洛茲集團 (L) 2007 Q3 法說會逐字稿

Good morning, my name is Melissa and I'll be your conference parity 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 muted to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you, it is now my pleasure to turn to over to your host, Darren Daugherty, Head of Investor Relations. Sir, you may begin your conference.

Thank you, Melissa. Good morning, everyone, and welcome to Loews Corporation 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 or Jim Tisch, the Chief Executive Officer, 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'd like at the 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 files 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 security 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'd now like to turn the call over to Loews' Chief Executive Officer, Jim Tisch.

Thanks, Don 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 a settlement of or arbitration at our CNA insurance subsidiary. In August, we completed the acquisition of HighMount Exploration & Production. 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 of operation. In addition to making a successful transition to a stand alone company, HighMount was able to achieve 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 plans 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 smallest 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 PNC operations, although its bottom line was negatively impacted by the arbitration settlement and by realized investment losses. In recognition of CNA's improved fundamentals, Fitch upgraded CNA's insurance financial strength ratings to A from A- earlier this month. Like last year's third quarter, a mild hurricane season kept catastrophe losses to very modest levels. CNA has exercised enormous discipline in its underwriting and is more focussed than ever on writing 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 PNC operations in the third quarter. This represents a 3 percentage point improvement versus the comparable prior-year period. Additionally, in view of its 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. Mid water and deep water rig demand remained healthy especially in international markets where contract term in the deep water segment is increasing. Benefiting from these factors, Diamond's revenue backlog currently stands at $8.5 billion. For the past two years, Diamond Offshore has returned cash to shareholders by paying an annual special dividend in addition to its regular $0.125 quarterly dividend. The company pays 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 the regular dividend. The first such special quarterly dividend was set at $1.25 per share. For the quarter, the regular and special dividends represent a payment to Loews of almost $100 million.

Boardwalk Pipeline partners recorded solid results for the quarter and continued to make headway on its numerous expansion projects. Strong demand for gas transportation services pushed up reservation rates versus the prior-year third quarter, though revenues for gas storage and park and loan services remained flat. For the third quarter, Board has announced a cash distribution of $0.45 per quarter which represents the seventh consecutive quarterly increase since Board went public. This payment results in quarterly cash free cash flow to Loews of almost $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 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?

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 third quarter. Losses mainly consisted of other than temporary impairment losses in CNA's portfolio, largely on securities for which CNA did not have an intent to hold until an anticipated recovery in value. Net income for Carolina Group's 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 sale 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' 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' net income in the third quarter, versus $257 million in the prior-year third quarter. CNA previously disclosed a settlement related to a runoff book of business which decreased Loews' net income by $96.4 million. Diamond Offshore contribution to net income rose to $95 million from $81.8 million in the third quarter of 2006, and was driven by increased day rates for high specification floaters in mid water semi-submersible rigs. Year-over-year comparison of third quarter results is affected by a reduction in Loews' 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 production was 582,000 barrels, and an average price of $44.33 per barrel, and oil production was 38.1 thousand barrels at an average price of $72.88 per barrel. Revenue for the quarter was $100.2 million. Boardwalk Pipeline Partners' contribution to 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' total ownership interest to 75% from 85% and proportionately decreased Loews' 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 versus $5.1 million in the prior-year third quarter which benefited from a 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 with 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 sale of approximately $105 million before taxes in the first quarter of 2008 when closing is expected to incur. Holding company debt of $865 million 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 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 a 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'll now turn the call over to Marty Orlowsky, at Lorillard. Matter?

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 unit shipment being down 1.6% for the third quarter '07 versus Q3 '06. Offsetting effects of negative unit shipment on operating profit 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 top line of 1.6% for the third quarter of '07 versus the third quarter of '06 was in line with the industry's overall rate of decline. Wholesale 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 .3% and market share was up .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 and inventory levels during the third quarter of '07 were affected by distributors buying in anticipation of price increases and new brand introductions. Comparing Q3 '07 with Q3 '06 performance at retail, Lorillard experienced a 1.1% decline in units shipped from wholesalers to their retail accounts and the industry declined by 3.8%. Newport's retail volume was off 1.1%, and gained .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 6/10 of a share count versus last year's third quarter. Newport's 33.8% share of the menthol segment represented 2/10 of a segment share point increase as compared with Q3 '06.

