

100

125

150

175

200

225

250

≤5%

6% to

10%

11%

to 1

5%

16%

to 2

0%

21%

to 2

5%

26%

to 3

0%

31%

to 3

5%

36%

to 4

0%

41%

to 4

5%

46%

to 5

0%

51%

to 5

5%

56%

to 6

0%

61%

to 6

5%

66%

to 7

0%

71%

to 7

5%

76%

to 8

0%

81%

to 8

5%

86%

to 9

0%

91%

to 9

5%

96%

to 1

00%

% Debt Allocation

# of

Com

panie

s

2008 2007

Debt Allocation 2008 2007 Change 2008 2007 Change≤5% 4.2% 4.7% -0.5% 4.2% 4.7% -0.5%

6% to 10% 0.9% 1.7% -0.8% 5.1% 6.4% -1.3%11% to 15% 1.4% 1.9% -0.5% 6.5% 8.3% -1.8%16% to 20% 3.0% 5.6% -2.6% 9.5% 13.9% -4.4%21% to 25% 5.2% 10.1% -4.9% 14.7% 24.0% -9.3%26% to 30% 12.1% 22.0% -9.9% 26.8% 46.0% -19.2%31% to 35% 14.4% 18.4% -3.9% 41.3% 64.4% -23.1%36% to 40% 15.0% 16.2% -1.2% 56.3% 80.5% -24.3%41% to 45% 13.4% 7.8% 5.7% 69.7% 88.3% -18.6%46% to 50% 11.1% 4.5% 6.7% 80.8% 92.8% -12.0%51% to 55% 6.9% 1.8% 5.1% 87.8% 94.6% -6.8%56% to 60% 3.7% 1.1% 2.6% 91.4% 95.7% -4.3%61% to 65% 2.9% 0.8% 2.1% 94.3% 96.5% -2.2%66% to 70% 0.7% 0.5% 0.3% 95.1% 97.0% -1.9%71% to 75% 0.8% 0.5% 0.3% 95.9% 97.5% -1.6%76% to 80% 0.6% 0.3% 0.4% 96.5% 97.8% -1.3%81% to 85% 0.3% 0.2% 0.1% 96.8% 98.0% -1.2%86% to 90% 0.6% 0.3% 0.4% 97.4% 98.3% -0.8%91% to 95% 0.5% 0.2% 0.3% 97.9% 98.4% -0.5%

96% to 100% 2.1% 1.6% 0.5% 100.0% 100.0% 0.0%100.0% 100.0%

Distribution of Debt Allocations Across Universe

Cumulative Distribution of Debt Allocations Across Universe

Source: Company reports, Compustat, FactSet, and J.P. Morgan estimates.

Page 26: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Excel-Based Pension Risk Evaluator An Excel-based tool, the J.P. Morgan Pension Risk Evaluator accompanies this report. We provide company-specific data on all 3,200-plus companies in the report universe. With this tool, the following data points are among those that can be reviewed for all companies in the universe:

• Fiscal yearend;

• Pension measurement date;

• Market capitalization on 6/5/2009;

• Short-term pension risk ratio;

• Long-term pension risk ratio;

• 2008 pension plan assets, PBO, and funded status;

• Most recent total debt;

• Composite debt rating;

• Average equity analyst rating and total number of equity analysts covering the stock;

• Short interest (% of float);

• Contribution information;

• Asset allocation information;

• PBO pension discount rate information;

• Rate of return on plan assets; and

• GICS sector, industry group, industry, and subindustry information.

Clients of J.P. Morgan wishing to be added to our email distribution lists should contact Dane Mott to be added to the U.S. list or Sarah Deans to be added to our European list. You can also subscribe to our lists at morganmarkets.com.

Page 27: pension research

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North America Equity Research 08 June 2009

Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

Appendix I Table 16: Stock Performance of Highest Published Short-Term Risk Ratios in October 13, 2008 Report for Companies with Market Capitalizations Above $50 Million

Market Cap Pension Risk Ratios Market Cap Pension Risk Ratios10/10/08 Short-TermLong-Term Stock 10/10/08 Short-TermLong-Term StockMarket Pension Pension Performance Market Pension Pension Performance

