Executives
Roger Nicholson - SVP, Secretary and General Counsel
Ben Hatfield - President and CEO
Brad Harris - SVP, CFO and Treasurer
Mike Hardesty - SVP, Sales and Marketing
Analysts
Michael Dudas - Jefferies
Jeff Kramer
Bruce Klein - Credit Suisse
Lawrence Jolin - Barclays Capital
Brett Levy - Jefferies & Company
Justine Fisher - Goldman Sachs
International Coal Group, Inc. (ICO) Q1 2009 Earnings Call April 30, 2009 11:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the first quarter 2009 International Coal Group, Incorporated earnings call. 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). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the call over to your host for today’s call, Mr. Roger Nicholson. Please proceed.
Roger Nicholson
Thank you. Welcome to International Coal Group’s first quarter 2009 earnings conference call. I’m Roger Nicholson, Senior Vice President, Secretary and General Counsel of the company. We released our 2009 first quarter earnings report yesterday after the market closed.
With me on the call this morning are Ben Hatfield, President and CEO of International Coal Group; Brad Harris, Senior Vice President, CFO and Treasurer; Mike Hardesty, Senior Vice President, Sales and 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 and 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 April 29, 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. We are pleased to report significantly improved first quarter of 2009 results despite some of the most difficult conditions we’ve ever seen for both coal markets and the general global economy. Adjusted EBITDA, net income, revenues and margin per ton sold, all increased compared to the first quarter of 2008.
This was accomplished despite much weaker than expected metallurgical shipments, especially for our higher priced contracts. First quarter metallurgical shipments were 200,000 tons and we only expect to ship approximately 1 million tons of metallurgical coal for the year.
Operating margins, which increased to $8.94 in the first quarter, benefited from favorably priced utility contracts that were layered in during 2008 as part of our disciplined hedging strategy. Margins were also enhanced by higher productivity and lower commodity pricing.
At key operations, such as Beckley and Sentinel, we saw a meaningful boost in productivity, driven by staffing improvements and a sharp drop in employee turnover. The fierce competition for skilled miners that we saw last year has diminished as a result of the economic slowdown. The key commodity costs reduction was diesel fuel, although we also experienced lower pricing for steel items and (inaudible).
Despite a challenging business environment, we expect our 2009 financial performance to be significantly improved for several reasons. In response to weak demand, we have significantly reduced planned production by selectively idling higher cost production units. As a result of those production adjustments, we are essentially fully contracted for 2009 at prices favorable to 2008.
Our flexibility to redirect some of our high volatile metallurgical quality coals to the Northern Appalachian utility market at higher yields and reasonable margins is serving us well, given the depressed steel industry demand. Non-cost performance has improved from prior forecasted levels thanks to a combination of reduced labor turnover and the previously noted curtailment of higher cost mines.
According to the Energy Information Administration, year-to-date production in Appalachian is down 7 million tons versus 2008, or nearly 6%. Total U.S. production was down 14 million tons, or 3%. However, recent data indicates the pace of production reductions has accelerated significantly during the second quarter. Our internal projections anticipate that total U.S. production for 2009 could decline by as much as 75 million to 100 million tons.
We further anticipate that the production cutbacks, coupled with increased regulatory oversight, mine permitting delays and lack of access to capital for smaller independent producers, will eventually tighten coal supplies, setting the stage for rapid price recovery once demand returns to more normal levels.
Thus, we believe the long-term outlook for coal remains favorable and we expect coal to be the mainstay of U.S. electrical generation for many years to come. Pending anti-coal climate change legislation, including the proposed cap-and-trade system, will have to be weighed against its extremely negative impact on energy costs, especially in a depressed economy.
The short-term outlook for coal is more difficult to discern. Demand for electricity is down sharply due to economic recession and displacement of coal by cheap natural gas. As a result, utility coal stockpiles are up significantly compared to the same time last year. Met coal demand is not expected to recover soon from the steep drop during the fourth quarter of 2008.
Steel producers were hit especially hard during the first quarter, as they struggled to maintain 40% capacity utilization. As a result, we expect only modest contracting activity for metallurgical coal in the first half of the year.
On the positive side, steel production seems to have found the bottom, and stimulus plans are being implemented on a global basis. In the near term, we will continue to aggressively manage coal production at our mines making further adjustments as markets dictate. We also plan to continue to maximize liquidity and protect margins by managing costs.
