ICAHN ENTERPRISES L.P. quarterly report, Q3 FY2013

Icahn Enterprises L.P. — Q3 2013 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2013; unaudited. Amounts are in millions of dollars except per-unit data. Icahn Enterprises is a diversified holding partnership spanning investment funds, automotive, energy, metals, railcar, gaming, food packaging, real estate and home fashion. Icahn Enterprises Holdings owns substantially all operating assets; the two registrants’ results are substantially the same.

Financial performance and position

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Total revenues	$5,721	$4,503	$15,658	$11,413
Net income	$1,220	$99	$1,991	$661
Net income attributable to Icahn Enterprises	$472	$84	$803	$390
Basic income per LP unit	$4.13	$0.75	$7.22	$3.70
Net cash from operating activities	—	$314	$1,368

Q3 total revenue included $1,201 of net investment gains, compared with an $81 loss in Q3 2012; investment activity was the principal driver of the sharp increase in earnings. Net sales fell to $4,181 from $4,519. For the nine-month periods, net investment gains were $1,551 versus $276. Consolidated net income includes substantial non-controlling interests: $748 in Q3 and $1,188 for the nine months of 2013.

At September 30, 2013, total assets were $31,781 (up from $24,556 at year-end 2012), total liabilities $19,134 (up from $14,783), and total equity $12,647 (up from $9,773). Investments rose to $12,275 from $5,491. Cash and cash equivalents were $3,274, with a further $1,430 in cash held at consolidated affiliated partnerships and restricted cash. Debt was $8,155, down from $8,548; due to brokers was $3,718, versus none at year-end. Long-term debt’s estimated fair value was approximately $8.3 billion.

Nine-month investing cash outflow was $790, including $785 of capital expenditures; financing cash inflow was $691. Cash and cash equivalents increased $203 from the beginning of the year. Cash flow from operations was affected by investment transactions and changes in securities-related receivables and payables. Cash interest paid was $438 for the nine months.

Margins varied significantly by business. Automotive’s Q3 gross margin was $254, or 15% of sales, versus $212, or 13%, a year earlier. Energy petroleum refining margin adjusted for FIFO effects fell to $8.21 per barrel in Q3 from $33.44. Metals reported gross losses of $3 in Q3 and $12 for the nine months. Consolidated margin measures are less informative because total revenue includes investment gains.

Material changes and business developments

The Investment Funds returned 18.4% for Q3 and 26.3% for the first nine months of 2013, versus negative 1.2% and positive 5.0%, respectively, in the comparable 2012 periods. Long equity positions drove gains; short positions and market hedges detracted as markets rose.
Energy results benefited from the full-year inclusion of CVR, acquired May 4, 2012, so nine-month comparisons are not like-for-like. Q3 petroleum sales and margins were pressured by an approximately 55-day FCCU outage at Coffeyville, lower product prices and higher RIN costs.
Federal-Mogul’s rights offering raised $500; Icahn Enterprises invested $434 and increased its ownership to approximately 80.7%. The partnership also issued units in two offerings, generating $311 net proceeds, and issued $500 principal amount of 6% notes due 2020, generating $493 of proceeds.
The $600 million variable-rate convertible notes matured and were repaid in August. CVR redeemed its second-lien notes using proceeds from the CVR Refining IPO. ARI redeemed its remaining $175 of senior notes and increased borrowing under its railcar term loan.
Quarterly distributions were $1.25 per unit for Q3, with holders able to elect cash or additional units. The nine-month declared distribution was $3.25 per unit. Icahn Enterprises reported 113.9 million depositary units outstanding as of November 1, 2013.

Outlook, risks and contingencies

CVR estimated 2013 petroleum-business RIN costs of approximately $175–$190, after recognizing $155 for the first nine months. RIN prices were volatile; the Wynnewood refinery sought hardship relief for 2013 and 2014. Management warned that availability, prices and compliance penalties could materially affect Energy results.
CVR estimated 2013 capital spending of $238–$273 and stated that existing cash, operating cash flow and available facilities were expected to cover anticipated needs for at least twelve months, subject to operating and market conditions.
Federal-Mogul’s restructuring plan, expected to run from 2013 to 2015, carries estimated total costs of $79. Management was completing the Automotive goodwill impairment test; any resulting charge would be recorded in Q4. Energy goodwill impairment testing found fair value above carrying value by 37% for Petroleum and 18% for Fertilizer.
Railcar management described tank-car demand as strong and hopper-car inquiries as improving, but cautioned that demand and orders may not follow industry trends. A 2,750-car plastic-pellet hopper order was accepted in October.
Effective October 2, the partnership acquired a 75% interest in a newly capitalized American Railcar Leasing entity through a related-party transaction. The entity was expected to incur additional debt of approximately $381; the filing subsequently identified significant leverage and refinancing, interest-rate and covenant risks.
Potential exposures include environmental remediation, regulatory compliance and litigation. Federal-Mogul estimated reasonably possible environmental losses of about $45 beyond its recorded liability. Federal-Mogul and ACF pension plans had an estimated combined $703 underfunding if voluntarily terminated; Icahn Enterprises may have controlled-group exposure, and the Starfire indemnity does not cover Federal-Mogul’s own unfunded termination liability.
Other notable matters include pending fee suits against CVR, refinery environmental and safety proceedings, a PSC Metals Clean Water Act citizen suit with no estimable loss range, and regulatory approvals required for Tropicana’s proposed $260 St. Louis casino acquisition. Management stated debt covenants were met at September 30.

Important facts for investors to verify

How much of Q3 earnings growth reflects recurring operating performance versus investment gains, and how investment returns and associated non-controlling interests affect Icahn Enterprises’ attributable earnings.
CVR’s refining margins, outage recovery, RIN expenses and any hardship relief; compare Energy results with care because CVR was consolidated only from May 4, 2012 in the prior-year period.
Liquidity available to the Holding Company versus cash held in subsidiaries, affiliated partnerships or restricted accounts; also review broker balances, debt maturities, covenants and subsidiary distribution restrictions.
The terms, leverage and related-party economics of the New ARL transaction, including expected debt and subsequent consolidation treatment.
Potential pension, environmental, tax, litigation and regulatory exposures, including the extent of the Starfire indemnity and whether recorded reserves prove adequate.
Whether the $1.25-per-unit distribution remains sustainable and the extent to which holders elect cash versus units.