International Coal Group, Inc. Q4 2008 Earnings Call Transcript

International Coal Group, Inc. (ICO)

Q4 2008 Earnings Call Transcript

February 12, 2009 11:00 am ET

Executives

Roger Nicholson – SVP, Secretary and General Counsel

Ben Hatfield – President & CEO

Brad Harris – SVP & CFO

Mike Hardesty – SVP, Sales and Marketing

Analysts

Shneur Gershuni – UBS

Luther Lu – FBR Capital Markets

Brad Levy [ph] – Jefferies

John Bridges – J.P. Morgan

Michael Dudas – Jeffries

Dave Wilson – Morgan Stanley

Presentation

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter International Coal Group Incorporated earnings conference call. My name is Lisa and I will be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator instructions)

I would now like to turn the call over to Mr. Roger Nicholson. Please proceed.

Roger Nicholson

Thank you. Good morning. Welcome to International Coal Group’s fourth quarter 2008 earnings conference call. I am Roger Nicholson, Senior Vice President, Secretary and General Counsel of International Coal Group. We released our 2008 fourth quarter earnings report yesterday after the market closed. With me on the call this morning are Ben Hatfield, President & CEO of International Coal Group; Brad Harris, Senior Vice President, CFO, and Treasurer; Mike Hardesty, Senior Vice President of Sales & Marketing; and Ira Gamm, Vice President, Investor and Public Relations.

Before we get started, please let me remind you that various remarks that we may make on this call concerning future expectations, plans and prospects for the company constitute forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s views and assumptions regarding future events in business performance as of the time the statements were made. Because these forward looking statements are subject to various risks and uncertainties, actual results may differ materially from those implied.

Factors that could cause actual results to differ materially are contained in our filings from time to time with the Securities and Exchange Commission and are also contained in our press release dated February 11, 2009. Non-GAAP financial measures will also be discussed. You will find a reconciliation of the differences between the non-GAAP financial measure and the most directly comparable GAAP financial measure at the end of our press release, a copy of which has been posted on our website.

At this time, I’d like to turn the call over to Ben Hatfield for his opening remarks.

Ben Hatfield

Thank you for joining us this morning. The fourth quarter of 2008 was a very challenging time for the coal industry. The ongoing financial and economic crisis touched virtually every sector of the US economy, including our customers in the steel and electric utility industries.

Many steel producers suspended metallurgical coal shipments in the fourth quarter as our orders collapsed, while electric utilities drastically curtailed spot market purchases due to reduced demand.

Fourth-quarter revenues were sharply reduced from the third quarter by the forced deferral of higher-priced metallurgical shipments and the loss of spot market sales for thermal coal. As a result, our fourth-quarter sales consisted primarily of lower-priced pre-2008 contracts.

Otherwise our fourth-quarter operating performance was actually somewhat stronger than third quarter’s as production cost improved despite an 8% reduction in coal shipments. We believe the missed shipments of metallurgical coal that affected the fourth quarter are issues of timing and not lost sales. We are working closely with our customers to develop a mutually agreeable schedule for shipping contracted metallurgical orders that recognizes their constraints of reduced near-term demand.

It is anticipated that all delayed met shipments will be rescheduled for future delivery. Most importantly, even in the face of one of the worst business environments we have ever seen, we still expect our 2009 financial performance to be significantly improved. Our positive outlook is based on several factors.

First of all, approximately 92% of our planned shipments for 2009 are committed in price at substantially higher prices than in 2008. Our cautious sales strategy leaves us well positioned for the market downturn. We have minimal exposure to the spot market in the first half of 2009 and relatively modest market risk in metallurgical coal for the entire year.

Secondly, we promptly adjusted our production in response to slowing demand by idling high-cost operations in Eastern Kentucky. Many of the workers, who otherwise would have been laid off, were relocated to vacant positions at lower-cost mines. Therefore, we were able to quickly rationalize production, while retaining most of the workforce we worked so diligently to build.

