Loews Q3 2007 Earnings Call Transcript

Loews Corp. (LTR)

Q3 2007 Earnings Call

October 29, 2007 11:00 am ET

Executives

Darren Daugherty - Head, IR

Jim Tisch - CEO

Peter Keegan - CFO

Marty Orlowsky - CEO of Lorillard

Analysts

Bonnie Herzog - Citigroup

Judy Hong - Goldman Sachs

Filippe Goossens - Credit Suisse

David Adelman - Morgan Stanley

Bob Glasspiegel - Langen McAlenney

Andy Baker - Jefferies & Company

David Siniscalchi - Renaissance Technology

Michael Millman - Soleil Securities

Judy Hong - Goldman Sachs

Presentation

Operator

Good morning. My name is Melissa, and I'll be your be your conference operator today. At this time, I would like to welcome everyone to the Loews' Third Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Operator Instructions)

Thank you. It is now my pleasure to turn the floor over to your host, Darren Daugherty, Head of Investor Relations. Sir, you may begin your conference.

Darren Daugherty

Thank you, Melissa. Good morning everyone, and welcome to Loews Corporation's third quarter 2007 earnings conference call. A copy of the earnings releases for Loews Corporation and Carolina Group 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. They will be joined by Marty Orlowsky, Chief Executive Officer of Lorillard.

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'd also like to remind you that during this call today, we may discuss certain non-GAAP financial measures. With regard to such, please refer to our Securities filings for reconciliation to the most comparable GAAP measures.

After Jim, Peter, and Marty 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.

Jim Tisch

Thanks, Darren, and good morning everybody and welcome. Loews' had a reasonably good third quarter. Each of our subsidiary companies performed well during the period. However, the otherwise excellent results for the quarter were somewhat diminished by a previously announced $96 million after-tax charge to earnings related to the settlement of arbitration CNA insurance subsidiary.

In August, we completed the acquisition of HighMount Exploration & Production Company. HighMount is the name of the company we formed to hold the natural gas assets acquired this summer from Dominion Resources. The company hit the ground running and performed well during its first two months operations. In addition to making a successful transition to a standalone company, HighMount was able to achieve a 100% success rate for the 103 wells it drilled during the quarter. Hopefully this will be a sign of things to come.

Also, during the quarter, we announced our plan to divest our Bulova Watch subsidiary. Bulova has been a steady performer ever since Loews' acquired a controlling interest in 1979. The price we are receiving for our smaller subsidiary will ease the pain of parting with Bulova. The transaction is expected to close in January of '08.

CNA reported another very solid quarter in its core P&C operations, although its bottom line was negatively impacted by the arbitration settlements and by realized investment losses. In recognition of CNA's improved fundamental Fitch upgraded CNA's insurance financial strength ratings to A from A minus earlier this month.

Like last year's third quarter, a mild hurricane season kept catastrophe losses to very modest level. CNA has exercised enormous discipline in its underwriting and is more focused than ever underwriting good business in the softening insurance market.

Good underwriting aided by favorable prior year development, led to improvement of the combined ratio, which decreased to 91.6% for P&C operations in the third quarter. This represents a 3 percentage point improvement versus a comparable prior year period.

Additionally, in view of the strong earnings, CNA announced an increase in the quarterly dividend on its common stock from $0.10 to $0.15 per share. This action will deliver increased cash to shareholders and will provide Loews with almost $145 million in dividend income from CNA on an annual basis.

Diamond Offshore again posted excellent results, as day rates for floating rigs continued to exhibit ongoing strength. Midwater and deepwater rig demand remained healthy, especially in international markets, where contract term in the deepwater segment is increasing. Benefiting from these factors, Diamond's revenue backlog currently stands at $8.5 billion.

Over the past two years, Diamond Offshore has returned cash to shareholders by paying an annual special dividend in addition to its regular $0.0125 quarterly dividend. The company paid a special annual dividend of $1.50 per share in January of ’06 and a $4 per share special dividend in January of this year.

Last week, Diamond's Board of Directors announced that in lieu of the annual special dividend, it has adopted a policy of considering paying special dividends on a quarterly basis along with regular dividends. The first such special quarterly dividend was set at a $1.25 per share. For the quarter, the regular and special dividend represents a payment to Loews of almost $100 million.

Boardwalk Pipeline Partners recorded solid results for the quarter, and it continued to make headway on its numerous expansion projects. Strong demand for gas transportation services pushed up reservations rates versus the prior-year third quarter, though revenues for gas storage and park and loan services remained flat.

For the third quarter, Boardwalk has announced a cash distribution of $0.45 per quarter, which represents the 7th consecutive quarterly increase since Boardwalk went public. This payment results in quarterly cash flow to Loews of $40 million.

Lorillard had another record quarter, posting its highest ever net income. The decline in volume as compared to the third quarter of last year was more than offset by strength in pricing. As usual, Marty Orlowsky will discuss operating results in greater detail in a few minutes.

