Icahn Enterprises LP (IEP) 2005 Q3 法說會逐字稿

Good morning and welcome to American Real Estate Partners' third-quarter investor presentation. My name is Adrian Tanier (ph) and I am the Chief Accounting Officer of American Real Estate Partners, LP. I shall now read the page entitled forward-looking statements, presented on page 1 of our 2005 third-quarter investor presentation.

This presentation includes forward-looking statements within the meaning of the Safe Harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended by Public Law 10467, particularly statements regarding our future financial and operating results and our businesses. These statements are based on our management's current expectations or beliefs and are subject to risk and uncertainties that could cause actual results to differ materially from expected or projected results.

More detailed information about these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q, including, but not limited to, in the section of these reports entitled Certain Trends and Uncertainties, in management's discussion and analysis of financial condition and results of operations.

We are under no obligation to and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise. Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure are contained in this presentation. Please note that questions will be accepted via our website at www.areplp.com. At this point, I will turn the call over to Keith Meister, our Chief Executive Officer.

Thank you, Adrian. I will begin by providing an overview of our operating results from our three core businesses for the third quarter, as well as some key highlights for the quarter and an update on subsequent events, after which I will turn it over to Jon Weber to discuss the acquisition of WestPoint International, which will become our fourth core operating business. Jon will also address a few significant nonoperating items that have affected our GAAP financial results for the third quarter of 2005. After we're done with our prepared remarks, we will be available for a Q&A period. Bob Alexander and Rich Brown will join Jon and I and assist in addressing your questions.

During the third quarter, each of our three core operating businesses -- oil and gas, gaming, and real estate -- continued to achieve strong results, driven by a combination of continued robust industry fundamentals in these lines of business as well as execution by our specific business unit management teams.

Specifically, AREP Oil & Gas and American Casino & Entertainment Properties, our Las Vegas gaming assets, once again exceeded our own internal projections and have achieved record results. In summary, the key takeaway that I would like to leave you with is that, while this quarter's financial results contain certain nonoperating items which negatively affect our consolidated GAAP results, the health and recurring operating performance of our core business units continues to thrive.

The next slide provides an overview of our Oil & Gas business for the quarter. During the third quarter, gross revenues, which do not include the effects of unrealized hedging losses, increased by 121% to 87.2 million. This strong growth in gross revenues was driven by both increased production and increased average realization prices. Third-quarter 2005 production totaled 10.1 Bcfe and represented a 53% increase versus the comparable quarter of the prior year.

Organic production growth was approximately 30%, driven by successful execution of our drilling program, which seeks to take advantage of our large inventory of low-risk repeatable drilling opportunities. Production in the quarter also benefited from the inclusion of Panaco's results, which were not included in the third-quarter 2004 results.

In addition to our substantial growth in production, our average realized price for oil and gas, after giving effect to our hedge production in the third quarter, increased approximately 42% to $7.48 per Mcfe. During the quarter, the Gulf Coast region was devastated by Hurricanes Rita and Katrina. Thankfully, none of our personnel were injured and our property suffered no material damage, with only slight production disruptions which were quickly rectified.

As a result of the market disruptions caused by these storms, the prices for oil and natural gas spiked. We were able to take advantage of this market move by increasing our commodity hedges. During the quarter, we increased our hedges for 2006 and entered into new commodity hedges for '07 and '08. These hedge transactions represent costless collars, which lock in the floor price we could receive and allow us to participate in commodity price upside until our ceiling prices are obtained.

We currently have hedges in place for 58%, 46%, 31%, and 23% of our estimated '05, '06, '07, and '08 production, respectively. Our weighted average floors over this period are $6.48 on gas and $52.74 on oil; and our weighted average ceilings are $8.43 on gas and $62.73 on oil.

As an active part of our risk management strategy, we will continue to layer on additional hedges to lock in attractive prices and manage our commodity price exposure as the opportunities arise to do so in a cost-efficient manner.

Later in the call, Jon Weber will explain in detail the GAAP accounting for our hedges, which resulted in non-cash, unrealized losses on hedging transactions during the quarter of approximately 80 million. These losses represent the mark-to-market of the future value of our hedging obligations and not the effects of realized hedges during the quarter.

Prior to the effect of unrealized losses on hedging transactions, operating income increased to 40.2 million. DD&A, by way of reference, was 21.8 million in the third quarter of '05 versus 14.2 million in the third quarter of '04. Adjusted for the unrealized losses on hedging transactions, our operating income plus DD&A for the quarter approximated 62 million, representing another great quarter for AREP Oil & Gas.