Lorillard's 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 to its 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, the Lorillard board reviewed its current ongoing cash and capital need of the company in light of its current cash balances. However, as I've stated many times in the past, whether or not the angle agreement is in effect, Lorillard 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.

Thank you, Marty. Operator, at this time, we will take questions.

Thank you. (OPERATOR INSTRUCTIONS). Your first question is coming from Bonnie Herzog with Citigroup. Please go ahead.

All right, thank you. Good morning.

Good morning.

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'm curious, was it because you were lacking such difficult volume cons and you thought that was the way to achieve the earnings growth that you wanted? And so depending on how you answer that question, I'm curious if we should expect lower promotional spending in the future. And then, sorry, but it's very intriguing because I'm also curious about how you think about balancing your promotional spending and volume growth as such in light of a likely federal excise tax increase.

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, long-term perspective. So from the long-term perspective, we felt that given the brand's trends 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 made given the circumstances of the trends and competitive factors that were occurring. So we're looking at the long term. It doesn't make -- you know, the third quarter of '07 obviously is important. We want to optimize our performance in any given quarter. But we're also taking much longer term view. 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 units shipped and market share performance. So I think you have to look at it on a more [wholelistic] basis than just the quarter. Relative to the FET, image really not going to comment, I don't know whether, in fact, there will be an FET increase, 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, it's very possible, to balance the profitability factor and the brand's -- Newport brand's performance factor.

Okay. That's helpful. And certainly I do appreciate that, because I know you do take a long-term view. And that does beg 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 calculations, I think you're going to have to generate or Newport's 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 brand for the last several years, is that fair, Marty, you're facing some difficult comps?

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, and that's 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.

Or roughly, yes.

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 set 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.

And Jim, can I turn to you for just a moment, just with one final question, and certainly it receipts to Marty of course with the notional debt and the pay-down, 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, if that's still a goal for Loews?

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

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

Yes. That's what we've always done. We've paid our 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 left over 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.

Okay.

Bonnie, I just want a technical qualification. The Loews Boardwalk has not yet declared these dividend, so this is -- we are making an assumption here.

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

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

Thanks, good morning everyone. First question, again going back to the notional pay-down in the quarter, does the fact that you chose to declare -- to pay down 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 U.S. Supreme Court requested the cert request.

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 mention in terms of our requirements for cash and other considerations. So it really isn't tied, necessarily, to the net worth covenant. However, we are -- we're still in conformance with it.

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

Will have you're correct, there was a filing for rehearing on Friday. However, I'm going to put it in these terms: The way this is 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 where 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 Engel case makes its decision, then I would have to say 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 and the trial court making that ultimate determination.

Is a 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 exists both on the refundable and the non-refundable side, or would that matter be taken care of by the trial court separately?

Well, I think it's all one -- look, the agreement is only tied to completeness of review. If the trial court determines that there's completeness of review, then the agreement, the terms of the agreement are no longer in effect. So whatever aspects that implies, that's what happens. And that would obviously imply that there's no longer a need for a net worth kind of limitation and it would also, the Court would then have to decide how to dispose of the dollars that are being held as part of this agreement. But the essential part here is a determination as to whether or not there's completeness of review.

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

Yes.

Yes, you aren't referring to that though --

I think you've been -- you've indicated in the past that that nonrefundable portion, you're not likely to go after.

Well, no, what we're saying is there's really no refundable portion to us.

It's just the net worth requirement portion for you guys. Marty, in terms of your business, it seems like in the quarter, even sort of looking at more the retail take away numbers the share growth was a little bit softer than kind of what we've been seeing in the past few quarters. 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?

