Icahn Enterprises - 10-Q quarterly report FY

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12-b-2 of the Exchange Act. (Check One).

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

      As of May 8, 2006, there were 61,856,830 depositary units and 11,340,243 preferred units outstanding.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

      Accumulated other comprehensive loss at March 31, 2006 was $10.6 million.

See notes to consolidated financial statements.

See Note 4 for discussion of the purchase of short-term investments in the third quarter of 2005.

See notes to consolidated financial statements.

      American Real Estate Partners, L.P. (the “Company” or “AREP”) is a master limited partnership formed in Delaware on February 17, 1987. AREP is a diversified holding company owning subsidiaries engaged in the following operating businesses: (1) Oil and Gas; (2) Gaming; (3) Real Estate and (4) Home Fashion.

      We own a 99% limited partner interest in American Real Estate Holdings Limited Partnership, or AREH. AREH, the operating partnership, holds our investments and conducts our business operations. Substantially all of our assets and liabilities are owned by AREH and substantially all of our operations are conducted through AREH and its subsidiaries. American Property Investors, Inc., or API, owns a 1% general partner interest in both us and AREH, representing an aggregate 1.99% general partner interest in us and AREH. API is owned and controlled by Mr. Carl C. Icahn.

      The accompanying consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes contained in our annual report on Form 10-K, as amended for the year ended December 31, 2005. The financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission related to interim financial statements. The financial information contained herein is unaudited; however, all adjustments which, in the opinion of management, are necessary to present fairly the results for the interim periods, have been made. All such adjustments are of a normal and recurring nature. Certain prior year amounts have been reclassified in order to conform to the current year presentation.

      The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries in which control can be exercised. The Company is considered to have control if it has a direct or indirect ability to make decisions about an entity’s activities through voting or similar rights. All material intercompany accounts and transactions have been eliminated in consolidation.

      For a number of reasons the results of operations for interim periods are not normally indicative of the results to be expected for the full year. Variations in the amount and timing of gains and losses on our investments and derivative contracts in our Oil and Gas segment can be significant. In addition, the results of our Gaming and Home Fashion segments are seasonal.

      Our historical financial statements herein have been revised to reflect the acquisition of interests in five entities in the second quarter of 2005 which were under common control of Mr. Icahn. In accordance with generally accepted accounting principles, assets transferred between entities under common control are accounted for at historical cost similar to a pooling of interests, and the financial statements of such previously separate companies for periods prior to the acquisition are revised on a combined basis.

      Certain of our real estate properties are classified as discontinued operations. The properties classified as discontinued operations have changed during 2005 and, accordingly, certain amounts in the statements of operations and cash flows for the three months ended March 31, 2005 have been reclassified to conform to the current classification of properties.

      On August 8, 2005, WestPoint International, Inc. (“WPI”), an indirect subsidiary of the Company, completed the acquisition of substantially all of the assets of WestPoint Stevens Inc. (“WPS”). Operating results for WPI are included with AREP’s results beginning as of August 8, 2005.

      A recent court order may result in our ownership of WPI being reduced to less than 50%. If we were to own less than 50% of the outstanding common stock, we would have to evaluate whether we should consolidate WPI and our financial statements could be materially different than those presented herein. (See Note 21.)

      We classify our marketable securities as either “available-for-sale” or “trading” based upon whether the objective of the purchase is to generate profits on short-term differences in price. Securities that are classified as available-for-sale are reported at fair value with unrealized gains and losses reported as a separate component of partners’ equity. Trading securities are carried at fair value with unrealized gains and losses included in net earnings (loss). Effective January 1, 2006, certain trading securities were reclassified to available-for-sale based on a reassessment of the manner in which we hold investments. (See note 4 for details of investments and note 13 for details of gains and losses on investments.)

      Each of National Energy Group, Inc. (“NEG”) and Atlantic Coast Entertainment Holdings, Inc. (“Atlantic Coast”) are reporting companies under the Securities Exchange Act of 1934. In addition, American Casino & Entertainment Properties LLC (“ACEP”) voluntarily files annual, quarterly and current reports.

      On February 14, 2006, NEG, Inc., our newly formed subsidiary, in connection with a planned initial public offering, filed with the Securities and Exchange Commission a Registration Statement on Form S-1.

