Operator: Good morning. My name is Jackie and I will be your conference operator today. At this time I would like to welcome everyone to Loews Fourth Quarter 2012 Earnings 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. Thank you.
I will now turn the conference over to Mary Skafidas, Vice President of Investor and Private Relations. Please go ahead.
Mary Skafidas - IR: Thank you, Jackie. Good morning, everyone. I'm Mary Skafidas, and thank you for joining us on our fourth quarter and yearend 2012 earnings conference call. A copy of our earnings release may be found on our website, loews.com.
On the call this morning we have our Chief Executive Officer, Jim Tisch; and our Chief Financial Officer, Peter Keegan.
Following our prepared remarks this morning, we will have a question-and-answer session. Before we begin, however, I will remind you that this conference call might include statements that are forward-looking in nature. Actual results achieved by the Company may differ materially from those projections made in our 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 disclaimers, which is included in the Company's filings with the SEC.
During the call today, we might also discuss non-GAAP financial measures. Please refer to our security filings for reconciliation of those most comparable GAAP measures.
I will now turn the call over to Loews' Chief Executive Officer, Jim Tisch.
James S. Tisch - Office of the President, President and CEO: Thank you, Mary, and welcome to Loews Corporation and good morning everyone and thank you for joining us today to discuss Loews' fourth quarter and yearend results. As you know by now, Loews reported earnings for 2012 of $568 million or $1.43 per share as compared to $1.1 billion or $2.62 per share in 2011.
Net income included catastrophe losses at CNA and impairment charges at HighMount which Pete will discuss in more detail later on the call. Absent fees charges our net income for the year, would have been $1.2 billion or $3.14 per share. We ended the year with 391.8 million shares outstanding. We purchased 2.1 million shares during the quarter for $83 million, and 5.6 million shares during the year for $222 million.
Now let's take a closer look at the results of each of our subsidiaries they've spent the prior year moving the growth strategies forward and strengthening their businesses. Turning first to CNA, although fourth quarter earnings declined due to higher catastrophe losses, primarily due to super-storm Sandy, CNA has continued to make progress towards improving its underwriting performance to risk selection and pricing discipline by generating premium growth. CNA's underlying P&C loss ratio excluding catastrophes and prior year developments, continues to improve with a year-over-year decrease of about 1 point. To improve its underwriting performance, CNA is focusing on select customer segments where it has specialized underwriting expertise.
Submissions, new business and retention continue to be strong in these segments. As of the end of the fourth quarter, more than half of CNA's new business, comes from these focused segments which grew 7% year-over-year and 7% quarter-over-quarter.
Rates continued to rise, increasing approximately 6% during the quarter in CNA's P&C operations. For CNA Commercial, rates increased 8% for the quarter and for CNA Specialty they increased 6%. CNA's book value per share increased to $45.71, up 7% from yearend 2011. Finally, CNA announced earlier today that it is increasing its quarterly dividend from $0.15per share to $0.20 per share. At that dividend rate, Loews will receive annual dividends from CNA totaling almost $200 million.
Turning to Diamond, demand for offshore deepwater and ultra-deepwater drilling rigs remained strong while the market for our mid-water rigs remained stable. Diamond's earnings for the quarter were down year-over-year, however, partially due to an impairment charge related to the carrying value of four drilling rigs. Nonetheless it was a strong quarter and a good year and Diamond is moving forward with the same core strategy which we believe creates value for all shareholders.
Diamond's fleet renewal program is ongoing with four new drillships on order and two Victory-class hulls, the Ocean Apex and the Ocean Onyx being fully reconstructed. These six rigs will be delivered in the next two years and three of them have already been committed to contracts with the traffic day rates.
In addition, last week Diamond announced a three-year contract with Shell Oil in the North Sea for the Ocean Patriot at a rate of $400,000 per day compared to its current day rate of $275,000 per day. Prior to mobilizing for this contract in the second quarter of 2014, the Ocean Patriot will undergo a six months upgrade in anticipation of this job.
