balance sheet risk management

M A R C H 2 0 0 8

C R E A T I N G S U P E R I O R B A L A N C E S H E E T R I S K M A N A G E M E N T S O L U T I O N S

2008 EACUBO Annual Workshop

S T

R I

C T

L Y

P R

I V A

T E

A N

D

C O

N F

I D E

N T

I A L

E A C U B O 2 0 0 8

English_General

This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of JPMorgan.

The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. JPMorgan’s opinions and estimates constitute JPMorgan’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.

Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company by JPMorgan.

JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. JPMorgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors.

IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. JPMorgan deal team members may be employees of any of the foregoing entities.

This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services.

C R

E A

T I

N G

S U

P E

R I

O R

B A

L A

N C

E

S H

E E

T

R I

S K

M

A N

A G

E M

E N

T

S O

L U

T I

O N

S

Agenda

Page

E A C U B O 2 0 0 8

Treasury Management at University of Pennsylvania

Internal Bank Management at University of Virginia

Overview of Risk Management Principles

Introduction

1

1

5

15

24

C R

E A

T I

N G

S U

P E

R I

O R

B A

L A

N C

E

S H

E E

T

R I

S K

M

A N

A G

E M

E N

T

S O

L U

T I

O N

S

E A C U B O 2 0 0 8

Today’s panelists

Helen Kreider, University of Pennsylvania

INSERT BRIEF BIO

Jim Matteo, University of Virginia

Director of Treasury Operations since August 2005, responsible for debt management, banking & cash management, investment portfolio oversight, liquidity & interest rate management

Charlie Giffin, JPMorgan

Co-Head of Issuer Solutions group within Tax Exempt Capital Markets, with specialty in enterprise risk management, market analytics, and integrated solutions across different markets

2I N T

R O

D U

C T

I O N

E A C U B O 2 0 0 8

What do we mean by “Balance Sheet Risk Management?”

Identify risk exposures Financing risks Investment risks Operational risks Construction risks

Quantify risk exposures (where possible) Expected outcome Volatility Correlation

Manage risk vs. return Accept appropriate amounts of risk Maximize net financial performance Anticipate “worst case” outcomes

3I N T

R O

D U

C T

I O N

E A C U B O 2 0 0 8

The danger of what we don’t yet know

“With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. …Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.”

- Alan Greenspan, April 5, 2005

“We are all wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must.”

- Jim Cramer, CNBC

“It's tough to make predictions, especially about the future.”

- Yogi Berra

4I N T

R O

D U

C T

I O N

Agenda

Page

E A C U B O 2 0 0 8




Introduction

5

1

5

15

24

C R

E A

T I

N G

S U

P E

R I

O R

B A

L A

N C

E

S H

E E

T

R I

S K

M

A N

A G

E M

E N

T

S O

L U

T I

O N

S

E A C U B O 2 0 0 8

Much of risk management can be simplified to averages and standard deviations (volatility)

There are a number of common risk factors within investment management…

Investment Factors

Average Return Annual Volatility

S&P 500 7.50% 14.0%

Russell 2000 9.00% 18.0%

MSCI EAFE 10.00% 14.0%

Lehman Bros. Agg 6.00% 3.5%

US Treasury Bills 3.75% 0.5%

HFR FOF Strategic 8.00% 9.0%

HFR FOF Conserv 6.50% 3.5%

Yield Factors

Average Rate Annual Volatility

LIBOR 5.00% 25.0%

BMA 3.40% 25.0%

BMA/LIBOR 68.00% 9.0%

CPI 3.25% 40.0%

… as well as within debt management

6O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

E A C U B O 2 0 0 8

Correlations between risk factors is what drives the benefits of portfolio diversification

Correlation Matrix

LIBOR BMA/LIB 5Y LIB S&P 500 Russell 2000 MSCI EAFELehman

Agg T-BillsHFR FOF

AHFR FOF

B

LIBOR 1.00 (0.35) 0.65 0.06 0.01 0.20 (0.05) (0.02) 0.09 0.08

BMA/LIB (0.35) 1.00 (0.20) 0.07 (0.01) 0.00 0.08 0.01 (0.10) (0.07)

5Y LIB 0.65 (0.20) 1.00 0.24 0.23 0.20 (0.88) (0.09) 0.16 0.12

S&P 500 0.06 0.07 0.24 1.00 0.74 0.82 (0.22) (0.00) 0.57 0.46

Russell 2000 0.01 (0.01) 0.23 0.74 1.00 0.72 (0.18) (0.08) 0.77 0.56

MSCI EAFE 0.20 0.00 0.20 0.82 0.72 1.00 (0.20) (0.08) 0.67 0.58

Lehman Agg (0.05) 0.08 (0.88) (0.22) (0.18) (0.20) 1.00 0.10 (0.15) (0.12)