      In July 2005, we entered into a new license agreement with an API affiliate for the non-exclusive use of approximately 1,514 square feet for which we pay monthly base rent of $13,000 plus 16.4% of certain “additional rent.” The terms of the license agreement were reviewed and approved by the audit committee of the Board of Directors of API. The license agreement expires in May 2012. Under the agreement, base rent is subject to increases in July 2008 and December 2011. Additionally, we are entitled to certain annual rent credits each December, beginning December 2005 and continuing through December 2011. In the three months ended March 31, 2006 and 2005, the Company paid rent of approximately $53,300 and $39,100, respectively.

      In the three months ended March 31, 2006 and 2005, we paid approximately $214,500 and $272,400, respectively, to an API affiliate for telecommunication services.

      An API affiliate provided certain professional services to WPI for which it incurred charges of approximately $81,000 in the three months ended March 31, 2006.

      An API affiliate provided certain administrative services for which we incurred charges of approximately $22,000 in the three months ended March 31, 2005. No charges were incurred in 2006.

      We provided certain administrative services to an API affiliate for which we charged $113,000 in the three months ended March 31, 2006.

      As of May 8, 2006, affiliates of Mr. Icahn owned 9,813,346 preferred units and 55,655,382 depositary units, which represent 86.5% and 90.0% of the outstanding preferred units and depositary units, respectively.

      We conduct business in four principal areas: Oil and Gas, Gaming, Real Estate and Home Fashion.

      We conduct our Oil and Gas operations through our wholly-owned subsidiary, NEG Oil & Gas LLC (“NEG Oil & Gas”) (formerly AREP Oil & Gas LLC). NEG Oil & Gas includes our 50.01% ownership interest in NEG, a direct 50% membership interest in NEG Holding LLC (“NEG Holdings”), an indirect 50% membership interest (through NEG) in NEG Holdings, and a 100% ownership interest in National Onshore LP and National Offshore LP. Our Oil and Gas operations consist of exploration, development, and production operations principally in Texas, Oklahoma, Louisiana and Arkansas and offshore in the Gulf of Mexico.

      Summary balance sheets for NEG Oil & Gas as of March 31, 2006 and December 31, 2005, included in the consolidated balance sheets, are as follows (in $000s):

      Summarized statements of operations for the three month periods ended March 31, 2006 and 2005, including amounts related to unrealized derivative gains (losses), are as follows (in $000s):

      Oil and gas operating expenses comprise expenses that are directly attributable to exploration, development and production operations including lease operating expenses, transportation expenses, gas plant operating expenses, ad valorem and production taxes.

      For the three months ended March 31, 2006 and 2005, natural gas comprised 65% and 63% of gross oil and gas revenues, respectively.

      We own and operate gaming properties in Las Vegas and Atlantic City. Our Las Vegas properties include the Stratosphere Casino Hotel and Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder. Our Atlantic City operations are based on our ownership of The Sands Hotel and Casino in Atlantic City, New Jersey through our majority ownership of Atlantic Holdings.

      Summary balance sheets for our Gaming segment as of March 31, 2006 and December 31, 2005, included in the consolidated balance sheets, are as follows (in $000s):

      Summarized statements of operations for the three months ended March 31, 2006 and 2005 are as follows (in $000s):

      Our real estate operations consist of rental real estate, property development, and associated resort activities.

      A summary of real estate assets as of March 31, 2006 and December 31, 2005, included in the consolidated balance sheets, is as follows (in $000s):

      In addition to the above are properties held for sale. The amount included in other current assets related to such properties was $26.5 million and $27.2 million at March 31, 2006 and December 31, 2005, respectively. The operating results of certain of these properties are classified as discontinued operations.

      Summarized statements of operations attributable to real estate operations are as follows (in $000s):

      As of March 31, 2006, we owned 51 rental real estate properties. These primarily consist of fee and leasehold interests in real estate in 23 states. Most of these properties are net-leased to single corporate tenants. Approximately 84% of these properties are currently net-leased, 6% are operating properties and 10% are vacant.