Finally, as you will hear in a moment from Pete Keegan, Lorillard has declared a dividend, which will allow for the reduction of the Carolina Group's notional debt by almost half from its current level of $829 million.

I will now hand things over to our Chief Financial Officer, Pete Keegan who will provide additional detail on our financial results. Pete?

Peter Keegan

Thanks, Jim and good morning everyone. In the third quarter, Loews reported consolidated net income of $555.7 million versus $635.1 million in the third quarter of 2006. Net income for Loews' common stock was $410 million or $0.77 per share, compared to $517.2 million, or $0.94 per share in the third quarter of 2006.

Net investment losses were 31.1 million versus gains of $30.7 million in the prior year's third quarter. Losses mainly consisted of other than temporary impairment losses in CNA's portfolio, largely earned securities for which CNA did not have an intent to hold until it anticipated recovery in the value.

Net income for Carolina Group stock increased to $145.7 million or $1.34 per share from $117.9 million or $1.17 per share in the third quarter of 2006. The main drivers were higher effective unit pricing and the increased weighted average number of Carolina Group shares outstanding after the sales of Carolina Group stock in August of last year. The change in the number of shares outstanding does not affect per share results.

Lorillard contributed $97.4 million to net income for Loews common stock during the quarter versus $100.9 million in the prior year third quarter. Lorillard's contribution was impacted by the reduction of Loews's economic interest in the Carolina Group resulting from the sale of Carolina Group stock. Loews Corporation owns $65.4 million share equivalents, representing a 37.6% economic interest in the Carolina Group.

Lorillard recorded charges of $177.5 million and $149.3 million after taxes for the third quarters of 2007 and 2006 respectively to accrue for obligations under the state settlement agreements. CNA contributed $189.2 million to Loews's net income in the third quarter versus $257 million in the prior year third quarter. CNA previously disclosed a settlement related to a run-off book of business, which decreased Loews's net income by $96.4 million.

Diamond Offshore's contribution to net income rose to $95 million from $81.8 million in the third quarter of 2006. It was driven by increased day rates to high specification floaters in mid-water semisubmersible rigs.

Year-over-year comparison of third quarter results is affected by a reduction in Loews's ownership interest from 54% to 51% during the first quarter of 2007 when the number of shares outstanding increased upon conversion of Diamond's 1.5% debentures due in 2031. For its first quarter of operation, actually consisting of only two months, HighMount reported net income of $18.7 million.

Natural gas production during the quarter was 13.7 billion cubic feet at an average realized price of $5.29 per thousand cubic feet. Natural gas liquids productions was 582,000 barrels at an average price of $44.33 per barrel. In oil production, it was 38.1 thousand barrels at an average price of $72.88 per barrel. Revenue for the quarter was $100.2 million.

Boardwalk Pipeline's contribution to Loews's third quarter net income was $18.1 million versus $15.9 million in the third quarter of 2006. Comparison of results between the third quarters of 2007 and 2006 is affected by secondary equity offerings by Boardwalk during the fourth quarter of 2006 and the first quarter of 2007.

The increase in limited partner units outstanding reduced Loews's total ownership interest to 75% from 85%, and proportionately decreased Loews's share of net income. The equity offering did not affect our 100% ownerships of the general partner.

Loews Hotels net income for the third quarter was $4.1 million versus $5.1 million in the prior year third quarter, which benefited from the lower effective tax rate related to a federal income tax settlement. Net investment income primarily consisting of gains in Loews' trading portfolio was $37.2 million versus $38.9 million in the prior year third quarter.

As of September 30th 2007, holding company cash and investments totaled $3.2 billion. The most significant change from the prior quarter was the payment of $2.4 billion in conjunction over the acquisition of Highmount.

Additionally, we received $316.8 million of dividends from our subsidiaries. We paid $82.4 million of dividends to our shareholders, and we repurchased $287.6 million of common stock. With regard to the announced sale of our subsidiary Bulova, we estimate that we will realize a gain on the sales of approximately $105 million before taxes in the first quarter of 2008, when closing is expected to occur.

Holding company debt of $865 remains unchanged from the previous quarter. Lorillard ended the quarter with $1.8 billion in cash and investments.

Loews has been informed by Lorillard that the Lorillard Board has declared a quarterly dividend to the Carolina Group of $244 million and a special dividend of $250 million.

The special dividend amount was determined by the Lorillard Board after a review of its working capital and current and future needs. Assuming that at its next scheduled meeting, the Loews Board following its regular practice, declares the Carolina Group dividend of $0.455 per share of CG stock and applies all remaining amounts after notional debt interest payment and other costs to notional debt pay down, then the amount of CG notional debt would decline from the current $829 million to approximately $423 million.

I will now turn the call over to Marty Orlowsky at Lorillard. Marty?

