洛茲集團 (L) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Loews first quarter 2009 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you. I would now like to turn the conference over to Darren Doherty, Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to Loews Corporation's first quarter 2009 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 would 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 would 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 via the webcast, please use the dial-in number to participate, 877-692-2592. I would now like to turn the call over to Loews Chief Executive Officer, Jim Tisch.

Thank you, Darren, and good morning, everyone, and thank you for joining us on our call today. The Wizard of Oz famously said, "Pay no attention to that man behind the curtain." And I feel like saying that today with respect to our first quarter earnings.

Our subsidiaries are in good shape relative to the current business environment and are doing much better than what's reflected by the earnings reported today. As you have seen, our first quarter results included realized investment losses in CNA's investment portfolio and a significant non-cash impairment charge of HighMount E&P While these results are disappointing, we remain confident that each of our subsidiaries can and will deliver solid performance over the long-term. In its core -- property and casualty operations, CNA produced another quarter of steady results driven by improving rate trends, better renewal retention and a sub-100% combined ratio. As a sign of CNA's strength and conservatism, its property and casualty operations have now had nine consecutive quarters of favorable reserve development. CNA's investment portfolio continued to be affected by the stress in the financial and credit markets, which led to realized investment losses for the quarter. The company's end realized loss position improved from year end '08 and even after taking into account the quarter's realized losses, GAAP shareholders equity and book value per common share increased. Statutory capital also remains strong and CNA holds substantial cash and short-term assets.

The improvement in CNA's book value can be attributed to three main factors. First, of course, is CNA's operating income. Second, the impairments taken in the first quarter were largely attributable to securities that had already been carried at market value on the GAAP and in many instances, statutory balance sheets. And third, the market values of corporate and tax exempt fixed income securities generally increased during the quarter. The recovery in the fixed income markets continued in the month of April as the market value of CNA's core securities, that is excluding limited partnership investments, increased by approximately $550 million through last Thursday. Earlier today on CNA's earnings conference call, Tom Motamed laid out the company's strategic initiatives that have been developed during his first four months on the job. CNA is now moving forward with these strategies to drive top line and bottom line growth and to optimize its property and casualty portfolio. We are very confident in Tom's ability to guide CNA and to achieve these goals.

The non-cash impairment charge taken by HighMount E&P relates to the ceiling test that is performed each quarter by all E&P companies using full cost accounting. The ceiling test calculates the value of HighMount's 20 years of reserves at a single point in time using the spot price of natural gas. Given a low price of natural gas at the end of the quarter, HighMount was required to book this impairment charge. Our view, however, continues to be that natural gas is a good investment over the long-term. We chose to buy long lived reserves precisely because we cannot accurately predict the short-term movement of natural gas prices. At today's energy prices, with spot natural gas at about $3.60 per Mcf, it doesn't make sense to drill or turn on new wells and therefore, HighMount has substantially reduced its drilling program. While being mindful of its cash flow for the time being, HighMount will again wrap up its drilling program when natural gas prices recover and drilling once again becomes economic. Revenues this year at HighMount are partially protected due to hedges that were put in place during the past 18 months. Pete Keegan will say more on that in just a few moments.

Boardwalk Pipeline reached a significant milestone during the quarter by placing into service all of its remaining expansion projects. During the commissioning process, Boardwalk discovered some anomalies in a small percentage of pipe joints and therefore reduced operating pressures and throughput on all of its expansion pipelines. This in turn resulted in decreased first quarter revenues for Boardwalk. It is anticipated that Boardwalk will have additional revenue losses on these pipelines as major sections will need to be temporarily shut down in order to allow for removal and replacement of the affected pipe. Until these pipe anomalies are remediated and the company receives the approval from its regulatory agency steps up to increase operating pressures, Boardwalk expects reduced revenues from its expansion projects. Boardwalk is still developing its remediation plan, so the final cost to repair the pipe anomalies is not certain. Currently, however, Boardwalk estimates that the remaining dollars within the $4.8 billion project cost estimate established over a year ago will be adequate to cover the costs associated with fixing pipe anomalies. Boardwalk does not anticipate a need to increase the overall expansion project budget. Despite these challenging start-up issues, Boardwalk's expansion projects, along with the performance of its legacy assets, are generating solid cash flow and have allowed the company to announce a cash distribution of $0.485 per limited partner unit, its thirteenth consecutive increase.