Now let's turn to Boardwalk. Boardwalk had another good quarter. Cash distributions to Loews from Boardwalk during the quarter were $73 million and totaled $286 million for the year. Since 2011, Boardwalk's management team has developed growth projects in excess of $1.9 billion. These growth projects focus on three key strategies. Number one, leveraging Boardwalk's core pipeline and storage assets. Two diversifying Boardwalk's services and three expanding Boardwalk's geographic footprint.
Boardwalk's diversification effort will continue to be the company's focus for the coming year. This strategy is aimed at making the company less reliant on its base gas transportation business. Where a number of factors including compressed basis differentials are negatively impacting Boardwalk's future revenues. Boardwalk's two most recent acquisition HP Storage and Louisiana Midstream have both helped to move this strategy forward.
In addition both of these acquisitions contributed favorably to Boardwalk's 2012 earnings. When Boardwalk was considering purchasing HP Storage and Louisiana Midstream it was not possible to obtain attractive funding through the capital markets.
Loews stepped in and provided bridge financing for both acquisitions because we've considered a long term growth prospect so promising.
HP Storage and Louisiana Midstream have been successful refinanced those bridge loans at very advantageous rates. The acquisition of HP Storage made possible Boardwalk's southeast market expansion project, which has benefited from HP's high turnover salt dome storage service.
Additionally HP Storage continued an existing pipeline that significantly reduces the amount of new pipeline required to reach this growing market. The project is supported by 10-year firm agreements primarily with electric generation and industrial customers, and how they targeted in-service state of late 2014.
In order to help offset the continued reductions in revenue associated with contracts that will be expiring Boardwalk will continue its efforts to access new power loads. Today's announcement of its long-term contracts with Kentucky Utilities is just one example of the strategy in action.
At HighMount E&P, low natural gas and natural gas liquids prices continued to impact the Company's results. Given the difficult pricing environment, HighMount is currently directing its drilling efforts to locations that should result in higher oil production, such as its acreage in the Eastern portion of the Oklahoma, Mississippian Lime region, which had acquired in late 2011. So far, HighMount has drilled 30 wells on its Miss Lime acreage and it continues to increase knowledge of the play. HighMount's drilling cost and time to drill are competitive with other operators in the region and HighMount intends to continue with its early phase of development for the next several quarters.
Finally, at Loews Hotels & Resorts, 2012 has been a very busy year. Since Paul Whetsell joined the Company a year ago as President and CEO, he is out of town for the Loews Hotel's bench by bringing in industry veterans to bolster all aspects of the business; operations, marketing, sales and more.
The Loews Hotel's team has been focused on growing in key urban and resort markets while at the same time, improving the performance and profitability of existing properties. Renovations are either underway or imminent at several of our current hotels and growth opportunities are being continually reviewed.
In the past year, Loews hotels and its partners have committed to projects worth more than $1 billion; including, the Loews hotel in Los Angeles acquisitioned in June of 2012, the Loews Madison Hotel in Washington DC, acquired at the end of last month. The Loews Back Bay Hotel in Boston, a transaction for which it should be finalized this month. Major renovations for several of our properties including The Loews Regency Hotel in New York, the Cabana Bay Beach Resort in Orlando currently under construction and expected to open in 2014 and the Loews Chicago hotel currently under construction and expected to open in 2015.
In December of 2012 Loews Hotels brought in an institutional investor as a joint venture partner for the Loews Hollywood hotel. Going forward, we'll continue to look for likeminded investors to partner with us in only new properties. This strategy will allow Loews Hotels to maximize its return on capital and affectively grow its net worth of top quality properties.
Now I'll turn the call over to Pete Keegan, our Chief Financial Officer. Pete?
Peter W. Keegan - SVP and CFO: Thanks Jim and good morning everyone. Loews Corporation today reported a net loss of $32 million or $0.08 per share for the fourth quarter 2012 as compared to net income of $271 million or $0.68 per share for the fourth quarter of 2011. Loews net income for the full year was $568 million or $1.43 per share compared to $1.1 billion or $2.62 per share in 2011. The increase for the quarter was due to lower net income at CNA and Diamond as well as decreased parent company investment income resulting from lower performance of equity investments. These decreases were partially offset by higher earnings of Boardwalk. These same factors also impacted annual results except the parent company investment income, which was higher year-over-year due to improved performance of equity investments.