Marty Orlowsky

Thanks, Peter. Good morning, everyone. For the third quarter of 2007 as compared with the third quarter of 2006, Lorillard's operating income and net income increased 5.9% and 11.3% respectively. These increases were achieved despite total Lorillard wholesale units shipments being down 1.6% for the third quarter of '07 versus Q3 '06.

Offsetting the effects of the negative unit shipment on operating profits, were higher effective unit prices, due to lower promotional spending, and higher pricing related to primarily a price increase taken in December 2006 and secondarily in September of '07. Contributing to the increase in net income, in addition to the aforementioned was higher investment income and a lower effective tax rate as compared with the previous year's period.

Lorillard's wholesale shipment decline of 1.6% for the third quarter of '07 versus the third quarter of '06 was inline with the industry's overall rate of decline. Wholesale's market share of 9.97% for the third quarter of '07 was flat as compared with the third quarter of '06.

For the nine months ending September 2007, wholesale unit shipments were up 0.3% and market share was up 0.39% comparing the prior-year period.

Newport's wholesale shipment share was flat at about 9.14% of the market and volume was off 1.6% for Q3 '07 compared with Q3 '06. Wholesale purchase patterns in inventory levels during the third quarter of '07 were affected by distributors buying in anticipation of price increases and new brand introductions.

Comparing Q3 with Q3'06 performance at retail, Lorillard experienced 1.1% decline in unit shipped from wholesalers to their retail accounts. And the industry declined by 3.8%.

Newport's retail volume was up 1.1% and gained 0.26 of the share point at retail for the same periods of comparison.

The menthol segment accounted for 28.4% of retail sales in the third quarter of '07, according to our data, reflecting an increase of 0.6 of the share point versus last years third quarter.

Newport's 33.8% share of the menthol segment represented of 0.2 of the segment share point increases compared with Q3'06. Lorillard performance during the third quarter of 2007 was consistent with the Company's core strategy of balancing Newport's marketplace performance and the Company's overall profitability.

Depending on market conditions, brand trends and competitive factors, Lorillard will continue to consider making appropriate adjustments, periodically towards promotional spending.

I would also add that Lorillard is pleased that in addition to its regular third quarter earnings related dividend, it declared an additional special dividend this month as Peter indicated. In considering this dividend for Lorillard Broad reviewed its current ongoing cash and capital needs of the Company in light of its current cash balances.

However, as I've stated many times in the past, whether or not the [escrow] agreement is in effect, Lorillard's will have ongoing cash, working capital and other capital needs that the Lorillard Board will carefully consider before making any future dividend declarations.

Thank you and I'll now turn it back to Darren.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question is coming from Bonnie Herzog with Citigroup. Please go ahead.

Bonnie Herzog - Citigroup

All right. Thank you. Good morning.

Jim Tisch

Good morning.

Bonnie Herzog - Citigroup

I have certainly a few questions. Let me start off with Carolina Group, Marty. I was hoping you could answer for me what the main reason was for the decreased promotional spending this quarter? I am curious, was it because you were all having such difficult volume counts, and you thought that that was a faster way to achieve the earnings growth that you wanted?

And, so depending on how you answer that question, I am curious if we should expect lower commercial spending in the future? And then, it's very intriguing because I'm also curious about how you think about balancing your promotional spending in volume growth, especially of a likely federal asset tax increase?

Marty Orlowsky

Okay. Let me try to answer the first part. First, the consideration in terms of our spending levels in promotion are not based on anything to do with how difficult the prior year's quarter was. We don't take that into consideration. As I've said repeatedly, our decisions are based on where we see the outlook. And again, we're not looking at a quarter-to-quarter. We don't take a quarter-to-quarter viewpoint.

We're looking at, as I've also said repeatedly, a long-term perspective. So from the long-term perspective, we've felt that given the brands strength and competitive factors that we were in a position to lower our spending to balance out the profitability side. And that doesn't imply anything beyond, for that period of time, the decision we make given the circumstances of the trends and competitive factors that were occurring.

So, we are looking at the long-term. It doesn't make -- the third quarter of '07 obviously is important. We want to optimize our performance in any given quarter, but we're also taking a much longer term view. And over the longer haul for this year, on a year-to-date basis through the end of September as I indicated, we're in a pretty positive position. And we strongly have outperformed the industry in terms of unit shipped and market share performance. So I think you have to look at it on a more holistic basis than just the quarter.

Relative to the FET, I'm really not going to comment, I don't know whether, in fact, there will be an FET increase. And we will make whatever decisions we feel appropriate, depending on whatever occurs on the federal tax level to be consistent with our strategy. And we will attempt to the degree possible to balance the profitability factor and the Newport brand's performance factor.

Bonnie Herzog - Citigroup

Okay. That's helpful. And certainly I do appreciate that, because I know you do think the long-term view. And that does dig another question just in terms of the fourth quarter because your comps are also quite tough, specifically for Newport.