T-Bills (0.02) 0.01 (0.09) (0.00) (0.08) (0.08) 0.10 1.00 (0.03) 0.02

HFR FOF A 0.09 (0.10) 0.16 0.57 0.77 0.67 (0.15) (0.03) 1.00 0.89

HFR FOF B 0.08 (0.07) 0.12 0.46 0.56 0.58 (0.12) 0.02 0.89 1.00

7O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

E A C U B O 2 0 0 8

For investment portfolio management, the “efficient frontier” is a common representation of risk vs. return

Potential Investment Allocation Alternatives1Potential Investment Allocation Alternatives1

1 Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market trends, which are based on current market conditions. We believe the information provided herein is reliable, but it should not be assumed to be either accurate or complete. Actual cash flows may vary substantially from figures shown based upon changes in market condition, our judgment or the underlying assumptions or methodology employed. Past performance should not be taken as a guarantee of future results. Analysis includes assumptions for initial and average interest rates, correlations, volatility and reversion speed, among others. Volatility is defined here as standard deviation of annual changes in an exposure, and not necessarily a cross section of potential future cumulative outcomes.

Current Portfolio

Efficient Frontier of investment alternatives

Current Portfolio Allocation Balance

S&P 500 25,000,000

Russell 2000 25,000,000

MSCI EAFE 25,000,000

Lehman Bros. Agg 25,000,000

US Treasury Bills 200,000,000

HFR FOF Strategic 100,000,000

HFR FOF Conserv 100,000,000

Total 500,000,000

Institutions can choose an efficient portfolio of investment alternatives, subject to individual risk tolerance constraints

8O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

E A C U B O 2 0 0 8

Debt managers can benefit from adopting risk management principles developed through the investment community

Investment Management Debt Management

Sensitivity Total Return (Mark to Market)

Cost (Cash Flow)

Risk Measures Value at Risk (VaR); Price Volatility

Cash Flow at Risk (CFaR); Cost Volatility

Objective Maximize Return; Minimize Risk

Minimize Cost; Minimize Risk

Analytics Capture Correlations of Returns

Capture Correlations of Carry

Diversification Uncorrelated Sources of Return

Uncorrelated Sources of Carry

Market Constraints

Value at Risk Important

Both VaR and CFaR Important

Market Opportunities

Hedge Funds, Energy, Weather

BMA, LIBOR, CPI, CMS, ???

Investment Management Compared to Debt ManagementInvestment Management Compared to Debt Management

9O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

E A C U B O 2 0 0 8

We can also create an “efficient frontier” for various debt management strategies in the current market

Potential Investment Allocation Alternatives1Potential Investment Allocation Alternatives1


Current Portfolio

Efficient Frontier of debt alternatives

Current Portfolio Allocation Balance

Fixed 150,000,000

% Libor Synthetic Fixed 150,000,000

Floating 100,000,000

BMA Basis Swap -

CMS Swap -

Total 400,000,000

Institutions can choose an efficient portfolio of debt instruments, again subject to individual risk tolerance constraints

10O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

E A C U B O 2 0 0 8

Finally, we can also incorporate operational exposures that are specific to each institution

Institutions have a number of potential operational risk exposures: Changes in top line revenue Changes in expenses Changes in Endowment distribution

Other potential sources of risk: Healthcare related income / expenses Royalties State contributions

11O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

E A C U B O 2 0 0 8

The Central Treasury function manages a number of different risks for the University

Internal Loans

Internal Deposits

Return: 4.5%Volatility:

0.5%

Cost: 5.0%Volatility:

0.0%

Capital Projects

Operations

$250mm

Central Treasu

ry

External Assets

External Debt

Return: 6.5%Volatility:

4.5%

Cost: 4.25%Volatility:

0.4%

$500mm

$400mm

$350mm

12O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

E A C U B O 2 0 0 8

With this framework, institutions can choose an appropriate level of risk, and maximize related net returns

Potential Net Risk/Return Alternatives1Potential Net Risk/Return Alternatives1

Current Portfolio

Efficient Frontier of Central Treasury


$354

$455

$556

$657

$758

$859

$960

$1,061

$1,162

$1,263

5Y Ending Balance

Current Solution

Ending Balance Distribution ($mm)Ending Balance Distribution ($mm)