Excluding catastrophe losses of $171 million after-tax and non-controlling interest at CNA relating primarily to storm Sandy, and the after-tax ceiling test impairment charge of $97 million at HighMount net income in the 2012 fourth quarter was $236 million as compared to net income of $271 million for the same period in 2011.
Net income in 2012 includes catastrophe losses of $243 million after tax in non-controlling interests of CNA and after tax ceiling test impairment charges of $433 million at HighMount related to the carrying value of its natural gas loyal properties.
Excluding these charges net income in 2012 was $1.2 billion as compared to net income of $1.1 billion in 2011.
Book value per share increased to $49.67 at December 31, 2012 as compared to $47.33 at December 31, 2011. For the fourth quarter of 2012 CNA had a net loss attributable to Loews of $5 million as compared to income of $195 million in the fourth quarter of 2011. For the full year 2012 net income attributable to Loews was $535 million as compared to $567 million for the prior year. CNA's earnings declined due to higher catastrophe losses primarily related to storm Sandy and a lower level of favorable net prior year development in 2012 than in 2011. Partially offset by increased investment income.
Increased investment income reflects improved performance of limited partnership investments.
Offshore's contribution in net income for the fourth quarter of 2012 was $73 million compared to $88 million in the prior year quarter. Net income attributable to Loews for the full year 2012 was $337 million as compared to $451 million for the full year 2011.
Results for the fourth quarter decreased primarily due to lower average daily revenue partially offset by an overall increase in utilization and lower contract drilling expense. As Jim mentioned, the fourth quarter was also impacted by an impairment charge related to the carrying value of three semi-submersible rigs and one jack-up.
For the year, results decreased due to lower rig utilization and a decline in average day rate. Boardwalk Pipeline's contribution to net income for the fourth quarter 2012 increased to $31 million from the $21 million in the prior year quarter. For the year, net income attributed to Loews was $111 million as compared to $77 million a year before.
Earnings for the quarter in the year increased because of HP storage, which was acquired in December of 2011 as well as due to lower general and administrative expenses. Comparisons for the full year benefitted from lower impairment charges in 2012 compared to 2011.
At HighMount, excluding the ceiling test impairment charge, net income from the quarter was $9 million compared to net income of $12 million in the fourth quarter of 2011. For the year, net income was $26 million as compared to $62 million excluding the ceiling test impairment charge. Results were impacted by low natural gas and natural gas liquid prices and a reduction in sales volume because of the continued decrease in natural gas drilling and production.
For the year ended December 31, 2012, HighMount recorded non-cash ceiling test impairment charges of $680 million, or $433 million after-tax, related to accounting value of its natural gas and oil properties. The write-downs were the result of declines in natural gas and gas liquid prices. At December 31, 2012 ceiling test calculation was based on average 2012 prices of $2.76 per MMBTU for natural gas and $41.11 per barrel for NGLs and $94.71 per barrel for oil.
HighMount's fourth quarter production volumes and realized prices, which include the benefit of hedges are as follows. Natural gas production was 9.2 billion cubic feet at an average realized price of $4.60 per 1,000 cubic feet. Natural gas liquids production was about 552,500 barrels at an average realized price of $37.63 per barrel and oil production was about 187,300 barrels at an average realized price of $88.82 per barrel.
HighMount had hedges in place as of December 31, 2012 that covered approximately 59.5% and 26.6% of its estimated 2013 and 2014 natural gas equivalent production at a weighted average price of $6.27 and $5.39 per Mcfe.
Loews Hotels and Resorts recorded a net loss of $2 million for the fourth quarter of 2012 as compared to net income of $5 million for the same period in 2011. For the full year 2012 net income was $7 million as compared to $13 million for the full year 2011. The decrease is primarily due to increased expenses including acquisition and transition related costs from the Loews Hollywood hotel and costs related to the closure of the Loews Regency hotel while its undergoing extensive renovation.