Thirdly, we expect that current economic conditions will reduce the inflationary pressures that drove up labor and commodity costs in 2008. This should also lead to reduced labor turnover and enhanced ability to retain experienced miners, both key factors in improving productivity.

And finally, we have dramatically reduced our capital spending budget and delayed production expansion plans in response to the weaker economic outlook. At the same time, we will continue critical work on mine permit approvals and exploration in order to position ourselves for growth when the economy rebounds.

We remain positive about the long-term outlook for coal, both metallurgical and thermal, and are cautiously optimistic that global economic stimulus efforts now being developed will have a favorable impact on coal demand. However, we are anticipating the overall coal consumption by utilities will decline in 2009 as a result of weaker electricity demand and some instances of fuel switching driven by depressed natural gas prices.

On the supply side of the market equation, we expect Eastern coal production to be significantly lower in 2009. The key constraints will include, mine permitting delays, increased regulatory oversight, difficult geology, and lack of access to capital. Additionally, if coal prices remain low, we believe coal producers will continue to rebalance supply by shutting in high-cost production.

We expect the result of tightening of Eastern coal suppliers to set the stage for price recovery once demand returns to normalized levels.

At this time, I like to turn the call over to Brad Harris, our chief financial officer, to discuss our fourth-quarter results.

Brad Harris

Thanks, Ben. In the fourth quarter of 2008, ICG reported total revenues of $257.7 million including $236.3 million attributable to coal sales of 4.4 million tons. This constitutes a 26% increase over fourth quarter 2007 total revenues of $205 million of which $178.6 million was attributable to coal sales of 4.4 million tons.

For the full year 2008, revenues were $1.1 billion compared to $849.2 million in 2007, an increase of 29%.

We reported adjusted EBITDA of $12.5 million for the fourth quarter of 2008 compared to adjusted EBITDA of $1.2 million for the fourth quarter of 2007.

For the full year 2008, adjusted EBITDA was $127.2 million compared to $59.1 million for 2007.

For the fourth quarter of 2008, we reported a net loss of $37 million or a net loss of $0.24 per share on a diluted basis compared to a net loss of $127.4 million or a net loss of $0.84 per share on a diluted basis for the same period in 2007.

The company's 2008 and 2007 fourth-quarter results include non-cash charges totaling $37.4 million and $170.4 million respectively related to the impairment of goodwill and non-recoverable mine development costs.

The 2008 charges consist of a $7.2 million charge for non-recoverable mining development costs related to the Sago mine closing announced in December, and a write-off of $30.2 million in goodwill related to our ADDCAR subsidiary.

As of year end, the company does not have any goodwill assets remaining on its balance sheet. Excluding the non-cash impairment charges, the company would have reported fourth-quarter net losses of $13.1 million in 2008 and $18.2 in 2007.

For the full year 2008, we reported a net loss of $24.7 million or a net loss of $0.16 per share on a diluted basis, versus a net loss of $147.0 million or a net loss of $0.97 per share on a diluted basis in 2007.

In addition to the previously discussed impairment charges, the company's 2008 and 2007 full year results include net gains on sales of assets including $32.5 million and $38.7 million, respectively, including a $21.6 million non-cash gain in 2008 related to an exchange of Eastern Kentucky coal reserves.

Average coal sales revenue per ton for the fourth quarter was $53.56 compared to $40.61 per ton for the same period in 2007. While cost per ton sold was $49.05 for the fourth quarter versus $39.64 per ton for the same period in 2007.

Depreciation, depletion and amortization totaled $25.2 million for the fourth quarter of 2008 compared the $20.5 million for the fourth quarter of 2007. Corporate SG&A for the fourth quarter was $11.1 million compared to the $7.5 million for the same period last year. SG&A expense included a $1.5 million reserve of pre-petition receivables related to two recent bankruptcies, CDX Gas, a coalbed methane developer; and Miller Brothers, a customer of our ADDCAR subsidiary.

