Loews Corporation — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2016, compared with the first quarter of 2015. Loews is a holding company with interests in CNA Financial (90%), Diamond Offshore (53%), Boardwalk Pipeline (51%) and wholly owned Loews Hotels.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 or prior balance |
|---|---|---|
| Total revenue | $3.173 billion | $3.478 billion |
| Income before tax | $195 million | $105 million |
| Consolidated net income | $199 million | $49 million |
| Net income attributable to Loews | $102 million | $109 million |
| Loews diluted EPS | $0.30 | $0.29 |
| Operating cash flow | $149 million | $42 million |
| Cash at period end | $308 million | $440 million at Dec. 31, 2015 |
| Total assets | $77.224 billion | $76.006 billion at Dec. 31, 2015 |
| Total equity | $23.125 billion | $22.810 billion at Dec. 31, 2015 |
| Short- and long-term debt | $10.587 billion | $10.560 billion at Dec. 31, 2015 |
Consolidated net income includes noncontrolling interests; Loews-attributable income is the relevant parent-shareholder result. Loews reported a $4 million income tax benefit in Q1 2016 versus $56 million of tax expense in Q1 2015. Consolidated net margin was not presented as a company-defined measure.
Parent-company cash and investments, net of receivables and payables, were $4.9 billion, versus $4.3 billion at year-end. Loews received $558 million in subsidiary dividends, including a $485 million special CNA dividend. Parent-company cash dividends were $21 million; the quarterly dividend remained $0.0625 per share. Book value per share rose to $52.60 from $51.67 at year-end; excluding AOCI, it rose to $52.98 from $52.72.
Material changes versus the prior comparable period
- Revenue fell $305 million, primarily reflecting a $156 million decline in contract drilling revenue and lower investment income.
- Loews-attributable net income decreased $7 million. CNA earnings and parent investment results weakened; Diamond Offshore and Boardwalk Pipeline improved. EPS increased to $0.30, which management attributed to share repurchases reducing weighted-average shares.
- Net investment income decreased to $422 million from $588 million, driven mainly by limited partnership results. Investment gains turned to a $28 million loss from a $10 million gain.
- Operating cash flow increased to $149 million from $42 million. Investing activities used $157 million, compared with $94 million provided in 2015; financing activities used $123 million, compared with $223 million.
- At CNA, property-and-casualty combined ratio improved to 96.1% from 98.9%; favorable prior-year development was $66 million versus $2 million unfavorable in 2015. CNA-attributable Loews income declined to $60 million from $210 million, substantially affected by the A&EP reinsurance accounting charge and weaker investment results.
- Diamond Offshore generated $43 million of Loews-attributable income versus a $126 million loss, largely because 2015 included a $158 million after-tax and noncontrolling-interest impairment charge. Contract drilling revenue fell to $444 million from $600 million.
- Boardwalk Pipeline-attributable income rose to $31 million from $25 million; Loews Hotels income was $3 million versus $5 million; Corporate and Other reported a $35 million loss versus a $5 million loss.
Outlook, commentary, risks and unusual items
- CNA A&EP reserves: CNA recorded $200 million of net adverse prior-year development before the loss portfolio transfer (LPT), relating to asbestos and environmental pollution claims. The full amount was ceded to NICO, but retroactive reinsurance accounting recognized only $73 million of benefit in the quarter; $127 million is expected to be recognized through future earnings as covered recoveries are paid. The quarter’s Loews-attributable after-tax and noncontrolling-interest impact was a $74 million charge. NICO’s collateral trust was valued at $2.7 billion at March 31, 2016; Berkshire Hathaway guarantees specified NICO obligations.
- Drilling market: Management described offshore drilling conditions as depressed, with weak demand, falling dayrates, contract cancellations and potential further rig idling or impairment. Fifteen Diamond Offshore rigs were cold stacked as of May 2. A PEMEX termination notice for the Ocean Scepter was received after quarter-end and was under discussion. Diamond evaluated ten rigs for impairment in Q1 and recorded none; further impairment may be needed if conditions worsen. Diamond’s April 1 backlog was $4.778 billion, down from $5.195 billion in the prior comparison, and includes $641 million for the Ocean GreatWhite under construction.
- Diamond expected approximately $620 million of remaining-2016 capital spending, including about $510 million for the Ocean GreatWhite. Estimated total project cost was $764 million, with a $440 million final payment due on delivery, expected in the second half of 2016. Two equipment sale-and-leaseback transactions generated $105 million; related future lease and service commitments were estimated at $327 million over ten years.
- Boardwalk Pipeline: Management warned that changing gas flows, lower producer activity, expiring contracts and customer credit deterioration could pressure revenues and distributable cash flow. Growth projects were estimated to cost about $1.6 billion in aggregate. A customer on the Northern Supply Access project rejected its contract in bankruptcy; another failed to increase required letter-of-credit support. Boardwalk expected approximately $850 million of 2016 capital expenditures.
- Financing and credit: Loews issued $500 million of 3.8% senior notes due 2026 and repaid $400 million of 5.3% notes at maturity. CNA issued $500 million of 4.5% notes due 2026 and repaid $350 million of 6.5% notes. Moody’s downgraded Loews unsecured debt to A3 from A2, stable outlook, and Diamond Offshore to Ba2 from Baa2, stable outlook. Diamond had $1.5 billion available under its revolving facility as of April 28.
- Diamond disclosed a $440 million remaining construction payment for the Ocean GreatWhite. CNA also disclosed approximately $2.0 billion of potential lifetime payments under guarantees of structured-settlement annuities, which it considers unlikely to be called because of a supporting trust.
- Management provided no consolidated earnings guidance. It cautioned that quarterly results are not necessarily indicative of full-year results. Market conditions and forward-looking statements are subject to substantial uncertainty. No material change in market-risk components was reported; management said disclosure controls were effective and reported no updates to the 2015 Form 10-K risk factors.
Most important facts for investors to verify
- Whether CNA’s A&EP reserve estimates, NICO recoveries and future recognition of the remaining LPT benefit develop as expected.
- Diamond Offshore contract cancellations, utilization and dayrates, backlog conversion, the Ocean Scepter matter, and potential impairment or liquidity effects.
- Boardwalk’s customer credit and project commitments, including replacement capacity for the bankrupt customer and collateral support from the other customer.
- Parent-company liquidity and subsidiary dividend capacity, particularly regulatory limits on CNA insurance-subsidiary dividends; Loews depends substantially on subsidiary distributions.
- Debt maturities, borrowing costs and credit-rating developments across Loews and its subsidiaries, as well as the Ocean GreatWhite delivery cost and sale-and-leaseback commitments.