洛茲集團 (L) 2008 Q4 法說會逐字稿

Good morning, my name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the Loews fourth quarter 2008 earnings conference call. (Operator Instructions). Thank you. I would you now like to turn the call over to Mr. Darren Daugherty, Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to Loews Corporation's fourth quarter 2008 earnings conference call. A copy of the earnings release may be found on our Website, Loews.com. On the call this morning, are Jim Tisch, the Chief Executive Officer of Loews; and Peter Keegan, the Chief Financial Officer of Loews.

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. Forward-looking statements reflect circumstances at the time they are made and the Company expressly disclaims any obligation to update or revise any forward-looking statements. This disclaimer is only a brief summary of the Company's statutory forward-looking statements disclaimer. We urge you to read the full disclaimer, which is included in the Company's 10-K and 10-Q filings with the SEC.

I'd also like to remind you that during this call today, we may discuss certain non-GAAP financial measures. Please refer to our security filings for reconciliation to the most comparable GAAP measures. After Jim and Peter have discussed our results, we will have a question-and-answer session. If you would like to ask questions and are listening through the Webcast, please use the dial-in number to participate, 877-692-2592. I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thank you, John and good morning everyone and thank you for joining us on our call today. As have you seen in our press release this morning, Loews reported a $958 million loss from continuing operations for the fourth quarter and a $182 million loss for the full year. Both of these figures include realized investment losses at CNA and non-cash impairment charges at HighMount Exploration and Production. While these results come as a disappointment, we are fully confident in each of our businesses and their ability to deliver solid earnings over the longer term.

Let me quickly review the performance of our subsidiaries. CNA is performing well in its core property and casualty business, with its continued focus on underwriting discipline, claims efficiency and expense management. In its core property and casualty operations, which include specialty and standard lines, CNA reported a combined ratio of 89.1 in the fourth quarter and was aided by 11.8 points of favorable reserve development. The full year combined ratio was 98.0, including 4.4 points of favorable development, offset by 5.7 points of catastrophe losses. CNA's other key operating metrics of premium rate and retention in its core property and casualty operations all reflect the Company's solid market position.

CNA's investment portfolio has been bruised but its capital position and reserves are solid. CNA continues to generate significant positive cash flow and possesses a high degree of liquidity, including at year end, more than $500 million in short-term investments at the CNA holding Company level. Furthermore, liquidity is not an issue for CNA's insurance companies because of their strong operating cash flow and because their investment assets and liabilities are well matched in terms of duration. CNA has the ability and the intention to hold its available for sale, unrealized loss securities until price recovery or until they mature. When these securities recover in value or ultimately mature, CNA's book value should show a commensurate increase.

Tom Motamed began his new role as CEO of CNA on January 1 of this year. When it was announced that still Steve Lillienthal was retiring, we never could have imagined the state of the economy and the financial markets that Tom would have to face in his first day on the job. We were glad, however, to have someone of Tom's caliber to step in and continue building upon the successful legacy left by Steve.

Since HighMount Exploration and Production began operations as a Loews subsidiary on July 31, '07 we have already been through an entire natural gas pricing cycle, with natural gas prices going from $7 to $14 and now back down to having a $4 handle. This massive pricing shift over a short period of time illustrates why we chose to buy long lived reserves because we cannot accurately predict the short-term movement of natural gas prices. The non-cash charges taken by HighMount relate to goodwill impairment and ceiling tests that are performed periodically by all E&P companies that utilize the full cost accounting method. Because the ceiling test uses pricing as of December 31, it represents a somewhat extreme valuation metric that is taken at one point in time.

Despite these two non-cash impairments, our fundamental thesis, that over the long term natural gas is a good investment, remains unchanged. Notwithstanding HighMount's significant gas price hedges in place for '09, with energy prices at their current depressed levels, HighMount plans to cut back on its drilling program. Our reserves remain in place, however and HighMount can again boost its drilling when natural gas prices recover to more economic levels.

Boardwalk finished the year by posting good fourth quarter results and announcing continued significant progress on its remaining expansion projects, all of which are in service and flowing gas. Final completion is scheduled over the next few months. These pipeline expansions transport natural gas out of the prolific shale and other unconventional plays in Texas, Oklahoma and Arkansas.

As the gas-flow through these new pipelines ramps up, there is a positive impact on revenue and operating cash flow for Boardwalk. In October of last year, we announced our willingness to invest up to $1 billion to fund the completion of Boardwalk's announced expansion projects. And subsequent to that, we invested approximately $500 million in Boardwalk common units. To finished planned construction projects, Boardwalk now estimates that its remaining financing requirements will be less than $500 million. And that the majority of these unfunded capital expenditures can be financed by issuing debt securities.

