洛茲集團 (L) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And thank you for calling into the Loews’ First Quarter 2003 Earnings Release Conference Call. At this time all parties have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the floor over to Josh Kahn, Manager of Investor Relations. Sir, the floor is yours.

Thank you, Operator. Good morning, everyone. This is Joshua Kahn, the Manager of Investor Relations for Loews. I’d like to welcome you to Loews Corporation’s First Quarter 2003 Earnings Conference Call.

By now you should have received a copy of our earnings release. If not you may get a copy from our web site at loews.com. The Carolina Group also issued a press release this morning announcing results for the first quarter of 2003. The Carolina Group release is also available at the Loews’ web site.

I’d also like to alert listeners to the fact that Loews will hold an Analyst Conference at 8:00 a.m. at the Plaza Hotel in New York at June 2nd, 2003.

The Chief Executive Officer of Loews, Jim Tisch, and the Chief Financial Officer of Loews, Peter Keegan, will lead today’s discussion, and will be joined by [Marty Orlowsky] [ph] of Lorillard.

Before we begin I’d like to make a few brief disclosures concerning forward-looking statements. This conference call will include the use of statements that are forward-looking in nature. Actual results achieved by the company may differ materially from those projections made in any forward-looking statements. The forward-looking statements reflect circumstances at the time they are made and the company expressly disclaims any obligations to update or revise any forward-looking statements made during this call. This disclaimer is only a brief summary of the company’s statutory forward-looking statements disclaimer. You are urged to read this disclaimer which is included in the company’s 10-K and 10-Q filings with the SEC in full.

I’d also like to remind you that during this call today we may discuss certain non GAAP financial measures such as operating income. With regard to such financial measures please refer to our earnings release for reconciliation to the most comparable GAAP measures.

There’ll be time for questions after Jim, Peter, and Marty have discussed our results. For those of you who have tuned in via our web site please call 877-692-2592 during the Q&A session if you’d like to ask a question.

Now I’d like to turn the call over to our Chief Executive Officer, Jim Tisch.

Thank you, Josh. And welcome, everybody.

Given the generally difficult economic environment Loews continues to perform well. As I am sure you’ve seen from our release, earnings were a bit lower for the quarter year-over-year, but they reflect what I would consider to be good performance by our subsidiaries under difficult operating circumstances.

As you may have heard during the CNA conference call that preceded this one, our insurance subsidiary recorded a 22 percent improvement in net income. The insurance market continues to exhibit a characteristic difficult, if not impossible, to find in other industries these days, namely pricing power. Prices across CNA's property and casualty operations improved 24 percent quarter-over-quarter. CNA continues to focus on improving underwriting and controlling costs in an effort to bring price increases to the bottom line.

Lorillard continued to weather significant market challenges admirably in the first quarter. And in just a moment I’ll let Marty Orlowsky, who is with us on this call today and the Chief Executive Officer of Lorillard, provide you with more detail on the past quarter and the general state of Lorillard’s business.

Diamond Offshore which recorded a loss in the quarter continues to suffer from weakness in the offshore drilling market. Utilization and day rates were lower across-the-board, hurt by the persistent reluctance of oil companies to commit to drilling contracts in the volatile oil and natural gas markets. Diamond Offshore has made use of its strong financial position to acquire assets cheaply in the prevailing environment. During the quarter the company completed its previously announced acquisition of the third generation rig Omega which has been aptly renamed ‘The Ocean Patriot.’

Bulova had a great quarter, particularly in light of anemic consumer spending patterns. Both sales and income increased significantly year-over-year, fueled by greater volumes in average selling prices for watch products, as well as by improved clock volumes. Bulova’s Wittnauer and Harley Davidson product lines which were introduced in 2001 have contributed significantly to its robust performance.