      We market portions of our commercial real estate portfolio for sale. Sale activity was as follows (in $000s, except unit data):

      We own, primarily through our Bayswater subsidiary, residential development properties. Bayswater, a real estate investment, management and development company, focuses primarily on the construction and sale of single-family houses, multi-family homes and lots in subdivisions and planned communities, and raw land for residential development. Our New Seabury development property in Cape Cod, Massachusetts, and our Grand Harbor and Oak Harbor development property in Vero Beach, Florida each include land for current and future residential development of approximately 450 and 1,000 units of residential housing, respectively. Both developments operate golf and resort activities. We are also developing residential communities in Naples, Florida and Westchester County, New York.

      Property development sales activity was as follows (in $000s except unit data):

      We conduct our Home Fashion operations through our majority ownership in WPI.

      Summary balance sheets for Home Fashion as of March 31, 2006 and December 31, 2005, as included in the consolidated balance sheets, are as follows (in $000s):

      Summarized statement of operations for the three months ended March 31, 2006 are as follows (in $000s):

      Total depreciation for the period was $10.4 million, of which $8.6 million was included in cost of sales and $1.8 million was included in selling, general and administrative. Total expenses for the period include $7.7 million of impairment charges related to the fixed assets of plants that will be closed and $2.1 million of restructuring charges (of which approximately $1.2 million relates to severance and $0.9 million relates to continuing costs related to closed plants).

      Our basis in WPI is less than our share of the equity in WPI by $110.7 million. The excess of fair value over cost of net assets acquired has been reflected as a reduction of long-lived assets in our consolidated balance sheet. Fixed assets were reduced by $98.4 million and intangible assets were reduced by $12.3 million. Reductions in depreciation expense and in the impairment charge of $5.4 million and $4.1 million, respectively, for the three month period ended March 31, 2006 were recorded related to the excess of fair value over cost that had been assigned to fixed assets.

      Investments consist of the following (in $000s):

      Proceeds from the sale of available for sale securities were $128.3 million (of which $86.1 million was due from broker) and $0 for the three months ended March 31, 2006 and 2005, respectively. The gross realized gains on the sale of available for sale securities were $28.9 million and $0 for the three months ended March 31, 2006 and 2005, respectively. For purposes of determining gains and losses, the cost of securities is based on specific identification.

      Net unrealized losses on available for sale securities in the amount of $10.8 million and $2.4 million for the three months ended March 31, 2006 and 2005, respectively, have been included in other comprehensive income.

      Included in “Trading — other investments” at March 31, 2006 are $14.7 million in unrealized gains on derivative instruments.

      In the third quarter of 2005, we began using the services of an unaffiliated third party investment manager to manage certain fixed income investments. At March 31, 2006, $460.1 million had been invested at the discretion of such manager in a diversified portfolio consisting predominantly of short-term investment grade debt securities. Investments managed by the third party investment manager are classified as available for sale securities in the accompanying consolidated balance sheets.

      At March 31, 2006 and December 31, 2005, liabilities of $217.3 and $131.1 million, respectively, had been recorded related to purchases of securities that had been made on margin. The margin liability is secured by the securities we purchased and cannot exceed certain pre-established percentages of the fair market value of the securities collateralizing the liability. If the margin liability exceeds such percentages, we will be subject to a margin call and required to fund the account to return the margin balance to the pre-established percentages of the fair market value of the securities collateralizing the liability.

      Inventories, net, relate solely to our Home Fashion segment and consist of the following (in $000s):

      Trade notes and other receivables, net, consist of the following (in $000s):

      Other current assets consist of the following (in $000s):

      At March 31, 2006, assets held for sale consists of $26.5 million of real estate assets and $15.6 million of WPI assets held for sale. At December 31, 2005, assets held for sale consists of $27.2 million of real estate assets and $22.7 million of WPI assets held for sale.

      Restricted cash is primarily composed of funds required as collateral for the outstanding short security positions. Additionally, restricted cash consists of balances for escrow deposits and funds held to collateralize letters of credit.

      Property, plant and equipment consists of the following (in $000s):

      Depreciation, depletion and amortization expense related to property, plant and equipment for the three month periods ended March 31, 2006 and 2005 was $45.3 million and $32.1 million, respectively.