And just based on my back of the envelope calculation, I think you're going to have to generate, or Newport is going to have to generate volume growth in the range of at least 8% to sort of generate the full year brand volume growth that we've seen for that, I guess, that brand for the last several years. Is that fair, Marty, so you're facing some difficult comps?

Marty Orlowsky

Well, to be honest with you, Bonnie, I haven't truly done the calculation because it really would be inconsistent with what I've just said. We're not looking at comparative performance per se to drive our decision-making. So I honestly have not done that comparison. I'll take your word for it that we need an 8% increase in volume.

Bonnie Herzog - Citigroup

Roughly, yeah.

Marty Orlowsky

But that's not really the point. The point is, we're looking to have a very positive year. And as you well know, we don't say guidelines or provide guidance. So, we hope to be able to deliver a positive performance factor. And that will be the best balance between profitability in the Newport brand's performance that we feel we can generate.

Bonnie Herzog - Citigroup

Okay. And then, Jim, can I turn to you for just a moment, just with one final question. And it certainly relates to Marty, of course, with the notional debt and the pay down on very positive something that I think a lot of us have been expecting, so it doesn't necessarily come as a great surprise. But, I'm curious when you are anticipating all of the notional debt to be paid down, is that still a goal for Loews?

Jim Tisch

Absolutely, positively. We've said that. We've been saying that for a long time that our goal is to pay down all of the notional debt. And then, once all that is paid down, then the cash flow of Carolina Group will be available for dividends for all shareholders.

Bonnie Herzog - Citigroup

Did you just do -- am I understanding correctly that you paid down half of the notional debt roughly, is that correct, Jim, and then -- but you're you still paying a dividend?

Jim Tisch

Yeah. That's what we've always done. We've paid quarterly dividend, and then we use the -- first, we pay the interest expense, then on the notional debt, then we pay the dividend, and then whatever cash is leftover, we use to reduce the notional debt. Over the years that notional debt has been reduced from $2.5 billion, when Carolina Group went public, to now just over $400 million.

And what I said was that the notional debt has been reduced in this latest period from just over $800 million to just over $400 million. So we have $400 million more to go before all the cash flow of Carolina Group can be used for only dividends as opposed to dividends and repayment of debt.

Bonnie Herzog - Citigroup

Okay.

Peter Keegan

Finally, I just want a technical qualification. The Loews Board has not yet declared these dividends.

Bonnie Herzog - Citigroup

Okay.

Peter Keegan

So, we are making an assumption here.

Bonnie Herzog - Citigroup

I appreciate that. That helps me. Thank you very much.

Operator

Thank you. Your next question is coming from Judy Hong with Goldman Sachs. Please go ahead.

Judy Hong - Goldman Sachs

Thanks. Good morning, everyone. First question, again going back to the notional paid out in the quarter, the fact that you chose to declare to pay down the half of the existing notional debt that's outstanding, does that imply that the net worth requirement under the agreement is still in place even though the US Supreme Court rejected this request?

Marty Orlowsky

Well, I'm going to speak for Lorillard. I'm not going to speak for paying down half the debt. That's a Carolina Group decision at Loews. The net worth requirement is not necessarily a factor that we're dealing with here. We determined -- it so happens we're still above the net worth requirement as per the annual agreement in declaring the special dividend.

But the reality is we made a decision based on all of the factors that I mentioned in terms of our requirements for cash and other considerations. So it really isn't tied necessarily to the net worth covenant. However, we're still in the conformance with it.

Judy Hong - Goldman Sachs

Okay. So then, following up on that, when do you expect to see net worth requirement to be lifted? Is it after the industry -- I think the industry filed for a rehearing on this, if the US Supreme Court comes back and they reject the rehearing, at that point is the net worth requirement lifted?

Marty Orlowsky

Well, you are correct. There was a filing for a rehearing on Friday. However, I'm going to put it in these terms. The way this has evolved in terms of the issue as it relates to this completeness of review question, which is the factor that triggers the agreement, I think we're really coming out is when the trial court in Florida that has responsibility for the disposition and determination of completeness of review relative to the Ingle case makes its decision, then I would have to say that that would be the point in time.

I don't think it's for us to comment any further than that regarding the specifics of the issue, but it really does come down to the judge in the trial court making that ultimate determination.

Judy Hong - Goldman Sachs

And is the decision by the trial court to say that the net worth requirement is no longer in play, is that in any way tied to the escrow agreement that also exist both on the refundable and the nonrefundable side, or would that matter be taken care by the trial court separately?

Marty Orlowsky

Well, I think it's all one -- look, the agreement is only tied to the completeness of review. If the trial court determines that it gives completeness of review, then the agreement, the terms of the agreement are no longer in effect. So, whatever aspect that implies, that's what happens. And that would obviously imply that there is no longer need for a net worth kind of limitation.