As we had indicated during a conference call we held a little over three weeks ago if all goes according to plan Loews should have a new subsidiary to speak of in early June. Loews, as many of you know, has agreed to acquire Texas Gas Transmission Corp. from the Williams Companies in a transaction valued at more than $1b. Texas Gas has historically generated reliable cash flows, and we expect it to generate meaningful returns for Loews shareholders in years to come.

And now I’d like to turn the call over to our CFO, Pete Keegan, who will provide some more insights into the financial performance of Loews.

Thanks, Jim. And good morning, everybody.

Loews reported net income of 190m in the first quarter of 2003, compared to 212.8m in the first quarter of ’02. Net income attributable to Loews’ common stock was 161.4m or 87 cents per share in the first quarter of ’03, versus $194.8m or $1.02 per share in the first quarter of ’02.

The decline in net income attributable to Loews’ common stock is the result of lower net operating income as well as lower net investment gains. Net operating income determined by excluding from net income net investment losses of 56.6m, an income attributable to Carolina Group stock of 28.6m amounted to 218m in the first quarter of ’03 versus 249.9m in the first quarter of ’02.

Net investment results declined from a gain of 15.5m in the first quarter of ’02 to a loss of 56.6m in the first quarter of 2003.

Net income attributable to Carolina Group stock measured 28.6m or 72 cents for Carolina Group’s share in the first quarter of 2003 against 18m or 45 cents per Carolina Group share in the first quarter of ’02. Carolina Group stock was issued in early February 2002, and therefore, the first quarter ’02 results for the Carolina Group reflect only the two-month period between the IPO and the end of that quarter.

The Carolina Group also issued a press release this morning which contains a pro forma presentation of the first quarter 2002 results of Carolina Group. This presentation is intended to assist you in drawing year-over-year comparisons. The pro forma calculation treats Carolina Group as if it had existed at January 1st, 2002. On this basis net income attributable to Carolina Group stock was $32m or 80 cents per Carolina Group share in the first quarter of 2002.

The Carolina Group’s first quarter ’03 net income included a charge of 17.1m net of taxes related to the resolution of indemnification claims and trademark matters at Lorillard. Excluding this charge Carolina Group net income would have been 32.6m or 82 cents per Carolina Group share.

Lorillard contributed 124.8m to net income attributable to Loews’ common stock in the first quarter of ’03. This represents Loews’ 76.99 percent interest in the net income of Carolina Group of which Lorillard is the principal asset. Lorillard’s 149m contribution in first quarter ’02 represents Loews’ 100 percent economic interest in Lorillard for the first month of 2002 and Loews’ 76.83 percent interest in Carolina Group for the two-month period from the time of the IPO of Carolina Group in February ’02 through the end of the quarter.

CNA contributed 123.4m excluding investment gains and losses to Loews’ first quarter ’03 net income versus 100.9m in the first quarter of ’02. Loews’ interest in CNA’s net realized investment gains and losses declined from a 2.2m gain in the first quarter of ’02 to a 43.9m loss in the first quarter of 2003.

Diamond Offshore’s contribution to net profits declined to a loss of 12.1m in the first quarter of 2003 from a gain of 8.7m in the first quarter of 2002. Both utilization and day rates were lower in the quarter year-over-year and across all rig segments.

Loews Hotels’ net income declined from $6m in the first quarter 2002 to $5.1m in the first quarter of 2003. Average room rates for all hotels increased by 3.2 percent while occupancy was 68.6 percent in the first quarter of ’03, versus 72.6 percent in the previous year’s quarter.

Bulova’s contribution to Loews’ first quarter ’03 net income decreased to 3m from 1.6m in the first quarter of 2002. Watch product volumes and prices were strong as were clock volumes. The company’s new Wittnauer and Harley Davidson brands also made significant contributions to operating results for the quarter.

Net investment income and other declined from a loss of 16.3m in the first quarter of ’02 to a loss of 26.2m in the first quarter of ’03 as a result of lower investment yields and lower invested asset balances, as well as lower income from shipping operations.