Cap Risk Risk 10/13/2008 to Cap Risk Risk 10/13/2008 toTicker Company Name (in $ mlns) Ratio Ratio 6/5/2009 Ticker Company Name (in $ mlns) Ratio Ratio 6/5/2009ABH AbitibiBowater Inc 85$ 6.59 75.63 -92% DFZ R.G. Barry Corp. (g) 67$ 0.19 0.57 8%VC Visteon Corp 144$ 3.08 16.90 -91% DDS Dillard's Inc 624$ 0.18 0.18 1%NWA Northwest Airlines Corp 1,621$ 1.77 5.66 N/A ARJ Arch Chemicals Inc 636$ 0.18 1.06 5%DAL Delta Air Lines Inc 1,720$ 1.45 4.29 3% FED FirstFed Financial Corp 92$ 0.18 0.18 -95%HAYZ Hayes Lemmerz International Inc 141$ 1.03 2.33 -98% NLC Nalco Holding Co 1,826$ 0.17 0.45 16%LBY Libbey Inc 75$ 0.94 4.36 -71% RT Ruby Tuesday Inc 179$ 0.17 0.22 129%RHD RH Donnelley Corp 65$ 0.89 4.65 -94% SHLM Schulman A Inc 395$ 0.17 0.21 3%AMR AMR Corp 1,675$ 0.81 6.24 -43% CKP Checkpoint Systems Inc 506$ 0.17 0.17 11%SR Standard Register Co/The 185$ 0.73 2.60 -49% DECC D&E Communications Inc. 83$ 0.16 0.83 76%SPC Spectrum Brands Inc 64$ 0.71 1.87 -84% NYT New York Times Co/The 1,750$ 0.16 1.04 -48%F Ford Motor Co 4,704$ 0.69 15.19 166% VRS Verso Paper Corp 63$ 0.16 0.26 -23%SSCC Smurfit-Stone Container Corp 627$ 0.65 5.63 -96% CVO Cenveo Inc 261$ 0.15 0.66 -5%AKS AK Steel Holding Corp 1,294$ 0.60 2.87 25% WHR Whirlpool Corp 4,773$ 0.15 0.83 -37%FA Fairchild Corp. 60$ 0.59 2.92 -99% BSET Bassett Furniture Industries Inc. 79$ 0.15 0.15 -64%GRA WR Grace & Co 615$ 0.59 2.35 30% ASYT Asyst Technologies Inc 63$ 0.15 0.30 -95%MNI McClatchy Co 310$ 0.55 4.99 -77% AES AES Corp/The 5,804$ 0.15 0.84 9%TEN Tenneco Inc 273$ 0.54 2.48 52% CRD.B Crawford & Co 554$ 0.15 1.14 -65%XIDE Exide Technologies 388$ 0.50 1.66 -3% CE Celanese Corp 2,745$ 0.14 1.19 4%MEG Media General Inc 204$ 0.49 2.00 -76% BNE Bowne & Co Inc 170$ 0.14 0.85 -1%FDML Federal Mogul Corp 829$ 0.49 1.63 6% LVB Steinway Musical Instruments 189$ 0.14 0.49 -55%MGI MoneyGram International Inc. 132$ 0.48 1.51 30% FAF First American Corp 1,993$ 0.13 0.28 -8%GT Goodyear Tire & Rubber Co/The 3,046$ 0.48 2.64 1% HA Hawaiian Holdings Inc 265$ 0.13 1.13 -4%SOA Solutia Inc 573$ 0.47 2.22 -39% FOE Ferro Corp 679$ 0.13 0.80 -77%DAN Dana Holding Corp 334$ 0.46 7.12 -65% APFC American Pacific Corp. 89$ 0.13 0.47 -42%PNX Phoenix Cos Inc/The 372$ 0.45 1.80 -68% BLL Ball Corp 2,973$ 0.13 0.49 26%CAL Continental Airlines Inc 1,202$ 0.45 1.96 -17% PNW Pinnacle West Capital Corp 3,072$ 0.13 0.56 -5%MAG MagneTek Inc. (g) 86$ 0.44 2.00 -49% LSR Life Sciences Research Inc 333$ 0.13 0.60 -74%AXL American Axle & Manufacturing Holdings I 188$ 0.42 3.17 -4% CBS CBS Corp 6,804$ 0.13 0.75 4%IPSU Imperial Sugar Co 137$ 0.42 1.46 -2% HAYN Haynes International Inc 314$ 0.13 0.59 -4%CEM Chemtura Corp 596$ 0.39 2.19 -85% AIG American