At December 31, 2008, total debt was $455 million consisting primarily of $175 million of 10.25% senior notes, and $225 million of 9% convertible senior notes. Our total debt to capitalization ratio was 48% at the end of the fourth quarter, while our debt to market capitalization ratio was 56%.

Total assets for the company were $1.3 million as of December 31, 2008, up slightly from the prior year end. Capital spending for the fourth quarter totaled $61.4 million of which 96% related to support of existing mining operations. The remainder was primarily permitting costs for future development.

We remain focused on strengthening our liquidity and positioning ICG for strong performance in 2009 in light of near-term market conditions. We have significantly reduced our 2009 projected capital expenditures and now expect to spend approximately $100 million.

At the end of the fourth quarter, we had $63.9 million in cash. Our borrowing capacity under our $100 million credit facility as of December 31st was $24.6 million and we have $73.6 million in letters of credit outstanding. We are currently in compliance with all debt covenants.

In 2009, our debt covenants tightened immediately and dramatically. Our maximum leveraged ratio decreases from 5.5 times to 4 times, and our minimum interest coverage ratio increases from 2 times to 3.5 times. Additionally, new accounting rules become effective on January 1st that requires increased income expense recognition on our 9% convertible notes.

Even after taking these accounting changes into consideration, we still expect to be in compliance at the end of 2009. However, we believe there is risk of non-compliance at the end of the first and second quarters. Accordingly, we have already met with our Bank group and have presented a proposal for their consideration. The requested amendment relates only to 2009, the covenants for 2010 and beyond are not expected to change. We expect to resolve this issue successfully within the next few weeks.

At this time, I like to turn the call back over to Ben.

Ben Hatfield

Thank you Brad. I would now like to provide an update on key developments in the fourth quarter. We responded to weakening coal pricing by idling 600,000 tons of high-cost production in Eastern Kentucky in early 2009. This production included an underground mine at our Flint Ridge complex in Breathitt County and a surface mine loader spread at the Hazard complex. We will consider further production cuts later in the year if markets remain soft.

We are delaying the addition of the third and final production section at the Beckley complex until demand for metallurgical coal improves. The complex produces premium low-volatile metallurgical coal. This delay will lower planned production by 300,000 tons in 2009. With this adjustment, Beckley's production is 100% contracted.

Construction work on the Tygart No. 1 mining complex in Taylor County, West Virginia, remains suspended by West Virginia Surface Mine Board order. A permit modification that addresses the board’s technical concerns is now under review by the West Virginia DEP. Although we are making every effort to resolve the permit issue, we do not plan to resume construction on the Tygart complex until market conditions recover sufficiently to justify the capital investment.

Turning now to our committed sales for the next two years, for 2009, the company's committed and priced sales are approximately 19.3 million tons or 92% of planned shipments. Currently priced volume for 2009 averages $61.00 per ton, excluding freight and handling expenses.

For 2010, committed and priced sales are approximately 10.5 million tons, or about 51% of projected shipments. Currently priced volume for 2010 averages $60.00 per ton, excluding freight and handling expenses.

Focusing now on our outlook, we have updated our previous guidance for 2009 and 2010 to reflect the current economic slowdown. For full year 2009, we expect to sell approximately 20.5 million to 21.3 million tons of coal. Coal production for the year is expected to be approximately 19.5 million to 20.3 million tons.

We project the average selling price for 2009 to be in the range of $61.50 to $63.50 per ton. The projected average cost per ton sold for 2009 is $51.00 to $53.00 per ton, excluding selling, general and administrative expenses.

For 2010, we expect to sell 20.0 million to 21.0 million tons of coal. Coal production for 2010 is expected to be 19.5 million to 20.5 million tons. Due to the high degree of market uncertainty, we are not providing revenue or cost guidance for 2010 at this time.