At March 31st, 2003 cash and investments at market excluding CNA and Diamond Offshore was approximately 3.6b. Excluding CNA, Diamond Offshore, and Lorillard there was approximately 2.2b of cash and investments at Loews at the end of the quarter. Excluding CNA and Diamond Offshore Loews had roughly 2.4b of long-term debt at the end of the quarter.

And now I’ll turn the call over to Marty Orlowsky of Lorillard. Marty.

Thank you, Peter. Good morning, everyone.

Lorillard’s first quarter 2003 financial performance reflected positive results notwithstanding a very competitive market environment and unfavorable quarter-over-quarter wholesale unit shipment comparisons. Also affecting first quarter financial results, as Peter just pointed out was a one-time charge related to Lorillard’s sale of its international business in 1977 to Brown & Williamson, an affiliate. That transaction included certain provisions that obligated Lorillard to indemnify the purchase of the claims arising from the use of Lorillard products before the sale.

Lorillard recently paid Brown & Williamson $28m pretax to resolve all indemnity claims. Additionally, this recent agreement provided that Brown & Williamson and its affiliates would cease use of the name ‘Lorillard’ on all brands in international markets within 18 months of this agreement to assist Lorillard in its efforts to combat counterfeit and gray market product.

Excluding the pretax $28m charge Lorillard’s operating income for the first quarter would have been plus 9.9m or 3.8 percent over the first quarter of 2002. Including the charge operating income is down $18.1m or minus 6.9 percent. Also excluding the charge operating income per thousand units for the quarter, that is the first quarter of 2003, was $32 per thousand or plus 17.9 percent versus the $27.15 per thousand for last first quarter.

These financial results were achieved in light of Lorillard’s domestic U.S. wholesale shipment decline of 13.4 percent for the first quarter of ’03, versus the same period a year ago. Total Lorillard wholesale shipments shipped which includes domestic, Puerto Rico, and certain U.S. territories in the first quarter of ’03 declined 11.9 percent as compared with the quarter a year ago.

A major contributing factor to this unfavorable comparison were the significantly increased purchases made by wholesalers and retailers last first quarter due to the replenishment of inventories following the excise tax increase that took effect January 1st, 2002, as well as advanced buying during the first quarter of last year prior to last year’s manufacturer’s price increase.

Newport’s first quarter 2002 domestic U.S. wholesale unit shipments were significantly impacted by last year’s purchasing patterns just mentioned. And it’s 11 percent decline in the first quarter of ’03 as compared with first quarter of ’02 was fundamentally influenced by these events. However, I would point out that the brands [raised] decline of 11 percent was less than the total industry’s volume loss of 12.9 percent.

According to MSA total Lorillard share of wholesale shipments for the first quarter of ’03 was 9.39 percent, which is minus .05 versus the first quarter of ’02. Newport shipment share for the first quarter of ’03 was 8.47 and it was up .18.

Although the third and fourth quarters of 2002 were not particularly strong for Lorillard due to the increase in State excise taxes and the general nature of the economy performance during the first quarter of 2003 indicates an upward shift in volume and market share movement. For Newport in particular response to adjustments made to our promotional spending model is demonstrating positive results as compared with the last six months of 2002.

When we view performance using Lorillard’s retail data base it reveals the following trends for the first quarter of ’03 versus the fourth quarter of 2002. Sequentially total Lorillard improved its share of retail between the quarters by plus .51 share points.

Newport achieved an 8.02 retail share of market in the first quarter of 2003, which reflected a gain of .56 share points over the fourth quarter of 2002. Newport’s retail share of the menthol segment reached 30 percent during the first quarter of ’03, and demonstrated a gain of 1.3 segment points versus the fourth quarter of 2002.