International Group Inc 6,426$ 0.13 0.76 -33%NP Neenah Paper Inc 164$ 0.39 2.49 -22% TEX Terex Corp 1,890$ 0.13 0.25 -35%YRCW YRC Worldwide Inc 365$ 0.38 2.92 -53% FBN Furniture Brands International Inc 402$ 0.12 1.07 -50%ALK Alaska Air Group Inc 516$ 0.35 2.12 -28% THC Tenet Healthcare Corp 1,915$ 0.12 0.12 -25%WLB Westmoreland Coal Co 69$ 0.35 1.09 14% KWR Quaker Chemical Corp 186$ 0.12 0.62 -27%ROC Rockwood Holdings Inc 1,023$ 0.34 0.49 -1% TWIN Twin Disc Inc (g) 88$ 0.12 1.40 -34%IFC Irwin Financial Corp. 59$ 0.32 0.88 -76% AIN Albany International Corp 573$ 0.12 0.67 -30%LORL Loral Space & Communications Inc 267$ 0.31 1.38 125% SWX Southwest Gas Corp 1,061$ 0.12 0.51 -16%XRM Xerium Technologies Inc 204$ 0.31 0.65 -67% LDSH Ladish Co Inc 195$ 0.12 1.05 2%CFX Colfax Corp 391$ 0.30 1.03 -10% ADCT ADC Telecommunications Inc 612$ 0.12 0.12 32%GPK Graphic Packaging Holding Co 428$ 0.30 1.73 29% SWM Schweitzer-Mauduit International Inc 233$ 0.12 0.66 37%CVGI Commercial Vehicle Group Inc 55$ 0.30 1.43 -35% UFS Domtar Corp 1,273$ 0.12 1.36 -49%LEA Lear Corp 564$ 0.28 1.57 -79% MOD Modine Manufacturing Co 321$ 0.11 0.71 -54%CMS CMS Energy Corp 2,066$ 0.28 0.80 21% TLB Talbots Inc 514$ 0.11 0.32 -50%SSP EW Scripps Co 266$ 0.26 1.97 -54% TVL LIN TV Corp 169$ 0.11 0.62 -51%CBM Cambrex Corp 119$ 0.26 0.68 -29% UTL Unitil Corp. 136$ 0.11 0.49 -8%ARM ArvinMeritor Inc 692$ 0.26 2.65 -61% GR Goodrich Corp 3,981$ 0.10 0.90 58%VSH Vishay Intertechnology Inc 906$ 0.26 0.59 19% UAUA UAL Corp 673$ 0.10 0.35 -28%OMX OfficeMax Inc 440$ 0.24 2.93 31% HAR Harman International Industries Inc (g) 1,275$ 0.10 0.10 -6%GRB Gerber Scientific Inc 125$ 0.23 0.89 -36% CQB Chiquita Brands International Inc 525$ 0.10 0.16 -25%KEM Kemet Corp 65$ 0.22 0.44 -51% CTB Cooper Tire & Rubber Co 429$ 0.10 2.56 56%PPC Pilgrim's Pride Corp 264$ 0.22 0.74 36% HTZ Hertz Global Holdings Inc 1,610$ 0.10 0.40 26%AOI Alliance One International Inc 289$ 0.22 0.51 61% SMP Standard Motor Products Inc. 68$ 0.10 0.15 43%KRO Kronos Worldwide Inc. 602$ 0.22 0.76 -39% AWK American Water Works Co Inc 2,989$ 0.10 0.31 -7%GFF Griffon Corp 192$ 0.21 0.34 35% NC NACCO Industries Inc 522$ 0.10 0.56 -52%POL PolyOne Corp 409$ 0.21 1.19 -32% FNM Federal National Mortgage Association 1,081$ 0.10 0.83 -38%WBC WABCO Holdings Inc 1,581$ 0.21 0.31 -28% STL Sterling Bancorp/NY 203$ 0.10 0.24 -26%BRS Bristow Group Inc 642$ 0.21 0.80 34% SFD Smithfield Foods Inc 1,864$ 0.10 0.55 -22%FMXL Foamex International Inc. 67$ 0.21 2.18 -97% AA Alcoa Inc 9,972$ 0.10 1.16 -18%M Macy's Inc 4,819$ 0.20 0.68 18% CSC Computer Sciences Corp 4,642$ 0.10 0.96 35%TWMC Trans World Entertainment Corp. 74$ 0.19 0.19 -55% AVERAGE -19%