For the first quarter, Diamond Offshore reported strong earnings, which were, in fact, its second highest on record. Average day rates were up year-over-year across all rig categories. However, the utilization rate for its floater fleet declined, primarily because of downtime associated with scheduled shipyard projects and mandatory surveys. Utilization rates were also down for Diamond's jackup fleet, owing mainly to weakening demand in the US Gulf of Mexico. Diamond's board of directors recently declared a special quarterly dividend of $1.875 per share in addition to the regular quarterly dividend of $0.125 per share. Together, these dividends represent a quarterly cash payment to Loews of approximately $140 million.

So as you can see, the decline in natural gas prices and the stress in the financial and credit markets combined to impact negatively our first quarter earnings. Nonetheless, we continue to like the prospects for each of our subsidiaries. And with that, I'll turn our call over to Peter Keegan, our Chief Financial Officer. Pete?

Thanks, Jim, and good morning, everyone. Loews reported a consolidated net loss of $647 million in the first quarter of 2009 versus net income of $662 million in the prior year first quarter. The loss for the quarter primarily resulted from HighMount E&Ps $660 million non-cash after tax impairment charge and CNA's realized net investment losses, which totaled $310 million after tax and noncontrolling interest. Realized investment losses at CNA include the impact of other than temporary impairments of $359 million after tax and non-controlling interest, largely due to impairments of some asset-backed and structured products, some below investment grade corporate securities and our holdings in Banc of America-Merrill Lynch non=redeemable preferred stock. The recognition of these impairments and realized losses had only a minor impact on CNA's capital adequacy because for the most part, these securities were already held at market prices on CNA's balance sheet. While underlying operational performance was solid, CNA's contribution to Loews' net income before investment losses decreased to $140 million for the quarter from $200 million in the prior year first quarter. The decline was primarily due to decreased investment income driven by CNA's larger current cash position coupled with lower short-term interest rates, as well as losses from limited partnerships. Property and casualty operations delivered a first quarter combined ratio of 98.2% compared with 98.1% in the first quarter of 2008. Favorable reserve development improved the first quarter combined ratio by 3.7 points in 2009 versus 1.3 points in 2008.

Diamond Offshore had a strong quarter with its contribution to net income increasing to $163 million from $136 million in the first quarter of 2008. Diamond's revenue backlog currently stands at approximately $9.6 billion. HighMount reported a net loss for the first quarter of $641 million versus net income of $47 million in the prior year first quarter. In addition to the non-cash impairment related to the carrying value of natural gas reserves, HighMount's operating expenses included a $9 million pretax impairment on its tubular goods inventory and a $23 million one-time pretax expense to terminate a contract with a drilling rig contractor. Between year end 2008 when the previous ceiling test was performed and the end of the first quarter, natural gas prices declined from $5.71 per Mcf to $3.63. During the quarter, HighMount completed 82 gas wells for an aggregate drilling cost of $69 million. HighMount reported natural gas production of 19.7 billion cubic feet at an average realized price of $7.68 per thousand cubic feet. Natural gas liquids production of 921,000 barrels at an average realized price of $31.08 per barrel and oil production of 103,000 barrels at an average price of $39.07 per barrel. Revenue for the quarter was $175 million.

As of March 31, HighMount had hedges in place of 44% of its estimated total production for the remainder of 2009. Boardwalk Pipeline's contribution to net income for the quarter was $22 million versus $39 million in the prior year first quarter. Operating revenue benefited from a $28 million increase in gas transportation revenues, primarily from completion of the expansion projects. However, Boardwalk estimates that the revenues were approximately $12 million lower than expected as a result of decreased operating pressures in the expansion pipelines. As compared to the prior year first quarter, Boardwalk's operating expenses increased by $41 million. Although expansion revenues were lower than anticipated due to the pipe anomaly issue starting in the first quarter, significant expenses associated with the expansions, such as depreciation, property taxes and interest expense are now being recognized. Also affecting the year-over-year comparison is a one-time benefit of $11 million on a contract settlement gain reported in the first quarter of the prior year.

In the first quarter, Loews Hotels reported a net loss of $18 million which reflects a difficult operating environment and a $16 million after-tax non-cash impairment charge related to Loews Hotels' minority interest in a joint venture of the carrying value of a hotel property. In the first quarter of 2009, revenue per available room declined 26% to $137.56 versus $185.54 in the prior year first quarter. Occupancy declined to 62.3% from 70.8% for the same periods. Hotel bookings for 2009 remain significantly below levels seen in recent years and Loews Hotels expects its RevPAR and operating results to be significantly below prior period results in the near term. Holding company cash and investments as of March 31, 2009 totaled $2.5 billion. During the first quarter, we received $235 million of dividends from our subsidiaries and we paid $27 million of dividends to our shareholders. And now, I'll turn the call back over to Darren.