      Other non-current assets consist of the following (in $000s):

      Restricted deposits represent amounts escrowed with respect to asset retirement obligations at our Oil and Gas operations.

      Other non-current liabilities consist of the following (in $000s):

      Minority interests consist of the following (in $000s):

      Long-term debt consists of the following (in $000s):

      Both of our senior unsecured notes issuances restrict the payment of cash dividends or distributions, the purchase of equity interests or the purchase, redemption, defeasance or acquisition of debt subordinated to the senior unsecured notes. The notes also restrict the incurrence of debt, or the issuance of disqualified stock, as defined, with certain exceptions, provided that we may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of the aggregate principal amount of all outstanding indebtedness of AREP and its subsidiaries on a consolidated basis to the tangible net worth of AREP and its subsidiaries on a consolidated basis would have been less than 1.75 to 1.0. As of March 31, 2006, such ratio was less than

1.75 to 1.0, and accordingly, based on this ratio, we and AREH could have incurred up to approximately $1.5 billion of additional indebtedness.

      In addition, both issuances of notes require that on each quarterly determination date we and the guarantor of the notes (currently only AREH) maintain a minimum ratio of cash flow to fixed charges each as defined, of 1.5 to 1, for the four consecutive fiscal quarters most recently completed prior to such quarterly determination date. For the four quarters ended March 31, 2006, the ratio of cash flow to fixed charges was in excess of 1.5 to 1.0.

      The notes also require, on each quarterly determination date, that the ratio of total unencumbered assets, as defined, to the principal amount of unsecured indebtedness, as defined, be greater than 1.5 to 1.0 as of the last day of the most recently completed fiscal quarter. As of March 31, 2006, such ratio was in excess of 1.5 to 1.0.

      ACEP’s 7.85% senior secured notes due 2012 restrict the payment of cash dividends or distributions by ACEP, the purchase of its equity interests, the purchase, redemption, defeasance or acquisition of debt subordinated to ACEP’s notes and investments as “restricted payments.” ACEP’s notes also prohibit the incurrence of debt, or the issuance of disqualified or preferred stock, as defined, by ACEP, with certain exceptions, provided that ACEP may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of consolidated cash flow to fixed charges (each as defined) for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or disqualified stock or preferred stock is issued would have been at least 2.0 to 1.0, determined on a pro forma basis giving effect to the debt incurrence or issuance. As of March 31, 2006, such ratio was in excess of 2.0 to 1.0. The ACEP notes also restrict the creation of liens, the sale of assets, mergers, consolidations or sales of substantially all of its assets, the lease or grant of a license, concession, other agreements to occupy, manage or use our assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The ACEP notes allow it to incur indebtedness, among other things, of up to $50 million under credit facilities, non-recourse financing of up to $15 million to finance the construction, purchase or lease of personal or real property used in its business, permitted affiliate subordinated indebtedness (as defined), the issuance of additional 7.85% senior secured notes due 2012 in an aggregate principal amount not to exceed 2.0 times net cash proceeds received from equity offerings and permitted affiliate subordinated debt, and additional indebtedness of up to $10.0 million.

      Additionally, ACEP’s senior secured revolving credit facility allows for borrowings of up to $20.0 million, including the issuance of letters of credit of up to $10.0 million. Loans made under the senior secured revolving facility will mature and the commitments under them will terminate in January 2008. At March 31, 2006, there were no borrowings or letters of credit outstanding under the facility. The facility contains restrictive covenants similar to those contained in the 7.85% senior secured notes due 2012. In addition, the facility requires that, as of the last date of each fiscal quarter, ACEP’s ratio of net property, plant and equipment for key properties, as defined, to consolidated first lien debt be not less than 5.0 to 1.0 and ACEP’s ratio of consolidated first lien debt to consolidated cash flow not be more than 1.0 to 1.0. At March 31, 2006, we were in compliance with the relevant covenants. On May 10, 2006 we increased our senior secured revolving credit facility to $60.0 million on substantially the same terms and conditions.

      The restrictions imposed by ACEP’s senior secured notes and the credit facility likely will limit our receiving payments from the operations of our principal hotel and gaming properties.

