Loews Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Loews is a holding company with interests in CNA Financial (90%), Diamond Offshore (53%), Boardwalk Pipeline (51%) and Loews Hotels. Unless noted, amounts are in millions of dollars.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Revenue | $3,478 | $3,688 |
| Income before tax | $105 | $514 |
| Income from continuing operations attributable to Loews | $109; $0.29 per share | $265; $0.68 per share |
| Net income attributable to Loews | $109; $0.29 per share | $59; $0.15 per share |
| Operating cash flow | $42 | $423 |
| Investing cash flow | $94 | $(637) |
| Financing cash flow | $(223) | $233 |
Q1 2014 net income included a $206 million loss from discontinued operations, principally related to the sale of CNA’s Continental Assurance Company (CAC) business and HighMount. Q1 2015 continuing income included a $158 million after-tax-and-noncontrolling-interest Diamond Offshore impairment. Excluding that impairment, Loews reported adjusted continuing income of $267 million, versus $320 million excluding a $55 million after-tax-and-noncontrolling-interest Boardwalk Pipeline charge in Q1 2014.
At March 31, 2015, total assets were $78.6 billion, total liabilities $54.0 billion and total equity $24.6 billion. Cash was $271 million; investments totaled $52.2 billion. Short-term debt was $687 million and long-term debt $9.9 billion. Book value per share was $51.98, or $51.18 excluding AOCI. The quarterly Loews dividend was $0.0625 per share.
Segment results and material comparisons
- CNA Financial: Income attributable to Loews was $210 million versus $14 million, with the prior-year comparison affected by discontinued operations. Higher limited-partnership income and improved current-year underwriting, including lower catastrophe losses, supported results; lower realized gains and weaker long-term-care performance offset some gains. CNA property-and-casualty combined ratio improved to 98.9% from 101.6%. Net earned premiums fell to $1.55 billion from $1.67 billion.
- Diamond Offshore: Loews-attributable loss was $126 million versus income of $69 million. Contract drilling revenue fell to $600 million from $685 million as utilization weakened. The company recorded a $359 million pretax impairment on eight rigs amid lower oil prices, customer spending cuts and contract cancellations. Utilization declined across rig classes; management said adverse offshore-market conditions were expected to persist.
- Boardwalk Pipeline: Loews-attributable income was $25 million versus a loss of $18 million. The comparison benefited from the prior-year $94 million pretax Bluegrass project write-off. Q1 2015 revenue declined $27 million, with warmer weather and weaker transportation, storage and PAL conditions; management also cited lower storage spreads and less favorable contract renewals.
- Loews Hotels: Attributable income rose to $5 million from $3 million. Revenue increased with acquired properties and improved joint-venture results. Loews Hotels paid approximately $330 million for two hotel properties in 2015, including one acquired in April.
- Corporate and other: Attributable loss was $5 million versus income of $11 million, mainly reflecting weaker trading-portfolio and equity-investment performance, partly offset by limited partnerships.
Outlook, liquidity, risks and unusual items
- No consolidated earnings guidance was provided. Management described a conservative financial strategy and expects offshore drilling weakness to continue for the foreseeable future. Diamond Offshore reported $6.27 billion of contract backlog as of April 20, 2015, down from $6.84 billion on February 9; its 2015 floater rig-day commitments were 57% for the remaining nine months.
- Loews parent-company cash and investments, net of receivables and payables, were $5.5 billion at quarter-end, compared with $5.1 billion at year-end. The parent received $567 million of subsidiary dividends, including a $485 million special dividend from CNA. Loews relies substantially on subsidiary distributions, which are subject to regulatory, covenant and other restrictions.
- Diamond Offshore faced potential contract terminations involving PEMEX and Petrobras rigs. Its remaining contractual payments were approximately $395 million for the Ocean BlackLion, expected in Q2 2015, and $440 million for the Ocean GreatWhite, expected in Q1 2016. Its 2015 capital expenditure budget was approximately $920 million.
- Boardwalk Pipeline budgeted approximately $570 million of 2015 capital expenditures and reported $1.6 billion of growth projects, which will require significant investment and are expected to contribute over several years. Its Gulf South rate case outcome remained uncertain. Remediation of the acquired Evangeline pipeline was expected to cost about $24 million; return to service was anticipated by the end of Q2, subject to regulatory approval.
- CNA’s fourth-quarter 2014 asbestos and environmental pollution reserve review remained incomplete; management could not estimate the potential financial impact and expected to complete the review in Q2 2015. CNA also disclosed guarantees and indemnities tied to previously sold businesses, including approximately $2.0 billion of potential structured-settlement guarantee payments, which it did not believe were likely to be required.
- Diamond Offshore disclosed a disputed Brazilian tax-reimbursement claim related to Petrobras; the possible loss could not be estimated and could be material if the company’s position is not sustained. Loews reported ordinary-course litigation was not expected by management to materially affect results or equity.
- Loews repurchased 1.8 million of its shares for $71 million during the quarter. In April, S&P lowered Diamond Offshore’s ratings to BBB+ and Fitch lowered Loews’ unsecured debt rating to A; Loews stated its ratings outlooks remained stable. Management identified insurance reserve estimation, investment valuation, energy-market conditions, regulation, financing and project execution among relevant risks.
Important facts for investors to verify
- Whether Diamond Offshore’s rig utilization, backlog, customer contract status and impairment assumptions improve or deteriorate, and how its construction commitments are funded.
- Progress and ultimate impact of CNA’s outstanding asbestos and environmental reserve review, along with developments in insurance reserve adequacy and long-term-care results.
- Boardwalk Pipeline’s Gulf South rate case outcome, Evangeline pipeline restart, contract-renewal pricing and funding needs for growth projects and maturities.
- How recurring earnings compare with reported results after the substantial impairment and prior-period discontinued-operation effects; confirm the assumptions behind adjusted income.
- Subsidiary dividend capacity and parent liquidity, including the effect of regulatory restrictions, debt maturities, capital spending and rating changes.