Loews Corporation 2013 Form 10-K Summary
Business context and reporting period
Loews is a holding company reporting for the fiscal year ended December 31, 2013. Its principal businesses are CNA Financial (90% owned), Diamond Offshore (50.4%), Boardwalk Pipeline (approximately 53%), wholly owned HighMount Exploration & Production, and Loews Hotels. CNA generated 67.2% of consolidated revenue; Diamond Offshore 19.4%; Boardwalk Pipeline 8.2%; HighMount 1.7%; and Loews Hotels 2.5%.
Financial results and position
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $15.053 billion | $14.552 billion |
| Income before income taxes | $1.429 billion | $1.399 billion |
| Net income attributable to Loews | $595 million; $1.53 diluted EPS | $568 million; $1.43 diluted EPS |
| Operating cash flow | $2.097 billion | $2.854 billion |
| Investing cash flow | $(3.298) billion | $(3.095) billion |
| Total assets | $79.939 billion | $80.021 billion |
| Debt | $10.846 billion | $9.210 billion |
| Shareholders’ equity | $19.458 billion | $19.459 billion |
Revenue rose 3.4% and Loews-attributable net income rose 4.8%. Consolidated income included $636 million of goodwill impairment and $291 million of HighMount oil-and-gas property impairment. The filing identifies no single consolidated operating-margin measure. Loews paid $0.25 per share in dividends for the year; parent-level cash and investments, net of receivables and payables, were $4.7 billion at year-end. Consolidated cash was $295 million. Total investments were $52.973 billion.
Material changes versus the prior comparable period
- CNA’s results improved: net income attributable to Loews was $847 million versus $570 million. Property-and-casualty combined ratio improved to 97.9% from 105.0%, with lower catastrophe losses and better current-year underwriting; favorable prior-year development was also lower.
- Diamond Offshore’s attributable net income fell to $257 million from $337 million. Revenue declined, utilization weakened in several rig classes, and drilling expenses rose. Petrobras represented 34% of Diamond Offshore revenue in 2013, a significant customer concentration.
- Boardwalk Pipeline’s attributable net income declined to $78 million from $109 million. Lower transportation and storage economics were partly offset by acquired operations and other revenue items; it recorded a $52 million goodwill impairment.
- HighMount’s attributable loss widened to $573 million from $407 million. Revenue and production declined, natural-gas and NGL prices remained weak, and exploration results for oil had not established commercial development potential. It recorded a $584 million goodwill impairment, eliminating its remaining goodwill, and a $291 million property impairment.
- Loews Hotels recorded a $3 million attributable loss versus $7 million income. The Loews Regency closed for renovation during 2013; RevPAR for owned and joint-venture hotels fell to $168.67 from $174.08, while excluding the closed hotel it increased.
- Other comprehensive income attributable to Loews fell to $254 million from $857 million, primarily reflecting investment valuation changes. Book value per share increased to $50.25 from $49.67.
Outlook, management commentary, risks and unusual items
- Capital and investment: Diamond Offshore budgeted approximately $2.1 billion of 2014 capital expenditures, principally for rig construction and upgrades. Its reported drilling backlog was $6.829 billion as of February 5, 2014, but management cautioned that backlog may not be realized. Offshore rig markets were described as weakening, with new capacity likely to intensify competition and pressure dayrates and utilization.
- Boardwalk distribution and projects: In February 2014, Boardwalk cut its quarterly distribution to $0.10 per unit from $0.5325. It expected 2014 capital spending of approximately $420 million and had up to $300 million of subordinated financing offered by Loews. The Bluegrass NGL project remained contingent on customer commitments, right-of-way, and regulatory and other approvals; $79 million had been contributed to development by year-end.
- HighMount: Management said low gas and NGL prices were expected to persist and that new gas drilling was uneconomic. Oil-focused exploration is more costly and uncertain; further impairment charges are possible. HighMount had $480 million of term loans outstanding and received $210 million of Loews capital contributions in 2013 for debt repayment, plus additional contributions for capital spending.
- Insurance and reserves: CNA’s reserve estimates depend on uncertain claims, inflation, legal developments, and long-duration policy assumptions. Its legacy asbestos and environmental liabilities are ceded under a reinsurance agreement with a $4.0 billion aggregate limit; collectibility, contract limits, and uncovered exposures remain risks.
- Subsequent events: CNA agreed in February 2014 to sell most of its run-off annuity and pension deposit business, subject to approvals and closing conditions. The company expected an approximately $200 million after-tax, noncontrolling-interest-adjusted impairment loss in first-quarter 2014, and expected to report the business as discontinued operations.
- Other risks and contingencies: Material risks include insurance reserve adequacy, catastrophe losses, investment and interest-rate exposure, offshore drilling hazards and customer concentration, pipeline regulation and contract renewals, commodity prices, hydraulic-fracturing regulation, environmental liabilities, impairment risk, and reliance on subsidiary distributions. Management reported no material legal proceedings; ordinary-course litigation was not expected to materially affect results or equity. No off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Underlying earnings excluding HighMount impairments, goodwill charges, and the CNA retroactive-reinsurance accounting item; confirm how these items affect recurring earnings and cash generation.
- CNA reserve adequacy, prior-year development, and the terms and recoverability protections of the NICO reinsurance arrangement.
- Boardwalk’s reduced distribution, refinancing needs, contract renewals, and the funding, approvals, and customer commitments for growth projects.
- Diamond Offshore’s Petrobras exposure, contract backlog quality, rig utilization and dayrates, and remaining construction spending and delivery schedules.
- HighMount’s reserve revisions, commodity-price assumptions, borrowing-base capacity, and potential for further ceiling-test or goodwill impairments.
- Completion, sale proceeds, regulatory approvals, and the expected impairment treatment for CNA’s announced run-off business divestiture.