No, I wouldn't conclude that necessarily. I think it's more 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 extensor introduced in the third quarter that inflated, if you will, the universe. So it would sort of proportionately affect the lack of promotional effect on Newport's volume. So I would say it's more a result of Newport's decision as opposed to anything else.

Okay. And then just a final question for you, Jim, when Loews issued a tracking stock of Carolina Group years ago in the IPO, there were a number of factors why you chose to go with a tracking stock structure, the tax implication, 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 the current tracking structure for Carolina Group and at what point or what factors would you -- what factors would prompt you to maybe change the tracking stock structure to a common stock structure?

Judy, we're very happy with the tracking stock structure. It was done, I believe, for all the right reasons and it's served by the Loews shareholders well and the Carolina Group shareholders well. So we're very happy with how it's worked out.

Okay. Thank you.

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

Yes, good morning. Most of my questions have been asked 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 the availability of paper is and what extra, if any, cost would be to make that switch?

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

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 brand including Maverick.

Well, essentially nothing's changed. As you describe it, the non-core brands, Kent, True, Max, Satten and Old Gold for that matter, which is one of the other discount grand in addition to Maverick, we're basically optimizing their profitability. Maverick has shown growth, it was up a healthy 31, almost 32% in the third quarter. It's a low-margin proposition. We've always said that we're maintaining that as sort of a place holder, if you will, in that segment of the market. It's done well for us. We don't lose money on it, obviously. So-- 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.

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

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

Okay. Then my final question, if I may, Marty, something that has come up in the past that just happens to come back during our conversations with investors, is, again, the joint venture with Swedish Match I'm not going to ask you what you're doing at this current juncture or when we will hear something perhaps, but 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 wait until there was really a product to be rolled out?

There was no sort of magic formula 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.

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

Okay, thank you.

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

Good morning everyone.

Morning.

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

David, I'm going to leave my comments as I made them, that is we took into consideration the board, 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'm not going to get into any detail about that. And other than to say that the board, the Lorillard board felt 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.

Okay. Lorillard's board, Marty, typically meet once a quarter?

That's correct.

Then in terms of your promotional spending in the marketplace, did it tweak up just slightly sequentially from the second quarter level?

I actually don't know offhand. I don't think so. I don't know that, we can get back to you on that.

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

The retail?

Yes.

Retail market share during the third quarter was 9.59%.

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 in asset prices in the capital markets?

No, not at 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 month -- every quarter on a mark-to-market basis on our -- in our income statement. And I'm being corrected here. It's $3.2 billion, not $3.5 billion. I round up.

And then Jim, as it relation to the actual mechanics going forward, after the remaining no-show enter company debt has been paid down, as a practical matter, given the intent on the payout to all Carolina Group shareholders the available cash and assuming that, there's no further increase in that layer of CG reserves, which I think is run hundred million dollars, does that mean as a practical matter the mechanics is that a CG shareholder, all CG shareholders essentially will have 100% payout of the prior quarter's cash flow, assuming that that's been fully paid up to Loews?

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

Okay. And then lastly, Jim, could you comment for a moment on HighMount? 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 -- or 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?

The -- we have two months of operations of HighMount, and it performed basically as we expected. The main thing that drove it off 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 20% that's hedged for this year and 30% hedged for next year of we took -- 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 stand-alone subsidiary in that business.

Okay. Thank you.

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

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

The time factor in seasonality relates to gas prices. And if you look at the gas future, you see that gas prices tend to peak in December, January, February, and they tend to go down into the spring, maybe go up a bit in the summer when there's air conditioning demand, and then decline again in the early fall before going up again into the wintertime.

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 bonds?

No, definitely not. That's right.

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

That's correct.

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

That's correct.

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

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.

And were there any sort of front-loaded expenses to get going or -- that would depress things or any sort of one-timers that --

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

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

It's kind of hard to answer that question because we did not 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.

