Loews Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Loews is a holding company with insurance, offshore drilling, natural gas pipeline, exploration and production, and hotel businesses.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $3.388 billion | $3.542 billion | $7.132 billion | $7.210 billion |
| Income before tax | $214 million | $548 million | $955 million | $1.305 billion |
| Net income attributable to Loews | $56 million | $250 million | $423 million | $629 million |
| Diluted earnings per share | $0.14 | $0.61 | $1.06 | $1.53 |
- Revenue declined 4.3% for the quarter and 1.1% for the first half. Loews-attributable net income fell 77.6% and 32.7%, respectively.
- Reported results included noncash HighMount impairment charges of $142 million after tax in Q2 and $170 million after tax for the first half. Excluding those charges, management reported adjusted net income of $198 million for Q2 and $593 million for the first half.
- Six-month net cash provided by operating activities was $1.106 billion, versus $916 million in 2011. Investing activities used $1.158 billion, compared with $373 million provided in 2011; financing activities provided $59 million, versus $1.263 billion used.
- At June 30, total assets were $77.328 billion, total equity $24.241 billion, and cash $136 million. Investments totaled $51.075 billion, including $5.595 billion of short-term investments. Short-term debt was $88 million and long-term debt $9.048 billion, compared with $9.001 billion combined at year-end 2011.
- Parent-company cash and investments, net of receivables and payables, were $3.7 billion, up from $3.3 billion at December 31, 2011. Book value per share rose to $49.31 from $47.33 at year-end. Quarterly dividends were unchanged at $0.0625 per share.
Material changes and operating performance
- HighMount: Lower natural gas and NGL prices and sales volumes reduced revenue; the impairment drove the segment to a $139 million Loews-attributable Q2 loss and a $161 million first-half loss. Oil production increased, while gas and equivalent production declined.
- Diamond Offshore: Loews-attributable earnings fell to $94 million in Q2 from $125 million, and to $181 million for the first half from $242 million. Lower rig utilization, lower dayrates on some rigs, survey and repair downtime, and higher drilling expenses outweighed gains from jack-up sales. Six jack-up rigs were sold for $132 million; the first-half pretax gain was approximately $76 million.
- CNA: Loews-attributable earnings rose to $151 million in Q2 from $113 million and to $377 million for the first half from $312 million, reflecting lower catastrophe losses and stronger underwriting, partly offset by weaker investment income. First-half favorable prior-year development was $118 million versus $107 million. CNA Specialty’s combined ratio worsened to 94.4% from 92.2% in Q2; CNA Commercial’s improved to 108.1% from 118.3%.
- Boardwalk Pipeline: Loews-attributable earnings increased to $24 million in Q2 from $5 million and to $59 million for the first half from $38 million, benefiting from the acquired HP Storage business and lower comparative-period expenses.
- Corporate and Other: The Q2 net loss increased to $82 million from $16 million, mainly reflecting weaker equity and limited-partnership investment results. Loews said lower parent investment performance contributed to the consolidated earnings decline.
- Other businesses: Loews Hotels’ first-half revenue rose to $174 million from $169 million, with higher occupancy and room rates. Its Q2 earnings were unchanged at $6 million.
Liquidity, debt and capital commitments
- Boardwalk Pipeline had $215 million outstanding on its $1.0 billion revolving facility, $785 million available, and was in covenant compliance. It issued $300 million of 4.0% senior notes due 2022.
- HighMount had $600 million of term loans and $100 million drawn on its $250 million revolver at June 30; it borrowed a further $20 million in July. It reported covenant compliance at June 30.
- Diamond Offshore had $1.4 billion of cash and investments. Its four drillships under construction were expected to cost approximately $2.6 billion in total, with about $650 million paid and approximately $2 billion remaining due on delivery in 2013–2014. A semisubmersible rig project was estimated at $300 million. The company budgeted $400 million for new-build construction and $320 million for other capital expenditures in 2012.
- Loews Hotels borrowed $81 million under a new $105 million loan at 4.25%, due in 2015, partly funding its Hollywood hotel acquisition.
Outlook, risks and unusual items
- No consolidated earnings guidance was provided. HighMount said that if commodity prices remained unchanged through 2012, it could record additional after-tax ceiling-test impairments of approximately $230–$280 million for the remainder of the year. It had hedged approximately 66.4% of estimated 2012 and 28.3% of estimated 2013 natural-gas-equivalent production.
- Diamond Offshore described strong or tightening demand in some deepwater markets but noted substantial new rig construction, potential future supply, and limited availability in its own contracted fleet. Its drilling backlog was $8.614 billion at July 16, 2012; backlog and utilization depend on contract performance and other operating factors.
- Boardwalk Pipeline cited competition from new gas supply and pipelines, lower basis spreads, and uncertainty around renewals of 2013 transportation contracts and future storage/PAL revenues. It had renewed or replaced most contracts expiring in 2012, in some cases at lower prices.
- CNA’s insurance results remain exposed to catastrophe losses, reserve-estimation uncertainty, reinsurance performance, investment returns, and regulatory limits on subsidiary dividends. Management cautioned that ultimate claim costs may exceed reserves.
- CNA completed its approximately $230 million Hardy acquisition on July 2, after quarter-end; approximately $230 million of short-term investments had been held in escrow. The filing also describes tobacco-related lawsuits, which Loews said it did not believe would materially affect results or equity and for which Lorillard agreed to indemnify Loews, subject to the agreement’s terms.
- Loews reported no material change in market-risk components for the first half, no updates to its previously disclosed risk factors, and effective disclosure controls as of June 30. Its stated risks include commodity prices, drilling utilization and dayrates, pipeline contract renewals, insurance reserves, investment-market conditions, litigation, and asset impairments.
Important facts for investors to verify
- Reconcile reported and impairment-adjusted earnings, including the tax treatment and future impairment sensitivity at HighMount.
- Track Diamond Offshore’s utilization, dayrates, survey downtime, backlog conversion, and funding of its large new-build commitments.
- Assess CNA’s combined ratios, catastrophe losses, favorable prior-year reserve development, and investment income quality.
- Monitor Boardwalk Pipeline’s expiring contract renewals, pricing, revolver usage, and the effect of market competition on storage and transportation revenues.
- Review subsidiary-level cash availability, debt covenants, capital needs, and restrictions on distributions to the parent; Loews depends substantially on subsidiary cash flows.
- Confirm the final accounting and integration effects of the post-quarter Hardy acquisition, and developments in disclosed legal and indemnification matters.