Subsequent to the end of the quarter, AREP Oil & Gas announced and closed the acquisition of the Minden Field properties in East Texas for a purchase price of approximately 85 million. These properties present us the opportunity to acquire assets with which our management team has a great deal of familiarity. Currently, we own and operate properties that are located almost adjacent to Minden Field. These assets acquired include interest in 17 producing wells, approximately 59 Bcfe of proved reserves, and 36 identified additional drilling opportunities. We look forward to continuing to provide capital to grow our Oil & Gas business as opportunities present themselves.

Moving forward to our gaming business, our gaming operations for the quarter represent a tale of two cities. Las Vegas continues to meet or exceed our projections, while the Sands in Atlantic City continues to deal with difficult market and operating conditions. Overall, operating income was up $600,000 or 5.4% to 11.8 million. Specifically, Las Vegas operating income was 14.3 million, representing a 37% increase over the comparable quarter from the prior year. The Sands posted an operating loss of 2.5 million, down 3.2 million from the prior year. At quarter end, our casinos had cash balances of approximately 113 million, of which 98 million was at ACEP.

We continue to review opportunities to grow our business through development and potential acquisitions. Specifically, we're reviewing opportunities for expansion at the Stratosphere as well as opportunities in Atlantic City.

Moving forward to our real estate businesses, our rental real estate portfolio, which is currently comprised of 58 properties after the effects of our asset sales over the last 18 months, continues to achieve stable and predictable results; and we continue to try and enhance value through active property management.

In our homebuilding business, our ability to achieve our 2005 planned numbers and future results will be driven by the rate at which we deliver finished units. As a result of continued strong residential real estate market conditions, we have retained a third-party brokerage firm to market for sale or seek potential financing for our two largest homebuilding projects, New Seabury on Cape Cod and Grand Harbor in Vero Beach.

We believe we have it is significant value to these properties during our ownership period through gaming development entitlements and investing in infrastructure. To the extent buyers with lower cost of capital and larger organizations for building homes more efficiently are willing to pay us values that exceed what we view to be the risk-adjusted profits we would achieve through developing these properties ourselves, we will look to divest of these assets. Alternatively, we are also exploring the option of placing nonrecourse indebtedness against these assets, enabling AREP to take some profits off the table while continuing to maintain the development upside.

We view each of New Seabury and Vero Beach as having fair market values in the current environment well in excess of their current book values and intend to pursue that path that ultimately maximizes risk-adjusted returns for AREP.

I want to very quickly now walk through some key developments during the third quarter. We recently announced, working with Citibank and Bear Stearns, that we are seeking $500 million of revolver and term loan debt financing secured by the assets of AREP Oil & Gas. The proposed financing will be nonrecourse to AREP. The proceeds from the debt financing, to the extent it is completed, will be used to replace existing indebtedness at NEG operating, as well as to repay intercompany indebtedness from the purchase of Minden Field. Remaining debt proceeds after expenses, estimated to be approximately 275 million, will be distributed to American Real Estate Holdings.

This financing allows us to put in place a capital structure that reflects the scale and growth of the AREP Oil & Gas assets and allows us to do so in a way that maintains flexibility, to the extent we are able to complete an offer to buy out the NEG minority, or furthermore to the extent we elect to raise equity into AREP Oil & Gas in the future. Proceeds from any equity raised into AREP Oil & Gas in the future will be used both as a distribution to AREP as well as to pay down some of the new revolver being put in place at AREP Oil & Gas. We hope to be able to close the debt financing in December.

With regard to our offer to purchase the minority interest in NEG not held by AREP for $3.00 per share in cash, the independent committee of the Board of NEG deemed our offer to be inadequate and rejected our proposal. However, they invited us to continue to have discussions regarding possible alternative transaction proposals and structures. We intend to continue having those discussions; obviously there can be no assurance that these discussions will ultimately lead to any transaction.

During the quarter, the Board also declared a $0.10 per unit quarterly distribution, consistent with the previous quarter's distribution. This distribution will be payable to shareholders of record on November 28, and the payment date will be December 19.