And it would also -- the court would then have to decide how to dispose off the dollars that are being held as part of this agreement. But the essential part here is a determination as to whether or not

Jim Tisch

Judy, one slight correction on to what you asked. None of the $200 million of enhanced bond is refundable to us.

Peter Keegan

You were referring to that though, right.

Judy Hong - Goldman Sachs

Yeah, you’ve indicated in the past that, that non-refundable portion you are not likely to go after.

Jim Tisch

No, what we were saying is there is really no refundable portion to us.

Judy Hong - Goldman Sachs

It’s just the net worth requirement portion for you guys. Okay. And then, Marty, just in terms of your business, it seems like in the quarter, even sort of looking at more of the retail takeaway numbers, the share growth was a little bit softer than kind of what we are been seeing in the past few quarters, and I’m just curious, does that reflect even more heightened competitive landscape in the menthol segment? And is the share growth just becoming a little bit more difficult to achieve in the current competitive landscape in the menthol segment?

Marty Orlowsky

No, I wouldn’t conclude that necessarily. It’s more of an indication of the relative promotional levels behind Newport as opposed to anything else. And share, obviously is affected, because there was a major line extension introduced in the third quarter that inflated if you will the universe. So, it would sort of proportionately affect the lack of promotional affect on Newport's volume. So, I would say it’s more a result of Newport’s decision as opposed to anything else.

Judy Hong - Goldman Sachs

Okay. And, then just one final question for you, Jim. When Loews issued a tracking stock of Carolina Group years ago, and then IPO, there were a number of factors why you choose to go with the tracking stock structure, the tax implications, the ability for Loews to have full control of Lorillard's capital structure. I'm just wondering if all those factors are still in place in terms of maintaining their current tracking stock structure for Carolina Group. And at what point or what factors will prompt you to maybe change the tracking stock structure to a common stock structure?

Jim Tisch

Judy, we're very happy with a tracking stock structure. It was done, I believe, for all the right reasons and it has served both the Loews shareholders' well and the Carolina Group shareholders' well, so we're very happy with how it has workout.

Judy Hong - Goldman Sachs

Okay. Thank you.

Operator

Thank you. Your next question is coming from Filippe Goossens with Credit Suisse. Please go ahead.

Filippe Goossens - Credit Suisse

Yes. Good morning. Most of my questions have been answered already, but let me just kind of add a couple here. Marty, last week one of your competitors decided to move forward in terms of moving towards more fire-resistant paper by 2009. Can you just kind of share with us what your plans would be for that issue? And what is the availability of papers and what extra if any; cost would be to make that switch?

Marty Orlowsky

I'm really not going to comment on it, Filippe, I'm aware that Reynolds made that announcement, but I have no real comment to make on any specific basis.

Filippe Goossens - Credit Suisse

Okay.

Marty Orlowsky

Obviously, we're moving along in accordance with whatever the state laws are and whatever other decisions we make we'll do as we go along here, but I don't have any other comment on it.

Filippe Goossens - Credit Suisse

Okay. That's fine. Then Maverick, good growth there again, in that side of the portfolio, can you just kind of refresh our minds what the longer-term strategy is with some of the, what I would call perhaps the non-core brands including Maverick?

Marty Orlowsky

Well, essentially nothing has changed, as you've described, the non-core brands Kent, True, Max, Satin and Old Gold for that matter, which is one of the other discount brands, in addition to Maverick. We are basically optimizing their profitability.

Maverick has shown growth, it was up a healthy almost 32% in the third quarter. It’s a low margin proposition, we've always said that we are maintaining that as sort of a place holder, if you will, in that segment of the market, it has done well for us. We don't loose money on it obviously, but it's also obviously modestly profitable. And for the other brands long-term, they generate profit for us, and that hasn't changed for the last many, many years.

Filippe Goossens - Credit Suisse

Okay. Then the next question, Marty, have you seen any change in the pricing structure of Commonwealth and to what extend do you actively actually monitor Commonwealth given that there menthol brands are really not at all that relevant in the space?

Marty Orlowsky

Well, we monitor all brands, regardless of whether they are menthol or non-menthol, that doesn't mean we take action obviously to all brands. Yeah, I think, I am not actually factually certain, but I believe they've had some price increases at the Commonwealth level for their discount brands. I think, I am correct in that. Other than that, we don't really maintain too close sort of an evaluation on those brands.

Filippe Goossens - Credit Suisse

Okay. Then my final question, if I may, Marty. Something that has come up in the past, but it just happens to come back during our conversations with investors. It’s again the joint venture with Swedish Match. And I am not going to ask you what you are doing at this current juncture or when we will hear something perhaps. The question that comes back to me from investors is, given that nothing has happened and given that it was really not a material event, what made you to disclose that joint venture to begin with? And not to wait until there was really a product to be rolled out?