Lorillard’s share of the premium segment at retail was 11.9 percent for the first quarter ’03, versus 10.5 percent in the fourth quarter of last year. And Newport’s share of premium brands increased to 11.2 percent, which was a gain of .7 points over the previous quarter. The Menthol segment in the first quarter of 2003 accounted for 26.73 percent at retail of total market, up slightly versus the fourth quarter of last year.

According to our retail data the deep discount price segment appears to have moderated its growth trend between the fourth quarter of last year and the first quarter of this year. Our data indicates essentially flat volume with a modest increase of retail market share of .16. Total market share at retail for the deep discount segment was 9.61 percent according to our numbers for that first quarter, versus 9.45 percent in the fourth quarter of last year.

As we’ve stated in the past, our overall business strategy is to build profitable market share. We remain committed to this approach, and believe the results for the first quarter reflect this in terms of our overall financial outcome and improvements in the Newport brand. We continued during the quarter to follow a selective promotional investment strategy as opposed to every day low price off-invoice allowances.

By using the targeted market at retail store approach for investing promotional dollars we’re in a better position to achieve our overall objective. This goal is to strengthen Newport’s share of market on an efficient and effective basis. Efficient in terms of optimizing operating income per thousand units, effective in terms of reinforcing and growing Newport’s market share in markets and stores where the potential to do so is the greatest.

On May 5th, 2003 Lorillard announced the wholesale list price reduction of $55 per thousand cigarettes or $11 per carton for the Maverick brand. Prior to this date Maverick was being discounted through buy-downs at retail at the rate of $5.50 per carton for each carton sold. Consequently, we will be adding a net $5.50 per carton to the price reduction.

Repositioning Maverick into the deep discount price segment will allow the brand to establish a consistent and competitive identity for what this brand was originally intended to be, and that is a discount brand. This should provide the brand with greater potential to participate actively in the growth dynamic occurring in this price segment. As such, this decision is not inconsistent with our overall philosophy of optimizing profitable growth since we expect Maverick to add to our overall volume and profit on an incremental basis.

And that’s my prepared comments.

Thank you. Operator, I think we would now like to open the call up to questions.

Thank you. (Caller Instructions.)

Our first question is coming from [David Aloman] [ph] with Morgan Stanley. Sir, your line is live.

Good morning, everyone. Marty, I wanted to ask you some questions, please. First, do you have the pretax MSA accrual number, that went through the P&L this quarter and the year-ago quarter?

It sounds like Marty may not be on the line.

Yeah, we can give it to you David. In the first quarter of ’03 the pretax accrual was 197.5m.

I am sorry, Peter, can you say that again? 190?

197.5.

That was in the first quarter of ’03?

That’s right.

Okay.

And that was a reduction of 98m versus 2002.

And it’s down both because, the base rate is down but also because industry profitability is lower and you benefit from that?

Right. And it’s down for three reasons. One, as you’ve mentioned, the base rate is lower, lower volume, and the profit offset.

Marty, could you talk a little bit about Maverick? I mean you had let those – that brand bleed over time feeling it wasn’t profitable to compete at the low end. And now you’re choosing to do that. Can you, you know, can you really make money at charging a deep discount price given your MSA structure?

Well, yes. The answer is yes. We wouldn’t be doing it if we didn’t think we could make money. Yes, the economics is such that given volume increases or shipment increases on that brand we will be making money. As I said, it should add incrementally. It shouldn’t dilute us.

You made the point going from the third quarter to the fourth quarter, and then from the fourth quarter to the first quarter that you were incrementally increasing the promotional spending behind Newport. Can you characterize what the plan is now going into the second quarter? Are you generally comfortable with Newport’s spending rates as they exist today in the marketplace?

Well, I’m not going to comment as we normally don’t on future actions, but as we stated in the last call we intended to maintain a competitive position for Newport. And obviously during the first quarter we did so. And but not through the – as I indicated in my comments not through an off invoice allowance approach. It’s very selective. We think we’re better served by investing our dollars in markets and stores where we think we can get a better return on that investment. And I think our operating income per thousand units for the first quarter reflect that.