Source: Company reports, FactSet, and J.P. Morgan estimates.

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Sarah Deans (44-20) 7325-1775 [email protected]

Appendix II Table 17: Stock Performance of Highest Published Long-Term Risk Ratios in October 13, 2008 Report for Companies with Market Capitalizations Above $50 Million

Market Cap Pension Risk Ratios Market Cap Pension Risk Ratios10/10/08 Short-Term Long-Term Stock 10/10/08 Short-Term Long-Term StockMarket Pension Pension Performance Market Pension Pension Performance

Cap Risk Risk 10/13/2008 to Cap Risk Risk 10/13/2008 toTicker Company Name (in $ mlns) Ratio Ratio 6/5/2009 Ticker Company Name (in $ mlns) Ratio Ratio 6/5/2009ABH AbitibiBowater Inc 85$ 6.59 75.63 -92% XIDE Exide Technologies 388$ 0.50 1.66 -3%GM General Motors Corp 2,695$ (3.10) 40.46 -87% FDML Federal Mogul Corp 829$ 0.49 1.63 6%LEHMQ Lehman Brothers Holdings Inc. 69$ (3.43) 22.66 -54% CCK Crown Holdings Inc 2,936$ (0.07) 1.61 14%VC Visteon Corp 144$ 3.08 16.90 -91% AWI Armstrong World Industries Inc 1,333$ (0.36) 1.59 -19%F Ford Motor Co 4,704$ 0.69 15.19 166% LEA Lear Corp 564$ 0.28 1.57 -79%WAMUQ Washington Mutual Inc. 147$ (3.46) 11.78 15% OLN Olin Corp 1,102$ (0.08) 1.56 -15%UIS Unisys Corp 644$ (0.35) 10.84 -17% GGC Georgia Gulf Corp. 76$ (0.31) 1.55 -68%DAN Dana Holding Corp 334$ 0.46 7.12 -65% MGI MoneyGram International Inc. 132$ 0.48 1.51 30%TRW TRW Automotive Holdings Corp 1,073$ (0.87) 7.06 -5% BC Brunswick Corp/DE 711$ 0.08 1.51 -43%GY GenCorp Inc 257$ (0.35) 6.31 -59% XRX Xerox Corp 7,004$ 0.09 1.49 -15%AMR AMR Corp 1,675$ 0.81 6.24 -43% IPSU Imperial Sugar Co 137$ 0.42 1.46 -2%NWA Northwest Airlines Corp 1,621$ 1.77 5.66 N/A BA Boeing Co 31,608$ (0.15) 1.45 14%SSCC Smurfit-Stone Container Corp 627$ 0.65 5.63 -96% CVGI Commercial Vehicle Group Inc 55$ 0.30 1.43 -35%AHC AH Belo Corp 81$ (0.03) 5.58 -64% SCX L.S. Starrett Co. (Cl A) (g) 78$ (0.40) 1.40 -32%IOSP Innospec Inc 164$ (0.21) 5.21 40% TWIN Twin Disc Inc (g) 88$ 0.12 1.40 -34%MNI McClatchy Co 310$ 0.55 4.99 -77% LORL Loral Space & Communications Inc 267$ 0.31 1.38 125%IAR Idearc Inc 115$ (1.41) 4.81 -94% BGG Briggs & Stratton Corp (g) 668$ (0.08) 1.36 22%RHD RH Donnelley Corp 65$ 0.89 4.65 -94% UFS Domtar Corp 1,273$ 0.12 1.36 -49%LBY Libbey Inc 75$ 0.94 4.36 -71% NOC Northrop Grumman Corp 16,301$ (0.05) 1.35 12%DAL Delta Air Lines Inc 1,720$ 1.45 4.29 3% TECUA Tecumseh Products Co 299$ (0.72) 1.34 -49%KYCN Keystone Consolidated Industries Inc. 91$ (6.01) 4.07 -59% LEE Lee Enterprises Inc/IA 127$ (0.07) 1.33 -67%ES EnergySolutions Inc 861$ 0.05 4.01 -18% TKR Timken Co 2,033$ 0.07 1.32 -16%OMN OMNOVA Solutions Inc. 60$ (0.12) 3.49 96% PTV Pactiv Corp 3,004$ (0.00) 1.30 -14%CC Circuit City Stores Inc 72$ (1.07) 3.36 -96% GAP Great Atlantic & Pacific Tea Co 368$ (0.02) 1.25 -21%AXL American Axle & Manufacturing Holdings I 188$ 0.42 3.17 -4% TXT Textron Inc 4,546$ 0.04 