Marty Orlowsky

There was no sort of magic formulae here; we just decided that since we entered into a joint venture it was a unique occurrence for us. That we would let the public know that we were in such a venture, I don’t think it was anything more than that, just information.

Filippe Goossens - Credit Suisse

Okay, fair enough. Thank you so much, Marty.

Marty Orlowsky

Thank you.

Operator

Thank you. Your next question is coming from David Adelman with Morgan Stanley. Please go ahead.

David Adelman - Morgan Stanley

Good morning, everyone.

Jim Tisch

Good morning.

David Adelman - Morgan Stanley

Marty, let me ask you a few things first, if the $921 million Lorillard net worth requirement is not by any constraint, I am a little puzzled, why you wouldn't have paid down substantially more debt this month. In other words, if you had made these divided payments during the third quarter, looks to me like Lorillard's book value would be about $1 billion, its cash level would be a about $1.2 billion. Even less the MSA accrual, since March, you probably have $700 million in cash, and I am just curious, what do you think in the current legal and regulatory environment the appropriate cash balances is for Lorillard?

Marty Orlowsky

David, I am going to leave my comment as I made on it and that is we took into consideration, the Lorillard Board. All of, whatever capital and cash needs we have in light of the cash on hand, and relative to working capital and other contingent needs factored into this thing. I am not going get into any detail about that. And other than to say that the Lorillard board sells that, we could make a $250 million special dividend declaration given that we had that money to declare. And I’m really not going to get into any other specifics about it.

David Adelman - Morgan Stanley

Lorillard's Board Marty typically meets once a quarter?

Marty Orlowsky

That’s correct.

David Adelman - Morgan Stanley

Okay. And then in terms of your promotional spending in the market place, did it tweak up just slightly, sequentially from the second quarter level?

Marty Orlowsky

I actually don’t know or can. I don’t think so I don’t know that we’ll get back to you on that.

David Adelman - Morgan Stanley

Okay. And then Marty the retail market share of Newport during the third quarter was what?

Marty Orlowsky

The retail?

David Adelman - Morgan Stanley

Yeah.

Marty Orlowsky

Retail market share during the third quarter was 9.59%.

David Adelman - Morgan Stanley

Okay. Thank you. And then, Jim, if I could, have there been any material changes during the last several months in Loews investment portfolio in light of all of the volatility and asset prices in the Capital markets?

Jim Tisch

No, not all. The Loews portfolio which is now about $3.5 billion has been invested primarily in treasuries and some equities, but the earnings of that portfolio are reported every quarter on a mark-to-market basis in our income statement. And I’m being corrected here, it’s a $3.2 billion not $3.5 billion, high round up.

David Adelman - Morgan Stanley

And then, Jim, as it relates to the actual mechanics going forward after the remaining notional intercompany debt has been paid down, as a practical matter, given the intent to pay out to all Carolina Group shareholders the available cash, and assuming that there is no further increase in that layer of CG reserves, which I think is $100 million, does that mean as a practical matter the mechanics is that a CG shareholder or a non-CG shareholder essential will have 100% pay out of the prior quarters cash flow assuming that that's been fully paid up to Loews?

Jim Tisch

That makes sense, yes. There will be no more interest expense on the notional debt and there will be no more amortization to get itself. So all the cash flow coming up to CG will be available subject to the discussion of the Board to be paid out to all the CG shareholders.

David Adelman - Morgan Stanley

Okay. And then lastly, Jim, could you comment for a moment on high amount, what exactly over the last several months has transpired? In other words, I don't think it was actually an operating entity. What kind of structure has been created and the, sort of, the revenue and then the operating profit levels that were generated from that business during this stub period, how did those compare versus your internal expectations when you did the transaction?

Jim Tisch

We have two months of operations timeout. And it performed basically as we expected. The main thing that drove it, also of our expectations, was the change that occurred this summer in natural gas prices. But we have about 30% of our gas prices hedged for this year and about, I think, another 30% hedged for next year. So it's 20% that's hedged for this year and 30% hedged for next year.

We basically took properties that we received from Dominion and put them into HighMount, which is our corporation that holds our gas exploration and production properties. And we've taken over a substantial number of the employees from Dominion, and now it's operating within Loews as a standalone subsidiary in that business.

David Adelman - Morgan Stanley

Okay. Thank you.

Operator

Thank you. Your next question is coming from Bob Glasspiegel with Langen McAlenney. Please go ahead.

Bob Glasspiegel - Langen McAlenney

Good morning. Following up on the HighMount questions, is there any seasonality in the business as we think about modeling and what are the other sort of important factors that will cause sort of monthly pattern to change from what you reported this quarter?

Jim Tisch

The prime factor in seasonality relates to gas prices. And if you look at the gas futures, you'd see the gas prices tend to peak in December, January, February. Then they tend to go down into the spring, or maybe go up a bit in the summer when there is air-conditioning demand, and then decline again in the early fall before going up again into the winter time.

