Loews Corporation — Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2013; comparisons are with the quarter ended March 31, 2012 unless noted. Loews is a holding company with interests in commercial insurance (CNA), offshore drilling (Diamond Offshore), natural-gas pipelines (Boardwalk Pipeline), oil and gas production (HighMount), and hotels (Loews Hotels). Dollar amounts are in millions except per-share data.
Financial performance and position
- Revenue was $3,734, down slightly from $3,744. Income before tax declined to $512 from $741; consolidated net income was $398 versus $519, and net income attributable to Loews was $242 versus $367. Diluted EPS was $0.62 versus $0.92. The quarterly dividend was $0.0625 per share in both periods.
- Operating expenses rose to $3,222 from $3,003, including higher insurance claims and benefits ($1,429 versus $1,381) and other operating expenses ($982 versus $819). Interest expense was $108 versus $111.
- Net cash provided by operating activities was $608 versus $328. Investing activities used $633 versus $513; financing activities used $17 versus providing $154. Cash at quarter-end was $179, down from $228 at year-end.
- At March 31, total assets were $80,614 and total liabilities were $55,896. Total debt was $9,437 ($19 short-term and $9,418 long-term), compared with $9,210 at December 31. Total equity was $24,718. Investments totaled $53,184.
- Book value per share increased to $49.93 from $49.67 at December 31, 2012. Parent-company cash and investments, net of receivables and payables, were $3.7 billion, versus $3.9 billion at year-end.
Material changes and segment results
- HighMount: Reported an $88 attributable net loss versus a $22 loss. Results included a non-cash ceiling-test impairment of $145 pretax ($92 after tax), versus $44 pretax ($28 after tax) a year earlier. Lower oil and NGL prices used in the test and negative reserve revisions drove the charge. Sales volume fell to 12.0 Bcfe from 14.0 Bcfe; hedged realized price per Mcfe rose to $5.50 from $5.28.
- CNA: Attributable net income was $226, essentially unchanged. Higher premiums and improved current-year non-catastrophe underwriting were offset by lower investment income, higher catastrophe losses, and less favorable prior-year development. P&C combined ratio was 101.5% including Hardy, acquired in July 2012; excluding Hardy, the total comparison is not directly like-for-like. CNA recorded $39 of pretax net catastrophe losses and $39 of favorable pretax prior-year development.
- Diamond Offshore: Attributable net income fell to $82 from $87. Contract drilling revenue declined to $700 from $755, principally because of fewer revenue-earning days, surveys, and downtime. Backlog was $8.1 billion as of April 25, 2013, down from $8.6 billion on February 1.
- Boardwalk Pipeline: Attributable net income was $33 versus $35. Revenue increased to $329 from $314, partly due to the Louisiana Midstream acquisition; lower transportation revenue and increased operating costs weighed on results.
- Loews Hotels: Revenue rose to $94 from $80, while attributable net income was zero versus $4. New hotel properties added revenue, offset by the Regency renovation closure and higher costs. RevPAR decreased to $153.15 from $155.31.
- Corporate and other: Attributable net loss was $11 versus income of $35, mainly reflecting lower investment income, particularly weaker trading-portfolio performance.
Outlook, risks, contingencies, and unusual items
- No consolidated earnings guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Boardwalk expects 2013 transportation contract renewals to be at lower rates as contracts expire amid narrower basis spreads; management expects this to pressure transportation revenue and distributable cash flow. Storage and PAL revenue remains market-sensitive. Its proposed Bluegrass NGL pipeline was still in development and subject to definitive agreements, customer contracts, regulatory approvals, and board approvals.
- Diamond described strong deepwater and ultra-deepwater demand but noted competition from newbuild rigs and limited near-term flexibility given existing commitments. It budgeted about $1.8 billion in 2013 capital expenditures, including rig construction and upgrades; funding was expected from cash and operating cash flow, with potential capital-markets access also discussed.
- HighMount expected about $270 million of 2013 capital expenditures, focused on oil opportunities. Its credit facility had only about $20 million of borrowing capacity available under covenants at quarter-end; Loews contributed $49 million during the quarter. Commodity prices, production, reserve revisions, and borrowing tests are material sensitivities.
- Other stated commitments included approximately $247 million of future limited-partnership capital calls; Diamond rig construction and upgrade obligations; $130 million of Boardwalk commitments; and $285 million of Loews Hotels development and renovation commitments.
- Insurance reserve estimates, reinsurance recoveries, investment valuations, commodity prices, drilling utilization and dayrates, pipeline contract renewals, and access to capital are key risks. Management said ordinary-course litigation was not expected to materially affect results or equity; Part II reported no legal proceedings. No updates or additions were made to the 2012 Form 10-K risk factors.
- Loews repurchased approximately 2.1 million shares for $92 million during the quarter. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the earnings decline reflects recurring operations versus HighMount’s impairment and lower parent-company investment results.
- HighMount’s reserve revisions, commodity-price assumptions, hedge coverage, capital needs, and covenant headroom.
- Boardwalk’s upcoming contract expirations, renewal rates, distributable cash flow outlook, and financing needs.
- Diamond’s rig delivery schedule, backlog conversion, utilization, construction spending, and dividend sustainability.
- CNA reserve development, catastrophe exposure, investment income trends, and restrictions on subsidiary dividends to Loews.
- Parent-company liquidity after subsidiary contributions, share repurchases, dividends, and subsidiary debt and capital commitments.