In summary, we believe ICG is well positioned to achieve strong financial results in 2009. We remain focused on strengthening our liquidity and cost position. We are continuing aggressive efforts to curtail high-cost production and reduce capital spending. We believe these actions will have a positive impact in 2009.

At this time, I will open the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Shneur Gershuni with UBS. Please proceed.

Shneur Gershuni – UBS

Hi, good morning guys.

Ben Hatfield

Good morning.

Shneur Gershuni – UBS

I guess a couple of quick questions. You sort of talked about the covenant issues this morning, just to clarify you communicated with the bank group that you haven't actually gotten a waiver at this point right now?

Ben Hatfield

That is correct. We have a draft amendment which will be – actually it will be circulated today. We have had presentations with the bank, but it has not been officially approved as of yet.

Shneur Gershuni – UBS

Okay, but I mean – there is a general understanding and so forth or you are not even at that stage yet?

Brad Harris

Looking at the terms, they have all been presented to the banks. That is correct.

Shneur Gershuni – UBS

Okay. A second question I had is you are looking at shutting down the – your closing in Sago and so forth, in terms of the cash – related to actually shutting it down and so forth, is that part of your CapEx assumptions or is that going to run through the income statement on the cost side on your general collaborations cost?

Ben Hatfield

There's not a whole lot of costs related to that in the reserve fully included the remaining cost to extract the remaining equipment and things that were in the mines that has fully been provided for in the income statement already.

Shneur Gershuni – UBS

But what I'm saying is that is part of the – that is kind of run through on the cost side. It is not going to – there is nothing on. The $100 million for CapEx is not related at all to Sago then?

Ben Hatfield

Does not include anything related to Sago. That is correct.

Brad Harris

There is really no connection there. It is actually part of our reclamation liability, which essentially is mine closure cost we have in accrual for us. Essentially wrap up of depleted coal mines. So that has already been booked, if you will, and doesn't impact our CapEx.

Shneur Gershuni – UBS

Okay, perfect. In the past you have talked about, I believe it was at the Vindex operations, about negotiating for rail load out and so forth to help bring down some costs there and what not. Has there been any development with respect to that?

Ben Hatfield

We continue to have discussions with our key customer in that area but we have actually since that time seemed pretty significant performance improvement. We invested significantly in capital there during 2008 to improve mine performance and we are seeing a pretty dramatic improvement in cost. And so that doesn't take the pressure away of the legacy contract but it certainly gave us an overall improvement in performance. And so in that context, we are continuing to have discussions with the customer about usually acceptable alternatives that address their needs and ours and that are an ongoing dialogue. Nothing resolved at this point.

Shneur Gershuni – UBS

Well I guess it is the capital that you have deployed there so far is the primary reason why we saw some big improvements in margin in those areas as well or was that related to something else?

Mike Hardesty

This is Mike. Two things have happened. One during 2008, we were able to move quite a bit of our incremental production to the metallurgical market. Secondly, while that contract is still well below market, it does have an indexing feature that has responded quite well over the last 12 to 15 months. So it is not near as negative as it was, and so that's been a part of the improvement.

Shneur Gershuni – UBS

Okay. And just last two small questions, the new shovel that was purchased last year, is that part of the idled equipment or is that continuing to go on the other stuff that has been – and something has been idle?

Ben Hatfield

No, the new shovel spread that we purchased for the Hazard complex in fourth quarter is being deployed, actually erected on site, tracks being assembled as we speak. So that is part of our 2009 production outlook, and indeed it gives us an opportunity we believe to rationalize some of the higher cost units and push forward with the higher productivity shovel production. That is part of our 2009 active production plan.

Shneur Gershuni – UBS

And one last question just at any of your operations right now, are you currently running any Saturday shifts or any overtime at all, or is there an opportunity there to rationalize with some cost on that at all over the near future?