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

(Operator Instructions) Your first question comes from the line of Bob Glasspiegel with Langen McAlenney.

Good morning. Just thinking about the second quarter cash trends, you've committed potentially up to 500 million to Boardwalk and you have $100 million from Diamond, are sort of two key items to consider.

We've said that we would put in -- we said back six months ago or so that we would put in up to $1 billion into Boardwalk, and we've reported that we've so far put in $500 million. So that leaves $500 million. So that's cash going out. Diamond is cash coming in.

Right.

And that was dividends received of $140 million. And we also received $63 million of dividends from Boardwalk and $31 million of dividends from CNA on the preferred shares that we own.

Right. Okay. So the Diamond special has already been received in Q1, okay.

Yes.

Okay.

Well, but -- yes, that's right. But Diamond also declared another $2 dividend when they reported their first quarter earnings, and that's been received in the second quarter -- will be received.

Will be received.

Okay. What should we think in terms of -- we've had sort of an active parent capital management program where parent cash and parent cash flow have sort of been used to protect Boardwalk and CNA investments. How many quarters away are we from thinking that you could actually use the money for other purposes?

I think the problem is visibility on the economic front. Right now it is very, very difficult to see what's going to happen in our economy and to go back to the Wizard of Oz metaphor, our crystal ball is totally clouded still. And we want to make sure that we have the cash and the financial resources so that we do not have to rely on the financial markets for anything, and that if we are able to access the financial markets, that's a bonus. Economically, it seems like the economy is improving. My guess is that the money from the stimulus package that was passed in the first quarter is starting to have an effect, but I have no idea whether that is ultimately going to be successful or not. I have no idea whether we're going to have positive or negative growth in the second half of this year or in 2010. And so our view has been and continues to be that we want to be very, very cautious with the use of our cash to make sure that Loews is in triple-A shape and so are our subsidiaries.

Very fair answer. It seems like the first four months of data points are supportive of your year end and Q3 commentary, that you had a lot of confidence that your corporate investment and structured investments was going to pay off and these securities were going to mature close to par. So we've had four months of pretty good data points, yet I didn't sense that the structure of your comments were any more positive than they were a quarter ago. So you think there is still some uncertainty?

Yes, because I'm not willing to put out the all clear signal after one quarter of performance, especially when the stimulus money and the trillions of dollars that the fed is putting into the economy may be affecting or distorting the numbers.

Thank you.

Thank you.

Your next question comes from the line of David Adelman with Morgan Stanley.

Good morning.

Good morning.

Couple of things I wanted to ask. First, did the charge at HighMount trigger an assessment of goodwill during the quarter?

Yes, it did, but we did not have -- we didn't fail the first step, so we didn't have any additional goodwill impairment.

Okay. Secondly, on Boardwalk, is there a broader issue there from an execution, an oversight perspective? You had the cost overruns, now there are some anomalies. Could you comment on that issue?

We, we are -- what happened at Boardwalk is that as we were preparing to put the pipes in service, we had -- from a hydro test that is typically done, we had one leak indicating some sort of defective pipe. That pipe was replaced. And as a result of that Semsa asked us to run what's called a deformation pig, which is a tool that you put through the pipe in order to measure whether there's been any deformities in the pipe. It is a very sensitive tool that measures deformities of less than a quarter of an inch. And this is the first time that this tool has been used, I think industry-wide for this type of pipe. And had this tool not been used, then the Boardwalk pipe after that one joint was replaced would have been put in service and everything would have been hunky dory. But alas, we found these anomalies in the pipes. The question is, is this an industry problem or not? And the answer is, we don't know. Right now, as I said, we believe that we are the only -- we have the only pipelines that have actually used this tool, but it is possible that other pipes will -- other pipeline companies will have to use the tool and it will be interesting to see what they turn up from their own use of the tool.

Is there a risk, Jim, because of this delay on being able to use the pipelines that intended throughput that Boardwalk might not be able to fulfill its obligation on any of its existing contractual commitments?

No, we've talked to -- the Boardwalk management has talked to the customers and they understand exactly what's going on. They have been kept fully informed and unfortunately, there's nothing that we can do. We have to get the regulatory approval before we can operate the pipes at full pressure.

Okay, and on the dividend on the CNA preferred investment, am I right that that does not flow through your P&L of Loews?

