Session 39 – Workshop:Analyzing Defined Benefit Pension Plans & Postretirement Benefits  Greg Clifton VP/Senior Analyst Moody’s Investors Service   Rating Methodology Cash Flow Considerations Pension plans Understand contribution requirements Rough estimate can be    made with SFAS 87 information  Due to undisclosed credits, some companies may not face large contribution requirements for several years Can be offset by contributing stock  OPEB Primary focus on benefits paid (recorded on “pay-as you-go” basis) Can obtain benefits paid information in the rollforward of the APBO Can analyze growth in:  Net periodic postretirement cost Benefit payments Can use above rates to project future benefit payments Balance Sheet Adjustments:  For pensions  	Recorded Debt Per Balance Sheet +	Add: Off-balance sheet liabilities (e.g., lease obligations, guarantees) +	Add: Net underfunded PBO from notes to financial statements = Adjusted Debt  OPEB – may include the underfunded amount of the APBO in adjusted debt in certain circumstances  Income Statement As Adjusted By Moody’s: Service cost (no adjustments) Interest cost (adjusted only if Moody’s disagrees with discount rate) Amortization of prior service cost (Not used) Recognized net actuarial gains (Not used) Amortization of transition asset (Not used) Actual losses on plan assets, or Actual gains up to the amount of interest cost = Adjusted Net Periodic Pension/OPEB cost Financial Statement Information – A Closer Look Pension Plan Funded Status BS and IS Reporting Assumptions v. Reality Case Study – Dow Chemical Solution: Part I 1.	What is the funded status (i.e. underfunded PBO) of the U.S. plans (PBO – FVA)? 	2003:  $(2,304)  	2002:  $(2,536)	 2.	What is the funding ratio (FVA / PBO) ? 	2003:  82.9%		 	2002:  79.0% What is the amount of benefits paid for 2003?   	Pension:  $737 	OPEB:     $166 Do analysts care about benefits paid?  Why or why not ? 	Pension: No, they are paid out of the plan 	OPEB:  Yes, they are generally paid by the company   Solution: Part I 5. How much money did the company contribute to the plan in: 	2003:  $235 	2002:  $112	 How much does the company expect to contribute in 2004?  Pension: 			$37 OPEB (best guess):	$166-170 7. To be discussed  Solution: Part II 						  2003		 2002  What is the total amount of recorded debt?	$13,109		$13,036 What is the underfunded PBO?		    2,304		    2,536 	Pension adjusted debt:			$15,413		$15,572   Total equity				$9,175		$7,626	 What are the leverage ratios (BV)		      58.8%	      63.1% What are the pension adjusted leverage ratios?   62.7%	      67.1%  Debt + Equity: 	Book					$22,284		$20,662 	Adjusted				$24,588		$23,198 Solution: Part III 						  2003		 2002  EBIT					$ 2,341		$      32 Total Net Periodic Pension Income		       (28)		     (145) Service Cost				     (242)		     (219) 	EBIT, as adjusted:			$  2,071		$   (332) 	% EBIT changed			     (11.5)%	 >(1,000)%  Net income (loss)				$  1,730		$    (338) Total Net Periodic Pension Income		       (28)		      (145) Service Cost				     (242)		      (219) Pension

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