Ben Hatfield

We are certainly focused on that. It is a good question, but generally speaking we have a mixed bag of production schedules. Some of our operations are on seven-day rotating schedules and so they work right on through the weekend. Some reserve the weekends for maintenance efforts, so we're certainly monitoring that kind of extra production opportunity to be sure that we are only running what we have a good market opportunity to service. But just as an example, in Illinois for instance, we're not at all market constrained at this point. We have strong orders and we are actually running them on Saturdays because we need the extra tons for sale. So the answer is different depending on which complex you are focused on, but to your point, yes, we are closely monitoring those overtime costs to make sure that we don't generate extra production that just becomes spot market risk.

Shneur Gershuni – UBS

Great, thank you very much.

Operator

And your next question comes from the line of Luther Lu with FBR Capital Markets. Please proceed.

Ben Hatfield

Good morning, Luther.

Luther Lu – FBR Capital Markets

Hi, good morning. Can you give us – on the cost side, can you give us your hedging on the diesels and how you will control the cost this year?

Ben Hatfield

Certainly. I will address diesel first. We're anticipating significant improvements in diesel cost 2009 versus 2008. We have a hedging program in place that is locked in between 80% and 85% of our total diesel requirements over the entire year. Again obviously as most do layering in those contracts as the price started to fall, if you try to convert our diesel price to the kind of a crude equivalent, we are somewhere in the $80 to $85 crude barrel range on those hedges. So it is not the bottom of the market but it is a huge improvement over where we were in 2008. So there is a significant improvement in our diesel cost year over year.

On the other commodities, we haven't really pushed it into the numbers yet, but we're anticipating and seeing significant relief on things like steel components, ammonium nitrate, killion, explosive products that we use at our surface mines, that one is heavily influenced by both ammonium, by both nitrogen and natural gas. So that is moving favorably. So there are several commodities that we believe are moving favorably to allow cost improvement year over year and that's one of the certainly the few advantages that coal industry enjoys in a market downturn.

Luther Lu – FBR Capital Markets

Okay. And on your realization price guidance from yesterday, if I do a rough math, you sort of imply a realization of around $85 to $90 range, is that what you guys are hearing on the marketplace for metallurgical coal?

Ben Hatfield

Are you using that calculation on the top end?

Luther Lu – FBR Capital Markets

Yes.

Ben Hatfield

That reflects something that we would have some improvement and we have a component of metallurgical coal in that assumption. I think if you calculate it off the bottom end of the range, the assumption is much more conservative.

Luther Lu – FBR Capital Markets

Okay. So you believe there is a conservative estimate for the kind of quality you have?

Ben Hatfield

I would steer you towards the midpoint based on today's outlook.

Luther Lu – FBR Capital Markets

Okay, got you. All right, thank you very much.

Operator

And your next question comes from the line of Brad Levy [ph] with Jefferies. Please proceed.

Brad Levy – Jefferies

Hi guys. Sort of taking the 100 million of CapEx, can you divide that into sort of rough apportionment, how much of it is maintenance, and sort of what are some of the other projects in it?

Mike Hardesty

Definitely the bulk of it will be maintenance. We're probably closer to that 8% in the maintenance range for that or even higher, I would suggest.

Brad Levy – Jefferies

And then what are the other parts, what is the 20%?

Ben Hatfield

While we do have some ongoing costs associated with Tygart to push forward with permitting and similarly at Jennie Creek, we have to move forward with the permitting process, and that also requires some drilling and exploration. So there is kind of mixture of costs that go into that last component. But there are no new development costs, no new mining complexes being developed as such at all in 2009. By far the bulk of the 100 million is dedicated to our existing complexes, at new developments. We are simply moving forward with permitting and exploration requirements.

Brad Levy – Jefferies

All right. And then if you can help us a little bit modeling by quarter, you have given good information for the year, is there any equipment moves or anything along those lines that are planned in any particular quarter? And then as you look at your average cost and average price per quarter, is there a general upward trend or is it roughly flat, just if you can talk a little bit about the quarterly guidance in rough terms for 2009?