There are signs that the capital markets are beginning to thaw and we are hopeful that Boardwalk will be able to raise this capital on its own. If, however, the terms demanded from the public markets prove unacceptable, then our commitment still stands to fund the remainder of these attractive projects. We know and understand these projects well and we continue to expect that they will generate significant cash flows for years to come. With good cash flow from its expanding asset base, Boardwalk recently announced the 12th consecutive increase in its cash distribution, to $0.48 per unit for the fourth quarter.

Diamond Offshore achieved record earnings for the full year, thanks to high utilization rates and record day rates for its offshore drilling rates. Tempering our enthusiasm is weakening demand brought about by the fall in oil and natural gas prices. However, Diamond's existing contract backlog of just over $10 billion should help to mitigate the impacts of softening demand in the marketplace.

After making a number of sizable investments in our subsidiaries during the year, Loews finished 2008 with $2.3 billion of cash and investments and only $866 million of debt at the holding Company level. Loews has maintained an ultra conservative financial posture for the past 1.5 year, since the first signs of economic trouble started to appear on the horizon. Said another way, we remain hunkered down during this time of great uncertainty, when nobody knows when or to what extent we will see economic recovery. Fortunately for Loews, with our liquid balance sheet and conservative capital structure, we are well positioned to weather the current economic crisis, as is each of our subsidiary companies. And with that, I will now turn the call over to Pete Keegan, our Chief Financial Officer. Pete?

Thanks, Jim and good morning, everyone. For the fourth quarter, Loews reported a loss from continuing operations of $2.20 per share. And for the full year, a loss from continuing operations of $0.38 per share. Our GAAP earnings of $9.05 per share for the full year include the non-cash gain related to the Lorillard separation and the after-tax gain from the sale of Bulova. Loews' interest in CNA's realized investment losses, after tax and minority interest, was $283 million for the quarter and $756 million for the full year. The losses include other than temporary impairments of $377 million for the quarter and $865 million for the full year. These impairments relate primarily to corporate and other taxable bonds, asset backed bonds and non-redeemable preferred equity securities.

CNA contributed a net loss of $15 million to Loews' net operating income for the quarter versus income of $201 million in the fourth quarter 2007. For the full year, CNA contributed operating income of $488 million to Loews' net operating results versus $950 million in 2007. For the quarter, the decline in operating income primarily reflects lower investment income, which includes significant losses from limited partnership investments. For the year, the reduction in income from continuing operations primarily reflects lower investment income, as well as an increase in catastrophe losses of $169 million after tax and minority interest versus the prior year.

Diamond Offshore's contribution to net income for the fourth quarter increased to $137 million, from $76 million in the prior year fourth quarter. For the full year 2008, Diamond's net income contribution increased to $612 million from $396 million in 2007.

HighMount reported a fourth quarter loss of $717 million, which includes after-tax non-cash charges of $440 million related to the carrying value of HighMount's proved reserves and a $314 million charge related to goodwill impairment. As Jim stated, HighMount performs a ceiling test each quarter, as do all E&P companies utilizing full cost accounting. Additionally, HighMount normally performs an annual goodwill impairment test. While this is typically performed as of April 30 each year, the ceiling test impairment represented a triggering event, requiring HighMount to perform an interim period goodwill impairment test as of December 31. Using the market approach to calculate its enterprise value and the fair value of balance sheet items, it was determined that HighMount's goodwill was impaired.

One result of the write-down of the carrying value of reserves will be a reduction in future depletion, depreciation and amortization expense, which will favorably impact profitability on a forward going basis. As of last Friday, February 6, natural gas prices had declined from year end 2008 levels by approximately 15%. If HighMount had calculated the ceiling test as of December 31, using current pricing levels and holding all other assumptions constant, then HighMount would have incurred an additional after-tax ceiling test impairment of approximately $375 million. I'm not attempting to project any amount for a possible first quarter ceiling test impairment, since the number of variables in that calculation can only be determined as of March 31. However, if natural gas prices remain at current levels, a first quarter ceiling test impairment is possible.

HighMount's production volumes for the quarter were as follows. Natural gas production was 19.6 billion cubic feet, at an average realized price of $7.66 per 1,000 cubic feet. Natural gas liquids production was 851,000 barrels, at an average realized price of $42.14 per barrel. And oil production was 91,500 barrels, at an average price of $56.23 per barrel. Revenue for the quarter and the year were $180 million and $770 million. As of December 31, HighMount had hedges in place for 55% of natural gas production during 2009. At year end, total proved reserves were 2.2 trillion cubic feet equivalent, down from approximately 2.5 trillion cubic feet in the previous year. The majority of the decline in reserves relates to lower natural gas prices as of December 31. Conversely, if natural gas prices rise, this would similarly increase proved reserves.

Boardwalk's contribution to Loews' fourth quarter net income was $27 million versus $32 million in the fourth quarter of 2007. For the full year, Boardwalk contributed $125 million to Loews' net income versus $106 million in 2007, reflecting the additional revenue from completed expansion projects.