One last matter, an organizational change at ARAP. John Saldarelli has been with AREP since 1990 and has served as our Chief Financial Officer. John's service to the Company has been invaluable throughout the years. As our business increases in scale and complexity, we think it's appropriate to have a CFO for our real estate business, just as we have CFO's for each of our other business units. Effective immediately, John Saldarelli will assume the position of VP Finance and serve as CFO of our real estate business.

Jon Weber, from whom you will hear in a moment, who has been President of AREP, will additionally assume the duties of Chief Financial Officer. I thank John Saldarelli for his service and look forward to continuing to work with him, as well as working with Jon Weber in his new capacity. I believe that John's background and experience would prove to be tremendously valuable to AREP as we continue to grow our business and seek to access and communicate with the capital markets.

So with that, I would like to turn the call over to Jon to discuss our third-quarter GAAP financial results.

Thanks, Keith. I look forward to the additional responsibilities and very much appreciate the help from John Saldarelli and his team as we transition and build our Corporate and Holding Company finance and accounting functions.

I will begin now by reviewing some key financial developments for the third quarter of 2005. Our Q3 operating income declined from $14 million last year to a loss of $30 million this year. The results included $80 million of unrealized losses on hedging transactions. Excluding the effects of such losses, our operating income would have increased by 246% year-over-year to $50 million. The improvement comes from strong fundamental performance in each of our oil and gas, gaming, and real estate segments.

With the acquisition of the assets of WestPoint Stevens, AREP has continued its evolution from a real estate based business towards a Holding Company, focused on creating shareholder value through patient disciplined investments in undervalued operations. We purchased the WestPoint assets in a Bankruptcy Court approved transaction on August 8. The terms of the deal enabled us to improve the business by leaving behind significant liabilities and legacy costs. We acquired WestPoint with no net debt and 570 million of current assets consisting principally of unencumbered accounts receivable and inventory.

As you may know, AREP owns a 58.3% stake in Atlantic Coast Entertainment, that in turn owns and operates The Sands Hotel and Casino in Atlantic City. GB Holdings Inc., in which AREP owns a 77.5% stake, owns the remaining equity in Atlantic Coast. Through both entities, AREP now owns 90.6% of Atlantic Coast and The Sands.

On September 29, GBH filed bankruptcy, and as required under applicable accounting rules, AREP deconsolidated its holdings in GBH. The bankruptcy filing was prompted by capital structure considerations at GBH and not the underlying value or operations of The Sands. The Sands and its immediate parent are not in or directly affected by the bankruptcy, and continue to be controlled and 58.3% owned by AREP.

Nonetheless, the bankruptcy at GBH requires us to take a non-cash impairment charge of $52 million, representing the remaining amount of our $7 million investment in GBH, and a $45 million charge to reflect a 32.3% decline in our ownership interest in Atlantic Coast. These non-cash charges resulted in an increase by $45 million in the minority interest account on our balance sheet. Notwithstanding the bankruptcy at GBH, we remain committed to the Atlantic City market and believe that we can best improve the value of our investment directly through Atlantic Coast.

Now turning to other major nonoperating items for Q3, in addition to the $52 million writedown we just described, AREP incurred net losses on security transactions for the quarter of $24 million, principally because of a short equity position. If we valued that short position based on prices at November 1, the loss would have been $13 million lower.

Also, our interest expense for the quarter was up $9 million over last year, reflecting the incremental cost of the 480 million 7 1/8 Senior Notes issued earlier this year. Our interest income was down $8 million because we recognize a $12 million gain in Q3 of 2004 from a mezzanine investment. Excluding the effect of that investment, our interest income for last quarter would have been increased year-over-year by almost $5 million, both because of better rates of return earned and because of increased amounts of liquidity held by AREP.

As we continue to wrap up and sell down our net leased portfolio, income from discontinued operations representing the sale of such properties declined by $9 million year-over-year. Lastly, our income taxes increased by $4 million year-over-year, principally because of improved results in our taxable gaming operations.

Now, comparing year-over-year results for the quarter, our revenues were up significantly to $332 million with the consolidation of WestPoint. Despite improved fundamental performance in our gaming, oil and gas, and our real estate units, our operating income did decline $44 million to a loss of 30 million, principally due again to that $80 million unrealized loss from hedging transactions that we mentioned earlier.

Our pretax income also declined significantly, because of the $52 million charge relating to the bankruptcy of GBH, as well as an increased loss in marketable securities, higher interest expense, and a year-over-year decline in interest income. As a result, our income from continuing operations declined some $137 million, from an $11 million profit in Q3 of 2004 to a loss of $126 million in Q3 of 2005. Discontinued operations also declined because of the sell-off in the net lease portfolio.