Ben Hatfield

In very rough terms, generally the revenue position ramps up through the course of the year, primarily because the first quarter is most heavily impacted by carry over business, if you will. 2008 tons that didn't get satisfied, 2008 contracts or pre-2008 contracts that didn’t get satisfied in the last year, and we have to carry those tons forward and service them. So first quarter is going to be by far the weakest of the four quarters, but we will ramp up consistently from that forward. And the other factor that strengthened as you go forward, of course, is we have some late seasons shippers that take metallurgical coal on a April to December kind of schedule, that take virtually nothing in the first quarter. So that is another factor that builds revenue going forward. So first quarter is the lowest of the four quarters and then things build favorably from there on.

Luther Lu – FBR Capital Markets

And then planned outages or anything like that?

Ben Hatfield

We don't have any large-scale planned outages. That is more unique generally to long haul operations and things of that nature. We do have some production that kicks in at places that have already been constructed and completed like our Sentinel operation, it is building up production and running very well to this point. So we do have some production gains that also strengthens our performance in the second, third and fourth quarter.

Luther Lu – FBR Capital Markets

And then based on kind of the new guidance, what is rough split between steam and met in 2009, and what are you seeing for what little volume you are doing in that in terms of the spot market price right now, for both high volume and lower volume?

Ben Hatfield

I'll address the quantity and then I'll ask Mike to talk a little about price. In very round numbers, our total met tons, as we are currently forecasting in 2009, only around 1.5 million. And all but about 400,000 tons of that is already contracted and priced. That 400,000 tons could easily go down 200 or up 200 depending on where we see the stronger market opportunity, because we have coal that goes both directions, particularly in the northern Appalachian region. We can push it to the utility market, push for higher yield, and still make an attractive margin, or we may lose some of it to the met market if opportunities there are strengthening. So we have some flexibility on which market we go to with part of that tonnage and that is why the met portion is somewhat of a range rather than a specific number. Does that address your question?

Luther Lu – FBR Capital Markets

Just wanted to also get the pricing info.

Ben Hatfield

We don't have any major discussions going on right now, but frankly I think the whole industry is searching for that price point. I have seen quotes from 130 to 170, it is my personal belief that that number has to be at least 150 to provide adequate returns to the US domestic producers, which should put you back about 110 to 120 at the mine depending on your freight rate situation.

Luther Lu – FBR Capital Markets

Thanks much guys.

Operator

And your next question comes from the line of John Bridges with J.P. Morgan. Please proceed.

John Bridges – J.P. Morgan

Good morning, Brad, everybody.

Brad Harris

Good morning, John.

John Bridges – J.P. Morgan

Just a few tidying up questions, you mentioned your pre-tax as a value of the write downs, do you have a post-tax number for us to reconcile the numbers?

Brad Harris

The tax rate to apply to those breakdowns is probably about 38%. I don't have that calculation done, but if you apply a 38 % rate to those numbers, that would get you there.

John Bridges – J.P. Morgan

Okay. And how much met did you do in the fourth quarter?

Ben Hatfield

It's a very low number. I can count on my head about 13 trains that moved out of the fourth quarter that were planned to move at very attractive pricing. Mike, do you have an estimate about what the met tons was in the fourth quarter?

Mike Hardesty

We lost a little over hundred thousand – I would say our fourth quarter shipments where 200,000 tons or less.

John Bridges – J.P. Morgan

Okay. And then finally there was an increase of 25 million in your debt on the balance sheet with no obvious showing of that in the cash flow statement. Could you clarify that for us?

Brad Harris

We acquired several pieces of equipment through Caterpillar and they were financed on our line of credit facility with Cat, so that is part of the increase. If you recall, we had talked about the 240 ton trucks we were getting for Hazard in addition with that shovel spread expansion. Two of those tracks – we acquired all five trucks towards the year end, but two of them had the financing in place, and that's the piece of it. And then on an annual basis, we do a program of financing our insurance premium, just over a 12 month period, and that had just been renewed, so that was a piece of it. So those three factors are contributing to that increase.