Loews Hotels recorded net income of $4 million in the fourth quarter 2008 versus $7 million in the fourth quarter 2007. Net income for the full year was $40 million versus net income of $36 million in 2007. Average room rates for the fourth quarter decreased to $251.52, from $269.74 in the prior year's fourth quarter. While occupancy decreased to 66%, from 70%, resulting in an overall 12.3% decrease in revenue per available room. The severe downturn if the economy has caused cutbacks in leisure, business and group travel, putting the entire lodging industry under pressure, which we expect to continue in 2009.

Net investment losses from Loews' trading portfolio were $78 million for the quarter versus gains of $22 million in the prior year fourth quarter. For the full year, investment losses were $33 million versus gains of $194 million in 2007. These declines were primarily driven by mark-to-market losses in our equity trading portfolio, a lower cash and investment balance during the year, resulting primarily from investments in subsidiaries and lower realized interest rates on money market instruments. At year end 2008, holding Company cash and investments totaled $2.3 billion.

During the year, we spent $1.25 billion to purchase CNA's senior preferred stock, $700 million to purchase Boardwalk Class B units, and $500 million to purchase Boardwalk common units. We paid out $219 million of dividends and we received $1.263 billion of dividends from our subsidiaries. Including $491 million received from Lorillard. We also received $263 million in conjunction with the sale of Bulova. And now, I'll turn the call back over to Darren.

Thank you, Pete. Operator, at this time, we'll open it up for questions.

Thank you. (Operator Instructions). Your first question is from the line of David Adelman with Morgan Stanley.

Good morning, Jim and Peter.

Good morning.

I just had one question, which was Jim, when you look at CNA's fourth quarter performance and the marks that they've taken, is that performance within the range of expectations you internally had when you sized the preferred investment that you made, the $1.25 billion? And therefore, what's the likelihood or the reasonable likelihood of CNA needing more capital support from Loews?

I am certainly hopeful that CNA will not need any more support from Loews. The investment was made in mid-November. The markets bottomed on December 15 and actually started moving up between the December 15 and the end of the year. And when you look at all of our capital ratios, they are indicative of a Company that is in fine shape. So, I cannot imagine the credit markets going to such a level that -- let me start over. The credit markets today are at extraordinary levels; in high yield, in mortgage-backed securities. And it's difficult for me to see them going dramatically lower from here. Anything is possible but right now, if you think that stocks are attractive, then you ought to take a look at what's going on in the credit markets because there's enormous amounts of value to be had there.

And then, if I could just ask a second thing, perhaps for Peter. Can you go through on page eight of the release, the $123 million net income loss, the investment income loss in the fourth quarter, the principal components of that again, are?

It's all across the portfolio. The biggest piece of it is in our -- we had less cash, one. We took a hit on our equity portfolio, which at the beginning of the quarter was around $500 million and took a decline. Those are the two single biggest factors in the quarter.

Okay. Thank you.

Your next question is from the line of Andy Baker with Jefferies & Company.

Hi, good morning.

Good morning.

Just wondering, if you could give us a little -- some of your thoughts on the hotel industry going forward. Obviously, you talked about the tough market. So can you tell us a little bit how you're reacting to the tough markets, both in the short run and then how you think the best way to react to these tough markets is over the long run?

Well, first of all, I would tell you that Congress has done a great job of killing the resort hotel business with the way they've criticized the number of financial firms from having conferences. In fact, I just heard this morning of another investor conference that was cancelled by another major investment firm because of the fear of being criticized by members of Congress. So, the current outlook for the business is certainly not good.

As for Loews, we are -- we have, just as with our other businesses, we are hunkering down and cutting expenses where we can. And we feel confident that our business, which is not highly levered at all, will get through this economic crisis. We also expect that there would be a number of attractive hotel properties that are not able to make it through this economic storm that we're in and we will be looking to see what kind of attractive property acquisitions we can make in this environment. We believe that the world is cyclical and that when things go down, at some point, they hit bottom and they go back up again. And right now, we have the cash and the cash flow at the holding Company level in order to be able to take advantage of opportunities as they present themselves.

If I could just drill down there a little bit at the hotels. Is there -- what sort of margin improvement do you think there is available to you in the -- from cost cutting measures alone? Is this something meaningful or is this more of the economy's largely going to drive this story?

The economy is definitely going to drive this story. Definitely. The hotel business is primarily a fixed cost business because you've got to keep the lights on and the restaurants open and you have to keep people at the front desk. But nonetheless, you still have to have a focus on all of your costs. And so, that's exactly what we're doing and my guess is it's what just about every other hotel operator is doing.

All right. Great. I'll let someone else go and get back in the queue.

(Operator Instructions). Your next question is from the line of Steve Velgot with SIG.