Solution

13O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

E A C U B O 2 0 0 8

Better understanding of risk exposures leads to superior balance sheet risk management

Measures of annual risk exposure Annual external debt portfolio volatility of $4 million Annual external investment volatility of $22 million Annual net balance sheet volatility of $23 million

Size appropriate reserves 95% confidence level reserve: $55 million

Determine appropriate liquidity requirements A liquidity strategy is essential to anticipate sources of risk that

cannot be wholly quantified

14O V

E R

V I

E W

O F

R I

S K

M

A N

A G

E M

E N

T

P R

I N C

I P L

E S

Agenda

Page

E A C U B O 2 0 0 8




Introduction

15

1

5

15

24

C R

E A

T I

N G

S U

P E

R I

O R

B A

L A

N C

E

S H

E E

T

R I

S K

M

A N

A G

E M

E N

T

S O

L U

T I

O N

S

E A C U B O 2 0 0 8

University of Virginia Overview

Public University Founded by Thomas Jefferson in 1819

Ranked #2 among public universities and #23 among all universities in U.S. News and World Report’s 2008 Rankings

Fall 2007 - 20,834 students enrolled in 10 Schools on Main Grounds

FY 2007 Financial Data Net Assets = $5.4b Total Revenue = $2.8b Debt Outstanding = $573m Endowment Value = $4.4b AAA ratings from Moody’s, S&P, and Fitch

Operates the University of Virginia Medical Center Recognized among Solucient’s Top 100 Hospitals every year since 1998 Responsible for 31% of University’s FY07 Total Revenue

16I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

E A C U B O 2 0 0 8

University of Virginia Treasury Department Overview

Debt Management Fixed and Variable Rate Bonds Commercial Paper Interest Rate Derivatives

Investment Management ST Investment Management Oversight of LT Investments in Endowment Oversight of Other Financial Assets (Securities, Trusts, etc.)

Cash Management Bank Account Management Cash Forecasting

Internal Bank Management Internal Loan Program Internal Investment Program Quasi-endowment Administration

17I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

E A C U B O 2 0 0 8

Dual Goals of Treasury

University-wide Goals Optimize risk/return profile for financial assets and liabilities Provide for sufficient liquidity Manage the cash flow volatility

Treasury Internal Bank Goals Manage Budgetary Volatility Manage Allocation of Financial Resources Manage Margins

18I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

E A C U B O 2 0 0 8

Internal Bank Model

19I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

Internal Bank Net Cash Flow

Cash Forecasting

EXTERNAL FLOWS

INTERNAL FLOWS

Investments Activities

Financing Activities

Internal Financing Activities· Loan Programs

Internal Investment Interest Payments

Internal Investing Activities· Investment Programs

Internal Loan Interest Payments

Financing Interest

Payments

Investment Earnings

Liability

Liability

Revenue

Revenue Expense

Expense

Asset

Asset

E A C U B O 2 0 0 8

Scope of Identified Risk Exposures

19I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

University-wide Internal Bank

Investment Activities

External Investments External Investments

Internal Loans to Units

Financing Activities

External Borrowing External Borrowing

Internal Investments by Units

Operating Activities

University Operating Cash Flow

University Non-Financial Capital Flows

Cash Flow Managed by Treasury

E A C U B O 2 0 0 8

Treasury Internal Bank Balance Sheet

20I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

Assets

Cash 27,232

Short Term Investments 98,393

Internal Borrowing Program Receivable 321,521

Long Term Investments (LTP) 539,822

Total Assets 986,968

Liabilities

Short Term Debt - Commercial Paper and Other 84,900

Long Term Debt - Bonds 505,151

Bond Premium/Discount 17,779

Internal Investment Program (IIP) Deposits 358,859

Deposits Due To/(From) Departments (9,218)

Total Liabilities 957,471

Retained Earnings 29,868

Net Assets Designated to Budget Office (372)

Net Assets 29,496

Total Net Assets and Liabilities 986,968

Internal Bank Balance Sheet – December 31, 2007 ($000’s)Internal Bank Balance Sheet – December 31, 2007 ($000’s)

E A C U B O 2 0 0 8

Initial Internal Bank risk assessment

Internal Bank Risk Factors ($ in mm) – FYE 12/30Internal Bank Risk Factors ($ in mm) – FYE 12/30

21I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

E A C U B O 2 0 0 8

Pursuing the Efficient Frontier

Potential Internal Bank Alternatives1Potential Internal Bank Alternatives1


UVA can choose a desirable risk level and implement changes to any number of the underlying risk factors External investments External debt Internal debt Internal deposits