Okay. And do you have the limited and general split and dividends received in the third quarter from Boardwalk?

Yes, let us -- we're just thumbing through our book to get that.

The general is now starting to be a material.

Okay.

I just got the total.

Bob, we don't have that right now.

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

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

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

Well, it can be the year-to-date. The year-to-date is $115.4. That's nine months.

Okay. It might be some work but I think I can get it from there. Thank you.

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

Thanks a lot for taking my question. Going back to HighMount again, 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, do your ordinary operating expenses stay flat such that you get much expense in the margin in that period.

The transition expenses, we don't really want to give that number out right now. What was the other question?

In terms of whether or not the -- how much operating leverage you see in the model based on pricing, so if pricing doubles, do expenses stay the same as --

We should produce in the course of a year, between 100 and 125 BTFs of natural gas. So every dollar a share -- dollar an MCF change in price for natural gas leads to a pretax income change of $100 to $125 million.

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

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

Fair enough. Fair enough. What about can you give us reserve levels currently or we're going to get that quarterly, annually?

We don't have that at hand right now.

All right. What else did I have? Could you just repeat the barrels of oil that you produced in the --

We don't produce any oil, we produce natural gas liquids, and that's about 500 -- it's about 582,000 barrels for the third quarter, which represents two months.

All right. Thank you very much.

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

Good morning, guys, I have two questions. The first question is for Marty, that is given ow seldom you launch line extensions compared to your competitors, can you talk about Newport medium and how that complements 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 Loews Board or the Lorillard Board? Is there any preference to higher internally or externally within our outside the industry? And if the latter, is there a search ongoing? Thanks a lot.

Let me answer, maybe I could 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 had been offering, there are milds out there out there, competitive products, we thought we would introduce something in that taste range. We have a brand in testing right now, M blend, a unique blend, in a small market, in test. Our philosophy 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 regarding the different taste and flavor levels of the product. We're 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 the way where it offers some tangible benefit that we think might translate into incremental volume. And truly incremental volume, as opposed to just volume that costs money. Let me to respond to the succession, since Lorillard deals with concession for itself. We obviously have a succession plan in place. Whether or not we go inside or outside, we will always low 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.

Okay, thanks.

I hope that answers your question.

It does, thanks.

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

Thank you. A couple of questions, in 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?

I would say to some extent we've seen an uptick in price driven by the master limited partnerships that are trying to buy properties for their MLP's. So there's been a slight uptick in price.

Okay. Regarding the hotels, you seem to -- I think you've talked about it -- moving more towards em235 sizing brand. Can you -- can you talk about or give us some color as to how you think this changes the operation going on?

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

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

Well, as you know, we're 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 a few others scouted around the country, and Las Vegas is the latest resort property. For those that are going to head to the strip looking for the Loews Hotel you're 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.

Any plans to get into time-share or fractional condominiums.

No, we have no plans.

And I apologize, but can you repeat what the cash and debt position and take into account the [Imen Special].

At the end of the quarter, we have $3.2 billion. We have debt of $865 million, and I'll let you do the addition for the dividends that we're receiving.

Anything else we should be adding on to that?

You know, not really. Not that would make a significant difference.

Okay. Thank you.

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

Yes, hi, I just had a follow-up question on how Lorillard's cash gets divvied up to Carolina Group. Right now the policy is 100% of Lorillard's cash gets divvied up to Carolina Group on a quarterly basis; is that correct?

Yes.

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

Well, Judy, I'm going to give you the same answer I I gave relative to anything to do with how he we declare dividends and what factors we take into consideration. Anything relative dividend policy or the amount of a dividend will be based on the Lorillard board's 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 I -- look, there's no difference in our approach just because we declared a special dividend today. It is consistent, frankly, with our policy of declaring dividends up to Loews based on our ability to do so. And our ability to do so is predicated on the variables that I've mentioned several times today. So whatever the future policy is, it will depend on those variables.

Okay. Thanks.

Okay.

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

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.

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