Bob Glasspiegel - Langen McAlenney

I assume it's all related to sales of the stuff in the ground, the net asset value doesn't flow through the income statement like buns?

Jim Tisch

No. Definitely no. That's right.

Bob Glasspiegel - Langen McAlenney

Okay. So, it's all operationally driven by the patterns. So, the first quarter should be the big seasonal quarter?

Jim Tisch

That's correct.

Bob Glasspiegel - Langen McAlenney

And I would assume the third quarter would be late, right?

Jim Tisch

That's correct.

Bob Glasspiegel - Langen McAlenney

Okay. So, this should be sort of a below trend run rate on a monthly basis from a seasonal point of view?

Jim Tisch

We certainly hope that. Yes. For example, in September, we got down to gas prices with a $5 handle on it, and now we're up to $7.5 or $8.

Bob Glasspiegel - Langen McAlenney

And were there any sort of frontloaded expenses to get going to press things or any sort of one timers that…

Marty Orlowsky

Well, there are some transition expenses that are actually going to going on for a few quarters.

Bob Glasspiegel - Langen McAlenney

So this quarter's run rate is a little bit late for the month or so, but it will continue for a bit?

Marty Orlowsky

It's kind of hard to answer that question because we don't have prior year comps at this point. We're really looking at two months of activity with no prior year. But we do have some transitional expenses which are going to go well into the first and second quarter of next year.

Bob Glasspiegel - Langen McAlenney

Okay. Can you give the limited and general split in dividends received in the third quarter from Boardwalk?

Jim Tisch

Yeah. Well, we are just fumbling through our book to get that.

Bob Glasspiegel - Langen McAlenney

Because the general is now starting to be immaterial.

Peter Keegan

I just got the total.

Jim Tisch

Bob, we don't have that right now.

Bob Glasspiegel - Langen McAlenney

Okay. Well, I'll get that Darren later, hopefully. Thank you.

Marty Orlowsky

Well, the total dividend we received, this includes the GP in the third quarter, was $39.8 million.

Bob Glasspiegel - Langen McAlenney

Do you have the prior quarter maybe that would help me?

Marty Orlowsky

Well, I can give you year-to-date. The year-to-date is $115.4 million. that's nine months.

Bob Glasspiegel - Langen McAlenney

Okay. You might be doing some work probably I can get it from there. Thank you.

Operator

Thank you. Your next question is coming from Andy Baker with Jefferies & Company. Please go ahead.

Andy Baker - Jefferies & Company

Thanks for taking the question. Going back to HighMount again and sticking with the theme, can you sort of give us a sense of the levels of these transition expenses? And then also, how do the operating expenses vary quarter-to-quarter along with gas prices? In other words, is there a lot more leverage as gas prices rise in the winter months here, even your ordinary operating expenses to stay flat so you get much expense in the margin in that period?

Peter Keegan

Transition expenses, we don't really want to give that number out right now.

Andy Baker - Jefferies & Company

Thank you.

Peter Keegan

What was the other question?

Andy Baker - Jefferies & Company

How much operating leverage you see in the model based on pricing? So if pricing doubles, do operative expenses stay the same as price…

Jim Tisch

We should produce in the course of the year between 100 and 125 Bcf of natural gas. So every dollar in Mcf change in price for natural gas leads to a pre-tax income change of $100 million to $125 million.

Andy Baker - Jefferies & Company

Okay. So no extra expenses, that's good. And could you give the prices at which you have hedged your gas this year and next?

Jim Tisch

We don't have that available right now. And as I think about it, I really don't want to put ourselves in a position where we're constantly disclosing our hedge pricing.

Andy Baker - Jefferies & Company

Fair enough. Can you give the reserve levels currently or are we going to get that quarterly, annually?

Jim Tisch

We don't have that at hand right now.

Andy Baker - Jefferies & Company

All right. Can you just repeat the barrels of oil that you produced?

Jim Tisch

We don't produce any oil. We produce natural gas liquids. And that's about 582,000 barrels for the third quarter, which represents two months.

Andy Baker - Jefferies & Company

Alright. Thank you very much.

Operator

Thank you. Your next question is coming from [David Siniscalchi with Renaissance Technology]

David Siniscalchi - Renaissance Technology

Good morning, guys. I have two questions. First question is for Marty, and that is given how seldom, you have launched line extension to compare to your competitors, can you talk about new about Newport Medium and how that compliments the Newport franchise?

The second question is probably for Jim, and that is can you discuss your intentions with respect to succession planning for the CEO position at Lorillard, is this process handled by the Lowes' Board or the Lorillard Board? Is there any preference to hire internally or externally within or outside the industry? And if the latter, is there a search ongoing? Thanks a lot.