1.24 -40%OMX OfficeMax Inc 440$ 0.24 2.93 31% LFG LandAmerica Financial Group Inc 199$ 0.01 1.22 -100%YRCW YRC Worldwide Inc 365$ 0.38 2.92 -53% BLC Belo Corp 373$ (0.01) 1.21 -43%FA Fairchild Corp. 60$ 0.59 2.92 -99% POL PolyOne Corp 409$ 0.21 1.19 -32%AKS AK Steel Holding Corp 1,294$ 0.60 2.87 25% CE Celanese Corp 2,745$ 0.14 1.19 4%ARM ArvinMeritor Inc 692$ 0.26 2.65 -61% AA Alcoa Inc 9,972$ 0.10 1.16 -18%GT Goodyear Tire & Rubber Co/The 3,046$ 0.48 2.64 1% GCI Gannett Co Inc 3,050$ 0.05 1.15 -63%SR Standard Register Co/The 185$ 0.73 2.60 -49% CRD.B Crawford & Co 554$ 0.15 1.14 -65%CTB Cooper Tire & Rubber Co 429$ 0.10 2.56 56% HA Hawaiian Holdings Inc 265$ 0.13 1.13 -4%EK Eastman Kodak Co 3,658$ (0.42) 2.52 -78% NCC National City Corp 1,635$ (0.12) 1.13 N/ANP Neenah Paper Inc 164$ 0.39 2.49 -22% WLB Westmoreland Coal Co 69$ 0.35 1.09 14%TEN Tenneco Inc 273$ 0.54 2.48 52% HUN Huntsman Corp 2,719$ 0.06 1.07 -51%GRA WR Grace & Co 615$ 0.59 2.35 30% HPC Hercules Inc 1,712$ 0.09 1.07 N/AHAYZ Hayes Lemmerz International Inc 141$ 1.03 2.33 -98% FBN Furniture Brands International Inc 402$ 0.12 1.07 -50%SOA Solutia Inc 573$ 0.47 2.22 -39% IP International Paper Co 8,381$ 0.03 1.07 -29%CEM Chemtura Corp 596$ 0.39 2.19 -85% ARJ Arch Chemicals Inc 636$ 0.18 1.06 5%FMXL Foamex International Inc. 67$ 0.21 2.18 -97% OI Owens-Illinois Inc 3,612$ (0.07) 1.06 24%ALK Alaska Air Group Inc 516$ 0.35 2.12 -28% ATI Allegheny Technologies Inc 2,069$ (0.10) 1.06 51%Q Qwest Communications International Inc 3,978$ (0.41) 2.07 61% LDSH Ladish Co Inc 195$ 0.12 1.05 2%MEG Media General Inc 204$ 0.49 2.00 -76% NYT New York Times Co/The 1,750$ 0.16 1.04 -48%MAG MagneTek Inc. (g) 86$ 0.44 2.00 -49% ASH Ashland Inc 1,501$ 0.04 1.04 5%SSP EW Scripps Co 266$ 0.26 1.97 -54% CFX Colfax Corp 391$ 0.30 1.03 -10%CAL Continental Airlines Inc 1,202$ 0.45 1.96 -17% GLT Glatfelter 368$ (0.63) 1.02 6%X United States Steel Corp 5,454$ (0.04) 1.95 -28% GETI GenTek Inc 227$ 0.05 1.01 1%USU USEC Inc 383$ (0.11) 1.93 50% CBB Cincinnati Bell Inc 476$ 0.04 1.00 27%SPC Spectrum Brands Inc 64$ 0.71 1.87 -84% AVERAGE -24%NCR NCR Corp 2,856$ (0.11) 1.83 -29%PNX Phoenix Cos Inc/The 372$ 0.45 1.80 -68%ABD ACCO Brands Corp 247$ (0.08) 1.79 -33%NAV Navistar International Corp. 2,163$ 0.09 1.74 32%GPK Graphic Packaging Holding Co 428$ 0.30 1.73 29% Source: Company reports, FactSet, and J.P. Morgan estimates.

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Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

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Dane Mott, CPA, CFA (1-212) 622-1443 [email protected]

Sarah Deans (44-20) 7325-1775 [email protected]

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Sarah Deans (44-20) 7325-1775 [email protected]

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Sarah Deans (44-20) 7325-1775 [email protected]

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