Yes, a couple questions on HighMount. Could you give us an idea of what you're thinking about for the drilling program, where prices are today? And then, I had a follow-up question about the assessment you do in terms of valuation. Whether -- is that something that's typically done on a quarterly basis or more is it just extraordinary that you'd be considering looking at it again first quarter?

So, first, let's talk about where we are in our drilling program. Currently, spot natural gas prices are at about $4.83 for March delivery. That price is below the level that is economic for our nation, as a whole, to replace the gas that is being consumed. And so, what you've seen is a very significant decline in gas drilling rates that go on from about 1,600 now, down in a straight line to about 1,100. And they're still dropping. Analysts believe that they will probably have to go to 800 before the supply and demand equation changes.

The good news is that there's a fairly rapid response to a decline in drilling rates. The depletion rate in the United States is somewhere between 25% and 30%. So if all drilling were to stop, production would decline in the United States by about 30% over the coming year. So we need to do drilling just to maintain production. And my guess is that in order for us, as a nation, to have enough incentive for people to drill, we need gas prices that are about $2 to $2.50 higher than the current level. With that said, there still are a few areas like Haynesville, where even at sub-$5 gas, it's still profitable to drill.

With respect to HighMount, we don't operate in Haynesville and we don't operate in any areas where, on a fully allocated basis, it makes sense to drill. So we are in the process of reducing the number of rigs that we have working for us, especially in Sonora, which is our largest field. And we're going to take a time out, assess the situation and then, as the market improves, we'll begin to drill once again.

Okay. And then just on the question of valuation and assessment, whether you would typically do that on more of an annual basis or is the idea that there could potentially be another write-down first quarter, is that something extraordinary or would you normally look at the valuation on a quarterly basis?

The ceiling test, you would look at it quarterly, the goodwill normally annually. But if you had a ceiling test impairment in any given quarter, you'd also probably look at the goodwill in that quarter. So as I indicated in my comments, if gas prices stay where they are, which are 15% lower than where they were on December 31, at least where they were last Friday, then it is possible that we'd have a ceiling test write-down in the first quarter.

Right. And then, I suppose it's possible that if natural gas were back to $7 or $8, that those assets could be written up?

They wouldn't be written up but you'd -- the likely result is you'd have more proved reserves at the end of the year because you would have more wells that were economically produceable.

Okay, thank you.

You have a follow-up question from the line of Andy Baker with Jefferies & Company.

Thanks. Just wanted to circle back to Boardwalk Pipeline. We're talking about the -- another quarter of increasing their dividend. Could you just remind us about your thoughts on the value of the general partnership interest as those dividends increase and particularly, where your sort of triggers are that increase your percentage of the free cash flow?

We are currently receiving incentive payments -- incentive distribution rights on our general partnership interests. We're at the 25% level and we get to the 50% level once the distribution gets to $0.525

And do you see -- their current capital needs obviously, the increases have slowed over time, increases to their dividend. How long do you see that their current extension and capital needs negatively impacting their ability to raise the dividend more quickly?

Well, the capital program is just about over. As I said in my comments, Boardwalk had in place a $4.8 billion capital program, that we think that the Company will need to raise less than $500 million and that at least 50%, of that amount that it needs to raise, would be equity. So my sense is that there would not -- there should not be significant pressure on the stock from its need to raise equity over the coming quarters. Beyond that, we have -- we are -- Boardwalk is looking at a few different opportunities that should serve to increase its cash flow but will not require significant amounts of capital in order to be able to do that. So, I don't know -- if you're asking; When will the dividends for Boardwalk accelerate from here? I don't know that I can answer that for you. But I can tell you that there are opportunities for Boardwalk, number one. And number two, the weight of equity offerings has been dramatically mitigated.

Thank you.

Your next question is from the line of Josh Jones with Robeco Boston Partners.

Hi, yes, related to HighMount, absent price related revisions, was your reserve replacement greater than 100% last year?

I think it was about 100%.

Okay. And so, of the 300 Bcf decline, was a lot of that related to proved undeveloped locations or was it some proved developed locations or was it some proved developed?

Can we get back to you a little later on that?

Sure. That would be great. Thank you very much.

Okay.

There are no further questions at this time. I'll turn the floor back over to Mr. Darren Daugherty for any closing remarks.

Thank you for joining us on the call today. A replay and a downloadable MP3 file will be available on our Website, Loews.com, in approximately two hours. That concludes today's call.

Thank you for participating in today's Loews fourth quarter 2008 earnings conference call. You may now disconnect.

COMPANY NOTE

During Q&A, Mr. Tisch stated that Boardwalk "will need to raise less than $500 million and that at least 50% of that amount... would be equity."

As noted in Mr. Tisch's prepared comments in this transcript, Boardwalk estimates that the majority of its unfunded capital expenditures can be financed by issuing debt securities, not equity.