Marty Orlowsky

Well, let me answer. Maybe I'll answer both questions actually. Newport Medium has been out for a while as a line extension, I assume that's what you're referring to. And it was simply a matter of establishing an option in terms of the choice of the taste of the Newport brand. That was relatively somewhat consistent with what other menthol brands that didn't offer, and you are miles out there for competitive products, and so we felt that we would introduce something in that taste range.

We do have a brand in test right now called [EmBlend], which is unique blend it's in a small market in test. And again, our philosophy to line extensions is to try to round out, the appeal of the Newport line in the terms of what we believe or hope that the smokers have preferences for us regarding the different taste and flavor levels of the product.

We are not that active, we don't introduce line extensions, simply to generate volume out there. So, when we do, we try to do it in a discipline way, where it offers some tangible benefit that we think might translate into incremental volume and truly incremental volume, as apposed to just volume that cost money.

Let me respond to the succession since, Lorillard deals with succession for it self. We obviously have a succession plan in place, whether or not, we go inside or outside. We will always look to see if we can get the best candidate for the job. There is no active search going on at the moment. And since I don't have any plans to retire literally at the moment.

David Siniscalchi - Renaissance Technology

Okay. Thanks.

Marty Orlowsky

I hope that answers your question?

David Siniscalchi - Renaissance Technology

It does, thanks..

Marty Orlowsky

Okay.

Operator

Thank you. Your next question is coming from Michael Millman with Soleil Securities. Please go ahead.

Michael Millman - Soleil Securities

Thank you. I’ve got a couple of questions. On the Highmount, on the gas properties, what have you seen in terms of the market for gas properties over the last six months or so, since you first bought it and now?

Jim Tisch

I would say to some extent we've seen an up tick in price driven by the master limited partnerships, that are trying to buy property for their MLPs. So, there is been a slight up tick in price.

Michael Millman - Soleil Securities

Okay. And regarding the hotels, you seem to or I think you've talked about a bit, moving more towards emphasizing brands, can you talk about or give us some color as to how you think this changes the operation going on?

Jim Tisch

There really hasn’t been a change. We have one brand which is a Loews Hotels brand and there's been no change in the way we promote that brand or our individual hotels.

Michael Millman - Soleil Securities

Are you trying to broaden that brand into getting into some of the resort properties, that you have this Las Vegas property and to maybe even to time share?

Jim Tisch

Well, as you know, we are constantly trying to expand the brand in both cities and resorts. We've already got a number of resort properties, five of them in Florida, and then few others scattered around the country. And Las Vegas is the latest resort property, so those that are going to head of the strips, looking for the Lowes hotel, you are not going to find it on the strip, you'll find it about 30 minutes away in a place called Lake Las Vegas, that can give people that want to go to Las Vegas access to the city without actually being there.

Michael Millman - Soleil Securities

Any plans to get into time share or fraction of condominiums?

Jim Tisch

No. We have no plans.

Michael Millman - Soleil Securities

And I apologize, but can you repeat what the cash and debt position, and take into account the Diamond special?

Jim Tisch

At the end of the quarter, we have $3.2 billion. We had debt of $855 million and now what we do the addition for the dividends that we are receiving.

Michael Millman - Soleil Securities

Anything else we should be adding on to that?

Jim Tisch

Not anything, that will make a significant difference.

Michael Millman - Soleil Securities

Okay. Thank you.

Operator

Thank you. Your next question is coming from Judy Hong with Goldman Sachs. Please go ahead.

Judy Hong - Goldman Sachs

Yeah hi, I just had a follow-up question on how Lorillard cash gets [dived] up the Carolina Group. Right now the policy is that 100% of Lorillard cash gets split up to Carolina Group on a quarterly basis. Is that correct?

Marty Orlowsky

Yes.

Judy Hong - Goldman Sachs

Okay. And would there be any reason to think that that would change in your evaluation of what the right capital structure for Lorillard would be going forward?

Marty Orlowsky

Well, Judy. I'm going to give you the same answer I gave relative to anything to do with how we declared dividends or/and what factors we take into consideration. Anything relative to dividend policy or the amount of the dividend, it will be based on the Lorillard's Boards determination at given points in time, to its needs and what opportunities there might be.

So, I really can't speak to anything in terms of specifics, relative to the future. What we did this time around as a Board does not necessarily imply anything in the future either, So, look there is no difference in our approach just because we declared the special dividend today. It is consistent frankly with our policy of declaring dividends up to Lowes based on our ability to do so. And our ability to do so is predicated on the variables that I have mentioned several times today. So, whatever the future policy is that will depend on those variables.

Judy Hong - Goldman Sachs

Okay. Thanks.

Marty Orlowsky

Okay.

Operator

Thank you. At time I would like to turn the floor back over to Darren Daugherty for any closing remarks.

Darren Daugherty

Thank you for joining us on the call today. A replay will be available on our website, loews.com, in approximately two hours. That concludes today's call.

Operator

Thank you. This concludes today's Loews' conference call. You may now disconnect.

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