Holding company cash and investments as of December 31, 2012 totaled $3.9 billion compared to $3.3 billion held at December 31, 2011. We received $173 million in interest and dividends from our subsidiaries for the quarter, substantially all of which was dividends, $36 million from CNA, $61 million from Diamond and $76 million from Boardwalk.
For the full year we received $683 million interest in dividends from our subsidiaries again substantially all of which was dividends $145 million from CNA, $245 million from Diamond and $293 million from Boardwalk. We paid $25 million in cash dividends to our shareholders during the fourth quarter of 2012 and paid $99 million in cash dividends for the year. We also bought back 2.1 million shares of Loews common stock for $83 million for the quarter and 5.6 million shares for $222 million for the year.
Now I'll turn the call back over to Jim.
James S. Tisch - Office of the President, President and CEO: Thanks Pete. Before we open up the call to questions I would just like to close with some observations. Economic conditions in the U.S. for 2012 remained challenging with the pace of recovery sluggish and intermittent. We expect more in the same for 2013. Our consolidated results were impacted by a few large unusual items. Such as the impact of Super storm Sandy on CNA and the impact of continued low natural gas prices at HighMount. Absent these items we are pleased with the progress of all five of our subsidiaries are making towards meeting a strategic objective.
Now I'll turn the call back over to Mary.
Mary Skafidas - IR: Thanks Jim. Jackie?
Operator: Robert Glasspiegel, Langen McAlenney.
Robert Glasspiegel - Langen McAlenney: I'd like to go after hotels with my first question. I think I know how to go about trying to value most of your other subsidiaries, but this segment which is smaller is bit more challenging for me and once every couple of years, maybe at an Investor Day or on a call you gave us a little bit help with thinking about valuing the operations, but as this business is getting more emphasis, with growth dynamics maybe you can give us a little help with either what the EBITDA is or how we should think about what the value is with this operation?
Peter W. Keegan - SVP and CFO: I can't answer that question directly, since we're not going to give you a value. However, Bob when you see our 10-K this year, we are trying to change some of the metrics that we're going to be showing you going forward starting in 2013 and beginning with the K which will be filed by the end of February. So hopefully, we can start to answer your question with a little more clarity. Obviously, some hotel companies are valued at multiples of EBITDA, we'll start presenting more of that data publically, starting about the end of this month and we'll be providing some more overall chain metrics, so that you can compare the broader performance of the hotel group including the non-owned hotels in terms of their revenue and their RevPAR. So I can't answer your question directly today. Hopefully we'd be giving you a little better metrics going forward.
Robert Glasspiegel - Langen McAlenney: If you don't have EBITDA numbers today, but you can give us your rough guestimates of how it's running, if…?
Peter W. Keegan - SVP and CFO: We haven't made it public yet. We will be making more public going forward.
Robert Glasspiegel - Langen McAlenney: Do I read it right that this could be an area for a decent amount of cap spending prospectively or…
Peter W. Keegan - SVP and CFO: Yes. We are helping the hotel's growth strategy and really providing some level of bridge financing on individual hotel purchases. As Jim mentioned, the goal here is to bring in some investment partners and some of those purchases as we already have done on the Hollywood hotel.
Robert Glasspiegel - Langen McAlenney: Just a clarification question. I was getting a little bit nailed on my model. You had a decent amount of partnership income at CNA, but the trading portfolio generated outsize loss in the quarters, is that bond marks or is there anything that you'd characterize that hit the quarter and first quarter is off to a better start as far as partnership income I suspect.
James S. Tisch - Office of the President, President and CEO: I think it was generally stocks that were held – equities that we held at the Loews portfolio were down for the quarter.
Robert Glasspiegel - Langen McAlenney: So as I think about Q1 it's more how the equities might be doing in bond marks? They would drive trading…
James S. Tisch - Office of the President, President and CEO: We do not have too much in the bond market. We are generally bearish on bonds and we think that equities could do reasonably well. We also had a number of gold stocks that did not perform well in the quarter.