As a result of all of these factors, the full-quarter loss of 126 million compares with a gain of 21 million in the prior year. Now as we see when we will review our performance by segment, notwithstanding the nonoperating or non-cash operations that adversely affected our reported net income, we did see strong gains in the fundamental performance of each of our oil and gas, gaming, and real estate segments.

Given the importance to our third-quarter results of these unrealized losses on hedging transactions, I would just like to take a moment to describe specifically where and how those losses arose. As you can see, our production and the price of our oil and gas products increased dramatically year-over-year. As Keith mentioned earlier, we do protect against the decline in the value of our oil and gas by hedging to lock in prices of the products that we produce at prices that we consider to be attractive.

Following the recent rapid escalation in prices, we entered into hedges covering part of our production through 2008. The hedges ensure that even if (technical difficulty) energy prices decline we will benefit from recent high prices. Though the hedges match only part of the projected production, years away, accounting rules require us to take a non-cash charge for the entire mark-to-market value of the hedges in each quarter, as if we cashed out the hedges immediately. As a result, the more the value of our reserves increase, the greater the unrealized loss on these hedges.

Accordingly, we are required to deduct from revenue not only the $11.5 million of realized derivative losses for our actual production during the quarter, but also $79.8 million representing unrealized derivative losses pertaining to the entire life of the hedges. Now, additional detail on these hedges appears, and I direct your attention to note 18 of our recently filed financial statements on Form 10-Q.

So as you can see, the hedging losses had a dramatic effect on each of the principal line items in our consolidated statement of operations. Our revenue would have been 80 million higher; and our operating loss of 30 million for AREP would have instead been an operating profit of $50 million. In each case, these amounts are determined only by adding the unrealized hedging losses with no other adjustments.

Now I would like to now turn to an analysis of the performance of our principal operating segments in the third quarter of 2005. We have done a lot of work over the last two quarters to simplify and clarify our segment presentation, to better enable investors to understand and evaluate each of our operating businesses on a stand-alone basis.

I will turn now first to the home fashion segment, appearing for the first time in this quarter's results. As you can see, our home fashion segment, comprising the business and activities of WestPoint International, is the single largest contributor to revenues. Even though only eight weeks of revenue were included during this quarter, WestPoint added $184 million to our top-line results. WestPoint did have an operating result, operating loss of 5.1 million for the eight-week period and will likely continue to experience operating losses until we address and remedy the fundamental challenges that have troubled this company for several years. These include high domestic manufacturing and overhead costs, and diminished sales and profit margins, as retailers and others source directly from overseas mills.

Our gaming business continued improvement above plan, although better-than-expected results at our Nevada properties did compensate for the weaker performance in Atlantic City. Overall revenues have seen improvement in casino, hotel, and food and beverage; but a higher average daily room rate has been the primary contributor to increased profitability for the quarter. Rich Brown and his team have been able to improve upon the efficacy of their marketing efforts to both increase the volume of traffic and attract a better customer to stay in our hotels.

We do continue to face challenges in Atlantic City property, however, The Sands, and are working with management there to craft a plan to fulfill the longer-term promise of that market. In the interim, we suffered some profit erosion in Atlantic City as a result diminished gaming revenues.

Our Las Vegas properties continue to represent the lion's share of the revenue and operating income of the segment, contributing 65 and 121% respectively. On balance, our overall gaining business remains strong and we're confident in its future prospects.

As Keith said earlier, Bob Alexander and his team have delivered terrific results for our Oil & Gas business. The business is doing well and is well ahead of plan. We have enjoyed better pricing and better productivity, and our business was not materially affected by the hurricanes that hit the Gulf Coast.

Consistent with industry trends, and the increased level of activity, and increased competition for production-related resources, total operating expenses did increase by 25 million to 37 million or 51% during the quarter. Now, absent the inclusion of recently acquired Panaco in the 2005 results, the increase in operating expense would have been 38%. We believe those increases are well within market norms and they are being properly monitored and managed. Overall we're looking forward to continued strong operating performance based on very positive fundamentals for that business.

Our real estate operations improved in profitability thanks to continued selldown of our Falling Waters condominium development in Naples, Florida. We note that sustained improvement in our development business will require us to increase the pace at which we're selling and completing homes at our New Seabury and Grand Harbor residential developments in Cape Cod and Vero Beach, Florida.