Current Portfolio

Efficient Frontier of portfolio combinations

22I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

E A C U B O 2 0 0 8

Developing a Planning Horizon

INSERT

23I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

E A C U B O 2 0 0 8

Optimizing the Portfolio

23I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

E A C U B O 2 0 0 8

Next Steps on Balance Sheet Management

Education and Buy-in

Drawing from the Endowment Model

Making it manageable

Setting Priorities between External and Internal Goals

Implementation

18I N T

E R

N A

L

B A

N K

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

V I

R G

I N I

A

Agenda

Page

E A C U B O 2 0 0 8




Introduction

24

1

5

15

24

C R

E A

T I

N G

S U

P E

R I

O R

B A

L A

N C

E

S H

E E

T

R I

S K

M

A N

A G

E M

E N

T

S O

L U

T I

O N

S

E A C U B O 2 0 0 8

University overview & background

Academic Component 12 Schools

Health System 3 Hospitals 19 Clinical Practices

Revenues of $4.8 billion 55% Health System 15% Research; 13% Tuition; 6% Investment income; 10% Other

Expenses of $4.4 Billion 53% Health System 47% Academic

$7.3 Billion Investments $6.6 billion Endowment

$1.3 Billion Debt

25T R

E A

S U

R Y

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

P E

N N

S Y

L V

A N

I A

E A C U B O 2 0 0 8

Overview of treasury structure

$705 Million Working Capital at December 31,2007 $340 Million money market investment

— Recent in depth review of all money market funds in conjunction with our Investment Office

$320 Million invested in the University’s endowment $45 Million in Stafford loans

$570 Million Debt $228 Million variable rate

— $123 Million in auction market— $62 Million in VRDO market— $43 Million in private placements, bank loans

$342 Million fixed rate debt

$200 Million Projected Borrowing Needs $100 Million forward starting fixed rate swap

26T R

E A

S U

R Y

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

P E

N N

S Y

L V

A N

I A

E A C U B O 2 0 0 8

Management goals & objectives

Optimize investment return within acceptable risk parameters Primary object for working capital is preservation of capital Competitive real return

— Cash return (benchmarked at tbill) supports operating budget— Excess return funds a reserve and supports President’s initiatives

Stable return— Reserve fund created — Currently 5% of equity fund — Target 10% of equities

Optimize debt service cost within acceptable risk parameters Debt policy

— Consider the hedge between cash and variable debt— May choose to issue fixed rate in historically low environments to

preserve variable capacity Derivatives policy

— May be used to reduce costs or hedge exposures— Review broker exposures relative to market value of derivatives

27T R

E A

S U

R Y

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

P E

N N

S Y

L V

A N

I A

E A C U B O 2 0 0 8

Scope of identified risk exposures

Investment activities Return volatility Call on cash from schools Capital expenditures

Financing activities Variable Rate exposure

— SIFMA vs LIBOR— Health System risk

Operational activities Business continuity

— Identified critical procedures— Contract for off campus facilities in emergency

28T R

E A

S U

R Y

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

P E

N N

S Y

L V

A N

I A

E A C U B O 2 0 0 8

Sample analysis of alternative investment portfolios for working capital

Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market trends, which are based on current market conditions. We believe the information provided herein is reliable, but it should not be assumed to be either accurate or complete. Actual cash flows may vary substantially from figures shown based upon changes in market condition, our judgment or the underlying assumptions or methodology employed. Past performance should not be taken as a guarantee of future results.

Alternative Investment Analysis ($inMM)

Current Portfolio

More Endowment

More Fixed Income

More Alternatives

Cash 430 310 100 80

ML 1-3 - - 180 75

Lehman Agg - - 150 50

S&P 500 - - - -

Russell 2000 - - - -

HFR FOF Conserv. - - - 150

HFR FOF Strategic - - - 75

Penn Endowment 330 450 330 330

760 760 760 760

Expected Return 6.30% 7.15% 6.93% 7.59%

Volatility 3.63% 4.92% 4.02% 4.12%

Average Annual NFI 56.0 66.4 57.3 67.4

95% Worst Case NFI (38.0) (64.9) (47.0) (43.5)

95% NFI-at-Risk 94.0 131.3 104.3 110.8

29T R

E A

S U

R Y

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

P E

N N

S Y

L V

A N

I A

E A C U B O 2 0 0 8

In closing…

INSERT

30T R

E A

S U

R Y

M

A N

A G

E M

E N

T

A T

U N

I V E

R S

I T Y

O F

P E

N N

S Y

L V

A N

I A

balance sheet risk management

Economy & Finance