It's not income. It's cash.

Right, okay. And then lastly, on the hotel side, are you going -- are you willing to disclose which particular property triggered the write-off, what the circumstances were that led to it? And then I have a follow-up question.

It's our investment in Loews Lake Las Vegas. And as you know, the entire Las Vegas market, particularly the gaming and entertainment and hotel market, is in a severely distressed situation.

Right, okay. And then last question on hotels, out of curiosity, in a more normal RevPAR environment, would the economic model of your hotel business be significantly improved in terms of leveraging the fixed costs and the infrastructure and the reservation systems and so forth if you had three or four more properties? Is there sort of a magic threshold on the margin where in a more normal RevPAR environment, you would see significantly improved overall economics, or is that really not the case?

Yes,, that's generally the case. I don't know that it would make an enormous difference in our income statement for the hotel company, but it would spread the central costs over a greater number of hotels.

Okay. Thank you very much.

Thank you.

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

Good morning, guys.

Good morning.

Jim, wanted to ask your thoughts on how the supply and demand dynamics are playing out in the natural gas market. I know in the past you talked about obviously, as supply dwindles and demand stays where it is or moves a little bit here or there, we're going to move to the point where price has to move back up. So where do you think we are on that? How long do you think that takes to be more normalized level?

Well, I would say it looks like the spot natural gas market is starting to anticipate a change in the supply and demand, but so far, we haven't seen it in any of the statistics. When we look at -- what's happened is gas prices peaked in July at about $14.50 in Mcf. They are now about $3.60 and drilling rigs, gas drilling rigs peaked in September at just over 1,600 units and we're now down to about 720 units. So - and the third important data point is that it depletion is about -- in the United States, is about 30% a year. So that means that if we were -- we are currently producing about 56 billion cubic feet per day of dry gas. If we don't drill any wells for the next year, you would expect US production to be down to about 38 billion cubic feet.

So you can see that depletion is very important and drilling activity is very important. With that as background, right now, notwithstanding the decline in drilling rigs in use, we have not seen a decline yet in production. And my guess is that will come pretty soon and could be on the order of somewhere between a 0.5 billion cubic feet a day and 1 billion cubic feet a day decline per month. The other thing that's happening is that there are declines in consumption, primarily industrial consumption for natural gas and so we're in a situation where because of the declines in consumption and the steady production and also ending the heating season with relatively high inventories, that right now we have very high inventories of natural gas. That should all play itself out over the next one to two quarters and I would imagine that within six months, we should see a change in the supply/demand dynamics. But before you go out and buy natural gas futures, let me just caution that the market is already anticipating that because the price of gas a year from now is about 60% higher than the spot price of gas today.

Okay, great. Thanks a lot.

Your next question comes from the line of Steven McSorley with Instinet.

Hi, good morning, guys. To continue with the HighMount theme here, I'm trying to understand the dynamic of how these ceiling tests work going forward. Jim or Peter, is it possible if we do see a recovery in natural gas prices that there would be wells that historically hadn't been considered within the proved reserves because it wouldn't be profitable at a price, say, of $4 or $4.50 per Mcf that then would be considered in the active proved reserves in the event we saw a recovery with the writedowns?

Let me put on Dennis Millet who is the CFO of HighMount, to answer your question.

Yes. We did have some of the reserves that actually moved from proven to probable. So as the price moves up, they would move back into the proven category.

And then to follow on that, as you have these reserves being produced with a lower depletion expense, margins should actually be higher again with all else equalized as prices, or if prices recover, correct?

That's correct. The DD&A rate was removed -- was moved lower because of the ceiling test right down to the margin would be increased.

Okay, and your --

Dennis, what was the DD&A rate as of, say, the third quarter of last year versus the DD&A rate today? I think that's dropped by about $0.40 or $.50.

Yes, DD&A rate that we would be going into the remaining part of the year was $0.89. In the first quarter, we would have been about $1.47, something like that.

A $0.60 decline.

Yes.

Okay, and now, you've curtailed the drilling activity that you've had underway, so you're not drilling any new wells in this market. But is it correct to assume that the wells that you have active, you're not capping anything? You're not ceasing production at any active wells, right?

So first of all, we haven't curtailed all drilling. We are still doing some modest drilling in Michigan and also in Alabama. But we've ceased drilling in our largest area, which is Sonora. Now, we have not, we have not shut in production and it's not from not wanting to. Rather, we've determined that the damage to the wells by shutting in production is just too great and so it's not economic to shut those wells in.

Okay, great. Thanks, guys.

Your next question comes from the line of Ross Haberman with Haberman Fund.

Good morning, gentlemen. Quick question for Peter. Peter, the $2.5 billion of cash, does that include the CNA preferred stock?

No, it does not.

Okay. So that would be in addition to?

That would be in addition to the $2.5 billion.

Okay. And refresh me, was there any debt at the corporate level at the end of the quarter?

About -- long-term debt -- there's about $865 million in long-term debt.

And one question, a final one going back to the hotels, Jim, do you think you're ready or looking around more actively today than a quarter or two ago to add to that portfolio over the next couple of quarters?

Yes, we would like to, if we can find the right properties at attractive prices and my anticipation is that that will occur. But to date, we haven't seen much evidence of it.

In that sector, are you seeing any real forced sellers or distressed sales yet?

Not yet.

Okay, thank you, guys. Best of luck.

Thank you.

(Operator Instructions) Your next question comes from the line of Chuck Goldblum with Hurley Capital.

Just another follow-up on Boardwalk, if possible. It seems that you'll have to -- or perhaps make some significant repairs in the system, although it's a small portion, you'll have to be shut down for a fair amount of time. Can you sort of size the revenue risk at Boardwalk for the next quarter or two?

No, we really don't know it, and we're just putting that together right now. I think Pete said that there is $12 million a month of lost revenue. What did you say, Pete? $12 million a month -- for the quarter.

For the first quarter.

-- of lost revenue due to the lower pressures that we're operating at. Now, when the repairs are actually put in place, there will be times when the pipeline has to be shut down. So those are additional lost revenues that we will have to deal with.

When you're looking at the capital construct for Boardwalk, are you contemplating what sort of additional capital you might need to cover any additional, perhaps larger revenue shortfalls in the second and third quarters as you might have to shut down pipelines completely for a period of time?

I think the company has a capital plan and they are very comfortable with that.

But there's no capital increase contemplated as a result of the changes here?

No, and like we said, we anticipate that the cost to do these repairs will still be less than the $4.8 billion total capital cost for the project.

Okay. All right, thanks.

(Operator Instructions) Your next question comes from the line of Michael Millman with Millman Research Associates.

Thank you. Regarding the cash, can you size potentially how much you could need if, I guess the recession continues or even gets worse for a while? Or conversely, is there any amount of this $2.5 billion that you feel is excess for your subsidiary needs?

We've made the point that we would put in up to $1 billion into Boardwalk and $500 million of that has been already spent or announced. And our anticipation is that beyond that, our subsidiaries won't need any financial resources directly from Loews.

So just to hammer on this, that there's potentially $2 billion that you feel comfortable that you could spend other investments today?

No, what I said is we don't anticipate that that $2 billion will be required by our subsidiaries.

And why wouldn't you feel comfortable in, given the right opportunity in utilizing it, then?

Because feeling comfortable that it won't be needed by our subsidiaries is different than being damn sure that it won't be needed by our subsidiaries. And the goal here is to make sure that we always have enough financial resources in order to take care of our own family before we look to go out and adopt another baby.

Okay. Regarding Boardwalk with these anomalies, is it -- are these anomalies, these quarter-inch variations only showing up in the new pipe, or are they showing up in existing? And is it possible that you might have to, or someone might have to replace a lot of pipe?

From what I've heard, there is -- the people at Boardwalk are not concerned that, that old pipe will have to be replaced. In the past four or five years, pipe that's been used generally by the industry for these types of projects has been very strong, high tensile pipe that is called X 70. The, the legacy system of Boardwalk does not use that X 70 pipe.

It uses something better or worse?

Different.

Okay. Just on CNA, where are we on the cycle? What are you seeing in pricing on new insurance? Has it continued to decline? Is it --

We are seeing pricing declining at a less rapid rate. So the second derivative is positive. And we are hopeful that over time, we'll actually see price improvement. What's happened is that -- typically in a cycle, capital gets depleted by losses and natural disasters. That hasn't occurred this time, but what has occurred is that capital has been severely depleted as a result of the financial markets. And as you know, there are some insurers that are in some degree of financial stress and we are hopeful that with all that stress going around that the industry will be able to get some price increases and that CNA will be able to, number one, increase its market share and also get those price increases as well.

Okay, thank you.

Thank you.

At this time, there are no further questions. I would like to turn the call back to Mr. Doherty for 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.

This concludes today's Loews first quarter 2009 earnings release conference call. You may now disconnect.