Lastly, our Holding Company expense has increased because of the greater salary and professional expenses incurred in connection with the recently completed transactions that we have discussed. While we will monitor closely our Holding Company expense, I do expect that we will need to make investments to address the increased demands of reporting, enhanced controls, and Sarbanes-Oxley compliance, given the growing size and complexity of our operations.

Now I'll direct your attention to the depreciation, depletion, and amortization by segment, which we have included here to facilitate analysis for those who wish to perform an evaluation on a per-segment basis. The DD&A has increased most significantly in our Oil & Gas segment, where it was up 54% by 20 -- to $22 million.

Turning now to the balance sheet, we have included a summarized balance sheet for your review. Several of the balance sheet values, including those related to certain of our gaming and oil and gas assets, were determined using as-of pooling treatments, pursuant to which the cost basis was inherited from a related party. This treatment makes fixed assets and equity accounts much more difficult to compare with those of other companies that use only purchase accounting.

Nonetheless, as you will see, as you can see, we have a strong current position with almost 2 billion of current assets against 500 million in current liabilities. Also, in addition to 443 million in cash and equivalents, included in other current assets is 695 million of investments that are, for the most part, highly liquid investment-grade debt instruments.

Before concluding our presentation and opening up for questions and answers, I would like to share a few words on the recently completed acquisition of WestPoint Stevens. Like other companies that we have acquired, we will work closely with WestPoint, its employees, customers, and suppliers to address the difficult competitive conditions that have troubled WestPoint for many years. Although WestPoint has a proud tradition, well-known brands, impressive market position, and formidable talent and know-how, we do not expect its transition to a profitable growing enterprise to be an overnight success.

During eight weeks of operation, as I mentioned earlier, WestPoint incurred an operating loss of 5 million, including roughly 7 million of depreciation. Its operating losses stem from unabsorbed factory overhead, as closures have not kept pace with the decline in sales, as well as restructuring charges, some of which charges will continue to occur as WestPoint transitions to a more cost-competitive manufacturing footprint.

On a positive note, the company does boast a debt-free balance sheet with ample liquidity, so we expect the business to finance much of the changes in investments that will be required to improve its operating performance and competitiveness.

The principal challenge facing this business is that it must move its production, principally based in the United States, offshore and become more expert and reliant on sourcing from low-cost sources of supply for home textiles, principally in Asia. The business also faces the challenge of bringing about a significant reduction in its SG&A and needs to renew its focus and investment in brands, licensing, product innovation, and customer service.

WestPoint has recently hired a new Chief Executive Officer, Joe Pennacchio, who just joined the company on October 24. Joe brings to WestPoint more than 20 years of experience as a merchant and senior manager with leading retailers, expert in the home fashions segment, in addition to 10 years as CEO of an offshore manufacturer serving many of WestPoint's principal customers. He has demonstrated itself to be an able manager and capable change agent, and we look forward to having you hear directly from Joe in the future about the exciting changes that are underway at WestPoint.

That concludes my remarks. I would like at this point to open up the call for questions. We will mention that we have available on the line the CEOs and senior financial management of each of our oil and gas, and gaming, and real estate businesses available for questions. Thank you.

We're going to take questions, as Adrian mentioned, via the website at www.areplp.com. The first question is from Tom Quinn (ph) at Wachovia Securities, asking for a review of our oil and gas collars and our percent oil and gas -- our oil and gas revenue as a percent of total revenue; meaning what percentage oil, what percent gas. I'm going to turn it over to Bob Alexander and Randy Cooley, and let them maybe spend a minute adding any color they might want on our hedge portfolio, and then to talk about our production mix between oil and gas. Bob, are you there?

Yes, I am here. The gas as a percent of our total production on an Mcf equivalent basis is a little over 85%. So oil is not a very big part of our inventory.

The hedges on a total basis that we have got out through 2008 averages 35%. I think you mentioned a while ago we have got 58% in '05; we've got some of those that go out at the end of the year; and then 46% in '06; 31% in '07; 23% in '08. The average floor price for gas is $6.48 and for oil is $52.74. The average ceiling for gas is $8.43 and for oil it is $62.73.

Great, thanks Bob. At the moment, we don't have any other questions on the website. So with that, I would like to thank everyone for joining us; and we look forth to chatting with you next quarter about our full-year 2005 results. Thank you very much.