Loews Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Loews is a holding company with businesses in insurance (CNA), offshore drilling (Diamond Offshore), natural-gas pipelines (Boardwalk Pipeline), oil and gas exploration and production (HighMount), and hotels. Unless noted, amounts are in U.S. dollars and millions.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $3,725 | $3,388 | $7,459 | $7,132 |
| Income before tax | $581 | $214 | $1,093 | $955 |
| Net income attributable to Loews | $269 | $56 | $511 | $423 |
| Diluted earnings per share | $0.69 | $0.14 | $1.31 | $1.06 |
| Operating cash flow | Not provided separately | Not provided separately | $503 | $1,106 |
Q2 revenue increased 10% and Loews-attributable net income rose $213 million year over year. First-half revenue increased 5%; attributable net income rose 21%. Q2 2012 net income included a $142 million after-tax non-cash HighMount impairment. Excluding that item, management reported Q2 2012 adjusted net income of $198 million. First-half adjusted net income, excluding after-tax HighMount impairment charges, was $603 million in 2013 versus $593 million in 2012.
- Balance sheet at June 30: Total assets $80.0 billion; total liabilities $55.4 billion; total equity $24.6 billion. Loews shareholders’ equity was $19.2 billion.
- Investments and liquidity: Total investments were $52.3 billion, including $6.1 billion of short-term investments; cash was $166 million. Parent-company cash and investments, net of receivables and payables, were $4.6 billion, versus $3.9 billion at year-end 2012.
- Debt: Short-term debt was $33 million and long-term debt $10.0 billion, compared with $19 million and $9.2 billion, respectively, at December 31, 2012. Loews issued $1.0 billion of senior notes in May, receiving approximately $983 million net proceeds.
- Cash flow and capital allocation: First-half investing cash outflow was $1.293 billion and financing cash inflow was $734 million. Loews repurchased 4.0 million shares for $177 million and paid $49 million in shareholder dividends. Cash declined from $228 million to $166 million.
- Comprehensive income: First-half other comprehensive loss was $717 million, mainly reflecting $641 million of after-tax unrealized losses on available-for-sale investments. Loews-attributable comprehensive loss was $132 million. AOCI fell from $678 million at year-end to $37 million.
- Per-share and dividends: Book value per share was $49.36, down from $49.67 at year-end; excluding AOCI it was $49.26, up from $47.94. Quarterly dividends remained $0.0625 per share.
The filing does not present a consolidated profit margin. As an insurance operating indicator, CNA’s combined ratio was 101.5% for Q2 2013 versus 101.7% in Q2 2012; CNA Specialty was 90.4%, while CNA Commercial was 111.7%.
Material changes and segment results
- CNA: Loews-attributable net income was $175 million for Q2, up from $151 million, and $401 million for the first half, up from $377 million. Higher limited-partnership investment income and better current-year underwriting helped; lower favorable prior-year reserve development and weaker long-term-care results partly offset gains. Q2 included a $27 million after-tax settlement benefit related to workers’ compensation residual-market litigation. New York legislation also led to a $21 million after-tax reserve charge for reopened workers’ compensation cases.
- Diamond Offshore: Attributable income was $87 million in Q2 versus $94 million, and $169 million for the first half versus $181 million. Q2 drilling revenue rose and expenses fell, but 2012 included a $23 million after-tax gain from rig sales. First-half results also reflected lower revenue and a prior-year $32 million rig-sale gain. Backlog was $8.36 billion as of July 24, 2013, down from $8.57 billion on February 1.
- Boardwalk Pipeline: Attributable income was $22 million in Q2 versus $24 million and $55 million for the first half versus $59 million. Louisiana Midstream acquisition revenue and a $17 million storage-base-gas sale supported revenue, but lower transportation revenues and higher operating costs weighed on results. Public unit offerings reduced Loews’ ownership to approximately 53%.
- HighMount: Attributable income was $5 million in Q2 versus a $139 million loss; first-half attributable loss narrowed to $83 million from $161 million. Comparisons reflect non-cash ceiling-test impairments: $145 million pretax in Q1 2013 ($92 million after tax), versus $222 million in Q2 2012 and $266 million in the first half of 2012. Production volumes fell, while oil’s share of revenue increased.
- Loews Hotels and Corporate: Hotel attributable income was $1 million for Q2 and the first half, versus $6 million and $10 million in 2012; the Regency hotel was closed for renovation and two hotels were added. Corporate and Other attributable net loss improved to $21 million in Q2 from $82 million, mainly because limited-partnership results improved and 2012 trading losses did not recur.
Outlook, risks, contingencies and unusual items
- The filing gives no consolidated earnings or revenue guidance. Management cautions that quarterly and first-half results are not necessarily indicative of full-year results.
- Management said Boardwalk’s transportation revenues and distributable cash flows were negatively affected, and expected continued pressure in 2013. New gas supplies and pipeline capacity have narrowed basis spreads; contracts renewed in 2013 were at lower rates. Storage and interruptible-service revenue remains dependent on volatile market conditions.
- HighMount faces low natural-gas and NGL prices, reserve revisions, and production and well-performance uncertainty. Management said prices were not expected to improve in the near term and that continued adverse conditions could result in material future impairments. HighMount hedged approximately 67% of estimated 2013 and 36.7% of estimated 2014 gas-equivalent production.
- Diamond Offshore described ultra-deepwater and deepwater markets as firm, but noted substantial newbuild competition. It budgeted approximately $1.9 billion in 2013 capital expenditures and had major rig-construction obligations. Delivery timing, utilization, dayrates, operating downtime and customer performance remain risks.
- Notable commitments include Diamond Offshore construction projects (estimated costs include approximately $2.6 billion for four drillships and $705 million for two semisubmersibles), Loews Hotels commitments of approximately $270 million, and Boardwalk capital commitments of approximately $113 million. The Bluegrass NGL project remains conditional on customer contracts and required approvals; approximately $25 million had been contributed by Boardwalk and BPHC by June 30.
- Insurance reserves are estimates subject to claims, legal, medical-cost and other uncertainty. CNA reported catastrophe losses, net of reinsurance, of $104 million for the first half. The filing also identifies risks involving investments and interest rates, credit markets, commodity prices, regulation, litigation, reinsurance and subsidiary access to capital. Management said ordinary-course litigation was not expected to materially affect results or equity; no updates or additions to the prior annual report’s risk factors were reported.
Most important facts for investors to verify
- Whether CNA’s underwriting improvement and investment-income gains are sustainable, and how reserve development and long-term-care morbidity evolve.
- Whether Boardwalk can renew expiring pipeline capacity at adequate rates, and whether the Bluegrass project obtains customer commitments and approvals.
- HighMount’s production, commodity-price exposure, hedge coverage, reserve revisions and potential for further impairments.
- Diamond Offshore’s rig deliveries, contract coverage, backlog conversion, capital spending and exposure to customer credit risk; the filing noted $9 million of a $23 million OGX receivable was past due.
- How the sharp reduction in AOCI and unrealized investment losses affect reported equity and insurance asset-liability management.
- Parent liquidity and debt maturities, and the capacity of regulated or leveraged subsidiaries to distribute cash to Loews.