Other things, Marty. What is your estimate of the current pace of U.S. cigarette consumption declines?

Well, you know, trying to figure out consumption is a very difficult task. Our best analysis of this would indicate that consumption rates have, are declining at a greater rate than the historical levels.

One point I’d make is just look, Government statistics, the consumer price index for cigarettes increased 9.5 percent from January ’03 versus January ’02. The consumer price index overall for all items for the same period increased 2.6 percent. We’ve seen in the past in the cigarette industry when pricing for cigarettes outpaces the rate of inflation there tends to be a consumption, an acceleration of the consumption decline.

And so we do believe that the historical rate of one to two percent is not what it is currently. And that’s mainly driven by the State excise tax increases that took effect beginning last July. I don’t believe it’s at the same level that has been quoted by others, a five to 10 percent rate, but we believe it could be in the range overall of three to five percent for the industry.

Thank you very much.

Thank you. Our next question is coming from Bonnie Herzog with Smith Barney. Your line is live.

Hi, good morning. Actually, it’s [Kate McShane] [ph] calling for Bonnie. I have two questions. First, I guess, starting also with the strategy behind Maverick. The first question is do you have similar plans in place for Lorillard’s other second tier brands? And why have you decided to offer the $11 per carton off invoice at – and pay a cash discount off the net price rather than the cash discount on the full price?

Well, to answer your first question, if in fact we ever have any plans we will so state it. At this point in time I’m not going to comment no any future plans. The only plan we have is as I announced, that we reduced the price of Maverick.

And relative to the cash discount, our cash – Lorillard’s cash discount happens to be the highest of any company in the industry. We are still at a 3.75 percent cash discount rate at zero days terms. All other companies have varying levels of cash discount that they are offering, and if you look at our, whether it’s on a discount brand or a premium brand we pay the most competitively on a cash discount basis.

Consequently, even though there’ll be a lower discount in absolute terms based on the Maverick reduction we still feel that there is opportunity for wholesalers to earn money by increasing the volume of Maverick, and they’re still benefiting from our cash discount structure on all other brands.

Okay, thanks. And if I can just one more question regarding the promotions that you did do during the first quarter. We’re hoping maybe you could categorize, just tell us in what form they came in? We had seen or heard from our retailer and wholesaler contact that it seemed that the buy-down amount was about the same but you seem to have attached more volume. Is that consistent with what you actually did during the first quarter?

Well, buy-downs are the predominant form of our promotional effort, and we did increase the rate of discount during the first quarter as compared with last year. And we also increased the duration of the promotional periods for Newport versus last year.

Great, thank you very much.

We also do other promotions, obviously.

Right.

Thank you, our next question comes from [Martin Feldman] [ph] with Merrill Lynch. Your line is live.

Thanks. Good morning, Marty. And good morning, everyone.

Marty, if we can just talk a little bit more – I am sorry to beat this horse to death, but on Maverick, can you just -–should I assume that you plan to price Maverick at the same as the deep discount volumes in the market from the little manufacturers?

Well, the $11 per thousand reduction, $11 per carton reduction puts us in the general range of the deep discount segment. There are a myriad of price points out there. We’re closer to the Commonwealth Brand, USA Gold, which happens to be the leading brand in the deep discount segment. We’re not as low, obviously, by virtue of this reduction as some of the smaller companies that are, you know, somewhat lower priced. But none of the other brands from those companies have the same sort of broad national distribution and impact as does, for example, USA Gold. And so we felt that this price point would be the most effective on a broad scale basis, and by that I mean throughout all markets, to make Maverick more competitive than it once was.

Marty, do you think this movement by yourselves with Maverick will boost growth in the overall deep discount segment?

No, I really don’t. I think that growth will continue as it has. It’s just a basic organic perspective. I think that it will allow us to take business from some of the other discounted brands out there. So I think it’s a bigger opportunity to gain business or volume from existing brands as opposed to adding to the market.