      On December 22, 2005, NEG Oil & Gas entered into a credit facility, dated as of December 20, 2005, with Citicorp USA, Inc., as administrative agent, Bear Stearns Corporate Lending Inc., as syndication agent, and certain other lender parties. At March 31, 2006, the interest rate on the outstanding amount under the credit facility was 6.44%. Commitment fees for the unused credit facility range from 0.375% to 0.50% and are payable quarterly.

      The credit facility contains covenants that, amongst other things, restrict the incurrence of indebtedness by NEG Oil & Gas and its subsidiaries, the creation of liens by them, hedging contracts, mergers and issuances of securities by them and distributions and investments by NEG Oil & Gas and its subsidiaries. It also requires NEG Oil & Gas to maintain: (1) a ratio of consolidated total debt to consolidated EBITDA (for the four fiscal quarter period ending on the date of the consolidated balance sheet used to determine consolidated total debt), as defined, of not more than 3.5 to 1.0; (2) consolidated tangible net worth, as defined, of not less than $240 million, plus 50% of consolidated net income for each fiscal quarter ending after December 31, 2005 for which consolidated net income is positive; and (3) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0. These covenants may have the effect of limiting distributions by NEG Oil & Gas. As of March 31, 2006, NEG Oil & Gas was in compliance with each of the covenants.

      Other income (expense) of $21.5 million included, for the three months ended March 31, 2006, net realized gains on marketable securities of $28.3 million, net unrealized losses on marketable securities of $10.0 million, and other income of $3.2 million. Total gains or losses on marketable securities included $29.2 million of realized gains on long positions, $4.2 million of realized gains and $15.5 million unrealized gains on derivatives, and $5.1 million of realized losses and $25.5 million of unrealized losses on securities sold short. For the three months ended March 31, 2005, there were no sales of securities. Other income (expense) for the three months ended March 31, 2005 of $26.0 million included unrealized gains on marketable securities of $21.7 million, including $17.9 million unrealized gains on securities sold short, gain on sale or disposition of real estate of $0.2 million and other income of $4.1 million.

      On June 29, 2005, we granted 700,000 nonqualified unit options to our chief executive officer. The option agreement permitted our chief executive officer to purchase up to 700,000 of our depositary units at an exercise price of $35 per unit and vested over a period of eight years. On March 14, 2006, our chief executive officer resigned from that position, became a director and Vice-Chairman of the Board of API, and was designated to be principal executive officer. These changes in status caused the options to be cancelled in accordance with their terms.

      In accordance with SFAS 123(R) Share Based Payment, the cancellation required that any previously unrecognized compensation cost be recognized at the date of cancellation and accordingly we recorded a compensation charge of $6.2 million related to the previously unrecognized compensation cost.

      Pursuant to the terms of the preferred units, on February 8, 2006, we declared our scheduled annual preferred unit distribution payable in additional preferred units at the rate of 5% of the liquidation preference per preferred unit of $10. The distribution was paid on March 31, 2006 to holders of record as of March 15, 2006. A total of 539,846 additional preferred units were issued. At March 31, 2006, 11,340,243 preferred units are issued and outstanding. In March 2006, the number of authorized preferred units was increased to 11,400,000.

      Basic earnings per LP unit are based on earnings attributable to limited partners. Net earnings available for limited partners are divided by the weighted average number of limited partnership units outstanding. Diluted earnings per LP unit are based on earnings before the preferred unit distribution as the numerator with the denominator based on the weighted average number of units and equivalent units outstanding assuming conversion. The preferred units are considered to be equivalent units.

      The following table sets forth the computation of basic and diluted earnings per LP units (in 000s, except per unit data).

      Our asset retirement obligations represent expected future costs to plug and abandon our wells, dismantle facilities, and reclamate sites at the end of the related assets’ useful lives.

      As of March 31, 2006 and December 31, 2005, we had $26.6 million and $24.3 million, respectively, held in various escrow accounts relating to the asset retirement obligations for certain offshore properties, which is included in other non-current assets in the consolidated balance sheet. The following table summarizes changes in our asset retirement obligations during the three months ended March 31, 2006 and the year ended December 31, 2005, respectively (in $000s):

      The following is a summary of our commodity price collar agreements as of March 31, 2006: