Loews Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparative periods are the corresponding 2012 periods. Dollar amounts are in millions unless otherwise noted. Loews is a holding company with insurance, offshore drilling, natural gas pipeline, exploration and production, and hotel businesses.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $3,704 | $3,715 | $11,163 | $10,847 |
| Income before income taxes | $520 | $409 | $1,613 | $1,364 |
| Net income | $384 | $310 | $1,194 | $1,027 |
| Net income attributable to Loews | $282 | $177 | $793 | $600 |
| Diluted earnings per share | $0.73 | $0.45 | $2.03 | $1.51 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $1,329 | $2,102 |
- Q3 pretax margin was approximately 14.0%, versus 11.0% a year earlier; nine-month pretax margin was approximately 14.4%, versus 12.6%.
- Q3 net income included after-tax, noncash HighMount impairment charges of $42 million, compared with $166 million in Q3 2012. Excluding these charges, management reported adjusted net income of $324 million versus $343 million. For the first nine months, adjusted net income was $927 million versus $936 million.
- At September 30, total assets were $79.5 billion, total liabilities $54.7 billion, and total equity $24.8 billion. Cash was $257 million; investments totaled $52.4 billion, primarily held within subsidiaries. Short-term debt was $270 million and long-term debt $9.7 billion.
- Parent-company cash and investments, net of receivables and payables, were $4.8 billion, compared with $3.9 billion at year-end 2012. This is distinct from subsidiary-held funds, which may be subject to regulatory and contractual restrictions.
- Nine-month operating cash flow declined to $1.33 billion from $2.10 billion. Investing activities used $1.87 billion; financing activities provided $568 million. Loews paid $73 million in shareholder dividends and purchased $218 million of treasury shares during the period.
Material changes and operating drivers
- Reported Loews-attributable income increased, but Q3 revenue was nearly flat and adjusted income excluding HighMount impairments was lower. Management attributed pressure principally to lower Diamond Offshore earnings and reduced parent investment income, partly offset by improved CNA results.
- CNA-attributable income rose to $247 million in Q3 from $200 million. Its property and casualty combined ratio improved to 94.0% from 99.7%; the improvement reflected underwriting results and favorable prior-year development, partly offset by higher catastrophe losses. CNA recorded $42 million of net catastrophe losses in Q3 and $146 million for the nine months.
- Diamond Offshore-attributable income fell to $44 million in Q3 from $83 million. Two customers’ payment defaults led to a $23 million bad-debt provision and $70 million of Q3 revenue not recognized. Utilization, planned downtime and higher operating costs also affected results. Reported drilling backlog was $7.4 billion as of October 23, 2013, down from $8.6 billion in February; approximately $531 million of previously reported backlog was excluded because of the customers’ financial condition.
- Boardwalk Pipeline’s nine-month attributable income was $74 million versus $78 million. Louisiana Midstream and storage-gas sales increased revenue, but lower transportation rates and renewal conditions weighed on transportation revenue. Capacity reservation charges were $34 million below the prior-year period.
- HighMount reported a nine-month attributable loss of $121 million, improved from a $319 million loss, largely because impairment charges declined. Production and sales volumes fell; the company recorded a $210 million noncash impairment charge for the first nine months, citing lower NGL prices and negative reserve revisions.
- Accumulated other comprehensive income fell to $20 million from $678 million at year-end, mainly reflecting a $717 million after-tax decline in unrealized investment gains. Book value per share was $49.99, versus $49.67 at year-end 2012.
Outlook, risks and unusual items
- The filing provides no consolidated earnings or revenue guidance. Management said Boardwalk Pipeline expected transportation-revenue and distributable-cash-flow pressure to continue in 2013 and 2014 as contracts renew at lower rates; forward storage-price spreads were also expected to remain less favorable in 2014.
- Diamond Offshore described current deepwater demand as generally firm but warned that a large expected influx of new rigs could increase competition and pressure dayrates if demand does not keep pace. Its major rig construction commitments and planned capital spending are substantial; it expected approximately $730 million of Q4 2013 capital expenditures.
- HighMount expected to spend about $69 million in Q4 2013, focused on oil drilling. Management cautioned that low gas and NGL prices, well performance and reserve revisions could lead to further material impairments. Based on then-current commodity prices and reserve estimates, HighMount’s year-end borrowing-capacity measure was expected to be below its outstanding debt and could require partial repayment.
- Loews issued $1.0 billion of senior notes in May 2013: $500 million at 2.6% due 2023 and $500 million at 4.1% due 2043. Net proceeds were $983 million for general corporate purposes.
- Other material commitments include Diamond Offshore rig construction, approximately $105 million of Boardwalk Pipeline commitments expected to settle within 12 months, and approximately $205 million of Loews Hotels development and renovation commitments. The Bluegrass NGL project remained conditional on customer contracts and approvals; Loews subsidiaries had contributed $28 million by quarter-end.
- Key risks include insurance reserve estimation and catastrophe losses; investment valuation and interest-rate movements; energy prices, rig utilization and customer credit; Boardwalk contract renewals and pipeline competition; and subsidiary debt, regulatory limits and capital requirements. Management reported no material change in market-risk components and no update to the 2012 Form 10-K risk factors.
Investor verification points
- Reconcile reported earnings with management’s adjusted figures, especially the recurring economics and cash implications of HighMount impairments.
- Track Diamond Offshore customer collections, the status and replacement of excluded backlog, utilization, dayrates, and funding of rig construction commitments.
- Monitor Boardwalk Pipeline contract renewals, transportation rates, distributable cash flow, and whether Bluegrass secures sufficient customer contracts and approvals.
- Assess HighMount’s reserve revisions, commodity-price assumptions, hedge coverage, covenant headroom, and potential repayment requirement.
- Review CNA reserve development, catastrophe experience, long-term-care morbidity, and investment portfolio valuation; confirm how much parent liquidity is accessible after subsidiary restrictions.