Okay. And on the economics of Maverick, am I correct to assume that your MSA payments a pack are generally about 12 cents, on average higher, 12 or 13 cents higher than the, than your competitor deep discount? Or the little [FPMs]?

To be honest with you, Martin, I don’t know what the exact differences are. We tended to have through last year the highest payment per carton per pack, as well obviously. But I don’t know, I don’t have those numbers handy. And I’m not fully aware of what all those differences would be.

Okay. Just moving on, clearly you’re pleased with Newport’s performance during the first quarter, right?

Yes.

I know you’re obviously not going to tell us of your promotional activity through the remainder of the year, but is it reasonable to assume that at the moment the – your activity during the first quarter you’re satisfied with and it shouldn’t need to accelerate dramatically from here?

All I am saying, Martin, is that as we’ve said before, and I think we’ve said it the previous call, that our objective for Newport is to ensure that it remains competitive in the marketplace, and we intend to sustain and, or grow our market share. And so that’s our guideline.

Great, thanks Marty. I have a question for Peter, or perhaps for Marty, either one of you. But I think it’s for Peter. If I look at the numbers you didn’t buy-back any stock during the quarter for Carolina Group. But it looks as though you paid down a small amount of the debt of Carolina Group. Is that, in fact, accurate?

Well, we paid down debt after the first quarter dividend payment. I think we mentioned that on the last call.

Peter …

We paid down debt in February of 2002, that was the last time we paid it down.

2003.

Excuse me, 2003.

What is the current level of debt?

Hold on a second.

And Jim, perhaps while Marty is getting that – while Peter is getting that number, can you give us any color on the $8.8m of investment income?

Say again? Color on what?

The investment income to Carolina Group?

You know, right now, historically for several quarters we had been investing in Treasury Securities of lengths up to 10 years, and we had, as interest rates had come down we had taken gains in those trading securities. Right now those cash balances are invested primarily in cash. So you should expect that the investment income will reflect current short-term interest rates, which is not too exciting but our goal is not to lose money.

Jim, on that basis, I mean the nine -- $8.8m as you said was down from $14.2m in the first quarter of last year. Should we assume that the current, that the $8.8m at least in the second quarter for the remainder of this year is likely to be more indicative than last year’s numbers?

Generally, yes, you should assume that unless you see interest rates picking up again.

Okay.

And the balance, the debt balance was or is 2374.2b.

Okay. Jim, can you give us – I mean the stock price was weak during the quarter but you elected not to buy-back any stocks again. I know you only go in from time to time, but were there any particular factors that pushed you not to buy-back any stock?

Martin, we tend not to explain why we do and don’t buy-back stock, and so I’m going to opt not to answer that question.

Okay. Perhaps just put another way for either of you. I mean when you got this extra cash, I mean is it always then in the future going to be a toss-up between either paying down debt or buying back stock?

Are you talking about for Carolina Group?

Yes.

Yes, Carolina Group has a balance of $150m, and that could be used for either of those purposes. But right now we’ve selected to maintain that $150m balance.

Okay, thanks very much.

Thank you. Our next question is coming from [Robert Blasfegel] [ph] with Langen McAlenney. Your line is live.

Good morning. Just one quick follow-up on that, and a few more. The Carolina Group capital gains, are they taken out when you characterize the operating income at Loews?

You know, we’ll get back to you on that. Right now, in this quarter there were no Carolina Group gains.

Okay, but there was – the Treasury stuff was not trading, it was income [still], that you were referring to?

For Carolina Group?

Yeah.

It was primarily, yes, primarily coupons.

Okay. Do you have the shipping earnings for Q4 and Q1? I am just trying to further get behind what’s going there.

Yeah, I don’t have the last quarter, but the current quarter and shipping is reported on a one quarter lag basis. And so what’s in our first quarter is a $6.1m loss.

And I think it was profitable. Wasn’t it in some of the prior quarters? Or am I mis-remembering that?

I don’t have handy the last quarter. I think you may be right, but I don’t have that in front of me.

Okay. I’m on a roll, let me keep going. On the Texas Gas acquisition I assume that you have some liquid, you’re more liquid at the corporate level to pay for that then you might be? Or is your short-term asset just a market call solely?

No, no. We have the cash on-hand to make that payment on settlement.

Right, but I am just saying as we think in terms of – you talked about a 10 percent cash return potentially on that going forward, 10 percent plus. Do I remember that correctly?

Yeah.

And the gap is going to be close to that, or – and then, we should think in terms of a one percent use of funds that you’re using to buy at the current level? I know that can change around?

Today Treasury bills are trading just over one percent.

Right, and so, then the GAAP should be close to that 10 percent sort of cash return, or is there anything dynamically different that’s going to?

It may vary from quarter to quarter, but in general that’s the case.

And are there any closing costs, or were there any legal costs, or banking costs that have been expensed today, or to look forward to next quarter if it does happen?

There will be closing costs associated with the transaction, yes.

But you haven’t expensed, you haven’t had any significant field related expenses to date?

There’s nothing material in the first quarter.

Okay. Thank you.

Thank you. (Caller Instructions.)

Our next question is coming from [Michael Millman] [ph] with Smith Barney. Your line is live.

Thank you. Could you – I was following up on the Texas Gas Transmission deal, give us the pro forma numbers for your cash and long-term debt? Assuming that you had purchased this say January 1st? And secondly, could you tell us in the first quarter what corporate cash flow was?

Okay. Assuming we had purchased it January 1st is difficult to do. The – it’s going to cost us, we anticipate that the cash that this will cost us is about $525m, and then the rest will be financed through debt security. And so you can just deduct that from our cash balances. And then you’d have to add back your estimate for what the income would be during that period.

And what was your second question?

It was the corporate cash flow in the first quarter.

Okay, Pete is looking that up right now. You know what, we don’t have that number available just yet. It will be, you will be able to get that from the Q when that’s released.

Can we – it’s sometimes difficult to pick-out the corporate from the consolidated, though.

It should be very easy because in the Q we are showing consolidating balance sheets.

Okay.

Just as we did in the Annual Report.

Yeah, you’ve got the complete spread in the Q, or you will have it. And that will be filed fairly shortly.

Okay, thank you.

Thank you. Our next question is coming from [Mark German] [ph] with [Paxton] [ph]. Your line is live.

That’s [Curt Werman] [ph]. Two questions. One for Jim. Jim, recently you guys filed a – you registered a debt equity shelf. And it was, I think it pressured the stock, and it certainly was, you know, for anyone who follows the company closely a little bit of a shocker to see that the company might be considering an equity offering of any kind. Could you, I think I know what your answer is, but could you comment on that? And then I have a question for Marty afterwards?

Yeah, we have, if you read our balance sheet in the debt footnotes you see that coming up we have in July some 7-5/8 percent notes that are callable. And in October we have some 7 percent notes that are callable. And so we wanted to have a shelf available so that if we decided that it made sense to refinance those securities we’d be able to do that in a rather timely manner.

Just to follow-up though. Since you put a shelf out for equity as well as debt, did you take a look at the Wells Fargo convert recently and see that as possibly an attractive way to raise money?

No, I don’t know what Wells Fargo did.

Okay. And then a question for Marty then …

One other thing, Curt, is that historically we have what I would call a kitchen sink shelf outstanding, so that we can issue securities when, as, and if it makes sense for us to do so.

Well, it would certainly be applauded, I think, if it was straight debt. You know, given your stock at 66 percent of book value.

But anyway, a question for Marty. Is it wrong – first of all, do you expect the MSA payment reduction year-over-year to persist throughout the year? And if that’s true am I looking at this wrong in thinking that starting in the third quarter you’re going to have some very easy volume comparisons for at least two quarters and probably four quarters?