John Bridges – J.P. Morgan

Okay that's great. Best of luck, guys.

Brad Harris

Thank you.

Operator

(Operator instructions). And your next question comes from the line of Michael Dudas with Jeffries. Please proceed.

Michael Dudas – Jeffries

Good morning, gentlemen.

Ben Hatfield

Good morning, Mike.

Michael Dudas – Jeffries

Ben, you have been in the Central Appalachian coal mining business for a long time, won’t say how long, could you – you have made some very difficult, tough decisions in 2008 relative to your capital allocation production et cetera, can you share with us maybe your observation of how difficult it is for less well capitalized small producers, what they are facing in the market, not only because of high ratios or of difficult underground geology, and of course the permitting for decisions that are coming up soon. You did mention in your prepared remarks lower ‘09 output versus ‘08, can you maybe give a little bit more color relative to that analysis?

Ben Hatfield

Sure. I mean in part I think we are very fortunate in the timing in that we began building our complex, our additional complex capacity three years ago, and we are now in a position, particularly during 2009, to get the benefits from it. We invested heavily in expanding complexes and creating new ones at places like Beckley and Sentinel over the last three years, and we really just now in 2009 beginning to see the production come about. And fortunately for us, 92% of that is locked up favorable pricing, and so we have minimal exposure to spot market. So our timing of this with respect to when we started out our growth effort and our ability now to kind of step back from the growth program and kind of harvest the benefits of our investment, and that is something we're certainly look forward in 2009.

But any one – particularly a small producer that is trying to create new production right now has challenges that are far tougher even we would have envisioned in 2005, 2006, when we started down this road. Corps of Engineers permit used to be a matter of few months, and now it has turned into what easily two to three year process. It is the approval process is locked up in litigation and frankly even the federal government has had little success at resolving some of the challenges, and it just continues to be a burden for the system and hence a constriction on the progress. So just the ability to get Corps of Engineers permit on valley fields is a huge hindrance to any kind of production growth effort, small producer or large producer.

But even more so, with small producers, because they are constrained on the capital end as well, bonding capacity has become a seriously limiting issue, very few companies remaining in the bonding business, and all of them generally determined over recent quarters, particularly to try to reduce their exposure to that sector. So bonds are tougher to get, permits take longer to get, and even something as straightforward as an equipment lease, we have learnt over the last two quarters, have gotten snared up in this global economic crisis and tightening credit availability by the banks, so even that process has become incredibly cumbersome unless you're pretty a substantial company.

So I would say it is tougher now to grow production than it has been in my entire career and I have been in this business for something like 27 or 28 years. So I think the ability to build supply is tougher and more constrained than it ever has been, and production is up and running today. The cost flow has more far higher than anyone would have envisioned. The general impact of the MSHA regulatory step up and MSHA’s general delay and intense scrutiny on new mine plans has raised the cost pretty dramatically for underground operations.

And so if you put all the tough trade companies on a chart of their quarterly cost growth over the last two years, I think it would shock virtually everyone to see how we have generally moved up over the community quarter over quarter, getting our cost more pushed up by these various outside pressures. So all that is to say that the circumstances have changed dramatically for new entrants to the business, I think the supply is going to be more constrained than it has ever has been and that generally is going to require that things come into balance pretty quickly.

When you have the coal market dropping to the $55 range on prop sales that we have seen recently in Central Appalachia, that is probably $10 or more below the cost floor of the third of the Central App production. So there is a pretty dramatic impact there on any one that is trying to grow business or stay in business, and I think that is going to come about through essentially the normal resolution of high cost production getting shut in and continuing consolidation among those that have locked in contracts, particularly on the thermal side, and can take advantage of what they have built on over the last few years.

Michael Dudas – Jeffries

Well said. Thanks Ben. Just a follow up on that, so therefore given that the lack of capital and some of the issues that you mentioned which started in the second half of 2008, this probably could really limit say two to three years out any significant contribution that Central App could provide to the marketplace?

Ben Hatfield

Well, certainly. I think 2010 you have to see a pretty significant market improvement because again all the factors I just described, they are still in play, and in 2009, you have heard virtually every US coal company step up and say, they are cutting expansion plans, they're constraining capital, they are going to build liquidity, and that is going to be very much a factor on the market outlook in 2010, 2011, and their interest, if you will, in locking in lower range processes. So I think you are going to see a lot of upward pressure on the market 2010, 2011, as a result of that.

Michael Dudas – Jeffries

And just one final question maybe for Mike Hardesty, maybe in some of the discussions you have heard some of your utility customers, what is their sense of how they are looking at the marketplace, are there really talking of the high inventory gas levels to you, or are they starting to maybe think a little bit more longer term given what Ben has kind of put forth?

Mike Hardesty

On the near term, certainly they are talking about the gas and trying to pressure prices down over. But the feedback we have had on our initial two solicitation responses in January is actually encouraging. We submitted bids by our evaluation for 2010 and 2011 that we $20 above index. Our feedback was – we didn't get any business, but the feedback we got is they are going to buy coal that was probably $10 or $11 above index. From our strategy, we think it is premature to sell coal in the mid to high 60s, given the discussions Ben just went through on production pressures and the risk of inflation down the road from all the free monetary policy.

Michael Dudas – Jeffries

Well said, Mike. Thanks to you both.

Ben Hatfield

Key point there, Mike. As you gathered from Mike's – from his comments, even producers that are pretty hungry for business right now, fortunately we are not in the first half of the year, but even those hungry for business are bidding at levels that are $10 plus above current index, so that is encouraging to us.

Michael Dudas – Jeffries

Sounds good. Thanks Ben. Thanks Mike.

Operator

And your next question comes from the line of Dave Wilson with Morgan Stanley. Please proceed.

Dave Wilson – Morgan Stanley

Hey guys. How are you? Let me preface this by saying I am a portfolio manager not an analyst, so I rely on the currency numbers. I have been a shareholder since the offering in the December 2005, so (inaudible) of bad investment, but you take the good with the bad. More concerning is that and I believe I ran through most of your competitors, you guys are probably the worst performer in your group since the time. And I know you can't control stock prices and there has been some modest insider buying recently but I believe the Street is telling you something, and just I am interested in your thoughts of what you think the Street’s concerns are? And the follow-up on that, how you might be able to rectify that?

Ben Hatfield

Well, this is Ben. It’s tough to address obviously because I don't begin to be – to represent myself for the next quarter and what’s driving stock prices because the pattern certainly challenges my ability of recent quarters. But in my view I think investors are looking for proof of ability to execute. We have been certainly rolling out a story of building new complexes and positioning ourselves for market improvement over the last few years. We have invested a lot of capital to get to this point. As I noted to one of the callers earlier, I think it is going to pay off in 2009, because we have a spent a lot of capital now, we are in position of generating operating cash, favorable operating cash in 2009 and subsequent years, and that's the position we have been chasing for a while.

So I think we are at the point where you can begin to see a positive impact, but certainly our share of investor's frustration that we have not been able to deliver for a variety of reasons on the outlook that we would have presented a few years ago. There has been a dramatic market volatility that I don't think anyone could have foreseen and you can’t foreseen (inaudible) that certainly set us back a little while ago. But I think we are demonstrating quarter after quarter growing strength in our operations, we are eliminating some of our problem children, if you will, and I think 2009 is going to be our best year yet, and looking forward to demonstrating that to our shareholders.

Dave Wilson – Morgan Stanley

Okay, fair enough. Thank you.

Operator

With no further questions in the queue, I would like to turn the call back over to the management.

Ben Hatfield

Thank you for your interest in ICG. We look forward to joining you again next quarter. Have a good day.

Operator

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect and have a great day.

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