Robert Glasspiegel - Langen McAlenney: So I should look at gold and some of your other big equity holdings that are public as a guestimate if I don't want to use the market for…?
James S. Tisch - Office of the President, President and CEO: Yes.
Robert Glasspiegel - Langen McAlenney: And that's reported real-time, no lag?
James S. Tisch - Office of the President, President and CEO: The equities, yes.
Robert Glasspiegel - Langen McAlenney: The partnerships I know do have a little bit of lag at CNA and…
James S. Tisch - Office of the President, President and CEO: Not all of them, some of them do but they are each consistent.
Operator: David Adelman, Morgan Stanley
David Adelman - Morgan Stanley: Jim, can you – you mentioned the statistics about the new drilling program, but you didn't really characterized the performance of those new wells how are they doing how are they performing versus what other companies are drilling in that region.
James S. Tisch - Office of the President, President and CEO: So we found about the wells in the Mississippian Lime. We've drilled 30 wells there and we've had when you average out all the wells that we drilled our performance is similar to the performance of wells drilled by people in our area. What we are doing is we want to drill another set of wells so that we can begin to really delineate the area and understand what we have. Right now our belief is that this area is commercial and we just have to wait and see how the other wells come out to prove us whether that thought is accurate.
David Adelman - Morgan Stanley: Then can you give us a rough indication of how much the annual depreciation in that division is going to come down because of the sizeable ceiling test impairment you took this year?
Peter W. Keegan - SVP and CFO: I don’t have that readily available. Let's get back to you on that.
David Adelman - Morgan Stanley: Then lastly also a question on the hotel business. If you look forward two or three years could you characterize or define what success will be in that business unit from a strategic and financial perspective given the efforts underway. You'll have wowed Loews hotels into what?
Peter W. Keegan - SVP and CFO: We are looking to grow Loews hotels we are looking to do it in what I would call an asset light manner and that we would like to own 25% to 50% of the properties that we acquire with investors owning the other 50% to 75%. We'd like to build the hotel chain into one where hotel owners would want us to manage their hotel without actually owing it. In terms of earnings and EBITDA we'd be looking for that to grow and we're looking to take the hotel company from an enterprise that's been rather stable over the past decade or so to one that's got growth in its future.
Operator: Michael Millman, Millman Research Associates.
Michael Millman - Millman Research Associates: Just following up on that last – most of the hotel companies seem to either be owners of many of the REITs or managers – or fee for service. You seem to be somewhere in the middle. Is that correct and is that very difficult to manage if that's the case? I also have a question on the gas.
James S. Tisch - Office of the President, President and CEO: It's really a benefit to us, because we can invest the equity capital that’s needed to build hotels and once they've been built, we can sell off significant portion of it to investors. We can, react to any situation that presents itself, so that we can economically grow our business. So, at Loews Corp we are willing to continue using the cash that we have to help grow our hotel business and what we do for each project is we make sure that the economics to those transactions look promising and if they do we're happy to invest in them.
Michael Millman - Millman Research Associates: On the gas, in order for gas values to increase. Does gas have to become liquefied and if that's the case, is that seem to be economically feasible?
James S. Tisch - Office of the President, President and CEO: Let me try to understand what you are saying.
Michael Millman - Millman Research Associates: So, gas on a Btu value selling way below oil or petroleum and one way to get it up there is to liquefy it. I'm not sure.
James S. Tisch - Office of the President, President and CEO: Let me try to explain. Natural gas has at Henry Hub trades for the equivalent of about $20 per barrel of oil. So, it's trading at less than 25% on a Btu basis of WTI and its trading at less than 20% of oil value for our Brent, which is another major index for oil. You talked about liquefying. Generally there are only two times when you would liquefy natural gas. To liquefy natural gas you have to cool it down to minus 250 degrees or so and you do that in order to ship natural gas to export markets. There is currently a debate going on in Washington within the energy community about whether or not the United States should allow natural gas to be exported and that debate will play out, I believe, over the coming year. Currently, I think one license has been granted and others are pending. That could increase the demand for natural gas by a few billion cubic feet of natural gas per day. Those contracts generally will not kick-in until three or four years from now because there are developers that have to put in the substantial capital necessary in order to build the export facilities. The other plays where liquefied natural gas or LNG may be used is for over the road trucks and locomotives on railroads. That is something that is currently being tested and experimented with, and it's my guess that similar to the export of LNG that's something that will start to be more prevalent in the marketplace in the next two to three years. My guess is that at first the LNG as a motor fuel will not make a significant difference in daily production of natural gas, but over time, say over the next five to ten years it could actually be a very significant factor for demand. We'll only know that in the next five to 10 years when we see what the price of natural gas is compared to the price for oil. So we've got to stay tuned for that.
Michael Millman - Millman Research Associates: I guess the way, at least from a stock markets standpoint it seems a very long-term and unclear that there'll be a fair valuation for natural gas?
James S. Tisch - Office of the President, President and CEO: The valuation of natural gas is determined by two things; number one, demand and number two is supply. Demand has been actually growing very rapidly and my guess it will continue to grow and natural gas has been taking market away from oil. But the issue is that the supply of natural gas has grown rapidly as well. My guess and I've stated this before, is that the equilibrium price for natural gas is about somewhere between $4 and $4.50 per Mcf, which is the equivalent of $25 to $30 per barrel of oil. So, it still is – if I like to call it BTUs on the cheap and the thing that's happened, is that we have gone from a long era, where natural gas was seen as a commodity that's in short supply or very scares to one that's in abundant supply. So I think more and more people understand that and factor it into the capital spending, we will continue to see a natural gas consumption increase with our natural gas prices running away because, as I said, there is so much supply that's available at that price range of $4 to $4.50 per Mcf.
Operator: (Andy Baker, Barclays).
Andrew Baker - Barclays Capital: Just a question Jim. You were talking just a second ago about natural gas taking share from oil. Where do you see that happening and I guess over the next 5 to 10 years as this pricing plays out where do you think the – in which industries do you think are mostly likely to make these switch or can realize the best benefit from switching to the low cost Btu?
James S. Tisch - Office of the President, President and CEO: So the only place generally where there has been is direct head-to-head competition of natural gas and oil is in transportation fuels. But when you look at the energy mix of the U.S. economy, you see that oil has come down and natural gas has gone up. The place where natural gas has taken very significant market share over the past several years has been in power production and there natural gas has taken market share from coal. The other thing that's happened is that oil consumption has declined, steadily declined in the United States since about '07 and the reasons for that is either improved miles per gallon on cars or flat or miles driven not increasing so dramatically but it hasn't really been so much gas on oil competition.
Andrew Baker - Barclays Capital: Just one other question on hotels. I guess the question is why now? Why is there such a big investment or why are there more opportunities coming to you now than they have in the past? This is something we've talked about for a number of years and hoping that the – you were well poised with your liquidity, to take advantage of opportunities during the fiscal crisis. Now as we emerge, there are just more opportunities coming your way now or is that you're more comfortable with the outlook for the properties that are on the market, how do we think about the timing decisions here?
James S. Tisch - Office of the President, President and CEO: I'd say two things; number one, we do see opportunities there are not many hotels that are being built now, even though the hotel business is reasonably good. So that's an environment where we like to be developing hotels, combined with the fact that we have a management team now, that is very adept at acquiring hotels, they understand very well how to finance hotels, not only with debt, but also with equity investors. So, we're making use of their expertise.
Andrew Baker - Barclays Capital: Just on last, sort of for Pete. I missed what you said on the call, what the yearend corporate cash and debt balances were.
Peter W. Keegan - SVP and CFO: It's about $3.9 billion.
James S. Tisch - Office of the President, President and CEO: The debt is about $700 million.
Operator: That was our final question. Now I'd like to turn the floor back over to Mary Skafidas for any closing remarks.
Mary Skafidas - IR: Thank you, everyone. Thank you for your continued interest. A replay is going to be available on our website in the next two hours. This concludes our call for today.
Operator: Thank you. This concludes conference call. You may now disconnect.