Well, it’s hard to – I can’t really forecast what the payment structure will be going down the stream. There is one factor, as I think everybody is aware, there was a step-down in the base payment structure of the MSA for all companies. The rest of it will depend on where the volumes are and so forth.

With respect to the future as far as comparisons are concerned clearly our last half of last year was not as strong, but you know, it remains to be seen where this year’s market will come about. So I really can’t answer that at this point.

Thank you.

Thank you. (Caller Instructions.)

Our next question is coming from [Rob Meadway] [ph] with Royal Capital. Your line is live.

Hi. It’s actually [Jacque Faribaldi] [ph] from Royal. A couple of questions. Can you just confirm the cash balance again at Hold Co.?

2.2, and that excludes Diamond and CNA.

Okay.

And it excludes Lorillard’s cash balance.

And then a question on Texas Gas. What’s your estimated cost on the debt, both the new debt and the assumed debt?

The assumed debt is about, I think it’s about seven percent. There are two issues, one of $100m, and the other issue that matures a year from now of $150m. And as for the new debt that we issue we haven’t spoken about that so I’d prefer not to jump the gun.

Okay, but the assumed debt, and that’s the seven percent, that’s the coupon or is that current rating?

In fact, TGT files its own separate 10-K and so you can get it directly from them.

Okay. And just when I try to calculate your, kind of the return on equity it was tough to get to 10 percent. Are there any key assumptions on increased revenue or EBIT that go into your ROE calculations?

No, the one thing that you may not be able to glean from all the numbers is the difference between actual tax payments and GAAP taxes. You get accelerated tax depreciation.

Got it. Okay. A question on the investment losses and gains at CNA and corporate, on a pretax basis they were a positive $23m in ’02 and now they’re a negative $95.3 in losses. Can you give some more detail on the biggest components?

The biggest component of the losses I’d say was writedowns that we took for impaired securities. But the other thing you should note is the increase in unrealized gains that is shown on the balance sheet, which was, I think, a few $100m. And that’s reflective of two things. Number one the decline that occurred in interest rates, and number two the extraordinary rally that we’ve had in certain corporate bonds, especially corporate bonds that we wrote-down in the third and fourth quarters of last year. Many of them have doubled in value from those written down prices, yet we have not realized the gain on those securities.

Okay, so on the balance sheet there’s significant unrealized gains that are not …?

Yes, in excess of $1b.

And then last question is related to Maverick. If as a result of the price decrease the Maverick volumes go up will that increase your MSA payments?

Well, yeah, since it’s volume related it will, but that’s factored into our analysis of, prior to making this decision. And so I still stand by what I said earlier, and that is by virtue of increasing volume we should have any negative impact on our income, even with the MSA payments.

And I’d like to point out something else about Maverick. Maverick was at a very low volume level. It was, and it was getting lower, and distribution was at risk, and in fact, had been lost in some instances. So really with Maverick it’s not a subtraction of being at a higher level of anything to a lower level. All we can do is go up as opposed to go down, basically.

And so in our terms, even within MSA payments et cetera, it was an appropriate decision to make. And we believe, as I indicated, we can participate in the volume opportunities in the deep discount segment and do that on a prudent basis.

What’s the estimated increase in MSA payments?

Well, there is no – it depends on what the volume levels are. And I don’t have any estimate at this point in time.

Okay, thank you.

Thank you. (Caller Instructions.)

At this time there appear to be no further or new questions. Gentlemen, do you have any closing comments?

Okay, great. Thank you for joining us this morning. As a reminder, in about two hours a replay of this call will be available on our web site until May 15th, 2003. CNA’s call will also be archived later in the day for replay on CNA’s web site, cna.com, also until May 15th. Once again, thank you very much.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect at this time, and have a wonderful day.