At this time, I’d like to turn the call over to Brad Harris, our Chief Financial Officer, to discuss our first quarter financial results.
Brad Harris
Thanks, Ben. In the first quarter of 2009, we reported total revenues of $305 million, including $273.8 million attributable to coal sales of 4.7 million tons. This constitutes a 21% increase over the first quarter of 2008 total revenues of $251.9 million, of which $226.6 million was attributable to coal sales of 4.9 million tons. We reported adjusted EBITDA of $44.5 million for the first quarter compared to adjusted EBITDA of $14.6 million for the first quarter of 2008.
Net income for the quarter was $3.7 million, or $0.02 per share on a diluted basis, compared to a net loss of $11.9 million, or a net loss of $0.08 per share on a diluted basis for the same period of 2008. Average coal sales revenue per ton for the first quarter was $58.51 compared to $46.72 per ton for the same period last year, while cost per ton sold was $49.57 in the quarter versus $43.05 per ton for the same period in 2008. Margins were $8.94 per ton for the quarter, an increase of $5.27 per ton over the same period last year.
During the quarter, the company terminated two coal supply contracts in response to customer requests. The company received one-time payments totaling $5.8 million to forego shipments that were otherwise scheduled to occur over the balance of the year.
Depreciation, depletion and amortization totaled $26.3 million for the first quarter of 2009, compared to $22 million for the first quarter of 2008. Corporate SG&A for the first quarter was $10.6 million, compared to $8.5 million for the same period last year. This increase is attributable to one-time professional fees and does not represent the step up in our expected run rate.
As of March 31, 2009 total debt was $446 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 46.6% at the end of the first quarter.
Total assets for the company were $1.4 billion as of March 31, 2009, up from $1.3 billion at the same time a year-ago. Capital spending for the first quarter totaled $17.6 million, essentially all of which was spent in support of existing mining operations. Capital expenditures are projected to be approximately 90 to $95 million for the year. We remain focused on strengthening our liquidity and positioning ICG for strong performance in 2009 in light of near-term market conditions.
At the end of the first quarter, we had $66 million in cash. Our borrowing capacity under our $100 million credit facility as of March 31 was $26.4 million and we have $73.6 million in letters of credit outstanding. We are in compliance with all of our debt covenants.
At this time, I’d like to turn the call back over to Ben.
Ben Hatfield
Thank you, Brad. Now I would like to provide an update on key developments in the first quarter. As Brad mentioned, during the quarter we terminated two coal supply contracts in response to customer requests. These settlements helped partially mitigate the impact of various other shipments scheduled to occur during the quarter that were delayed due to weak market conditions. We are working closely with several customers to reschedule delivery of delayed shipments.
In the first quarter, we idled approximately 400,000 tons of high-cost coal production in Eastern Kentucky through deep mine closures at our Flint Ridge and Raven complexes. In addition, we delayed the planned startup of a surface mine at the Hazard complex, which represents an additional 900,000 tons of production. These actions were part of our ongoing strategy to match lower cost production with committed sales.
Since early this year we have idled or delayed approximately 1.9 million annual tons of higher cost production. We will continue to closely monitor coal markets and adjust our production mix as necessary.
The U.S. Army Corps of Engineers recently reissued a Section 404 permit to our Hazard complex’s Thunder Ridge surface mine in Leslie County, Kentucky. You may recall that back in December of 2007 the Corps suspended the Thunder Ridge permit in order to conduct further technical review and ensure that the permit meets all regulatory requirements.
During the past 15 months we retained experts in various fields to review our mine plan and to conduct a watershed scale cumulative impact assessment to determine the real effect of mining on the Middle Fork of Kentucky River. We are pleased that the Corps has reinstated the 404 permit, and we intend to continue development of the Thunder Ridge surface mine.
Unfortunately, anti-mining activists that oppose this permit are expected to pursue further litigation. During the quarter, we completed shipments on a below-market legacy contract under which we delivered 550,000 tons of Central Appalachian coal per year priced in the low $30 range.
Turning now to our committed sales for the next two years. For 2009 committed and priced sales are approximately 19.5 million tons, or 99% of planned shipments. Currently priced 2009 volumes should average $60 per ton, excluding freight and handling expense.
For 2010, committed and priced sales are approximately 13.6 million tons, or about 72% of planned shipments, including 2.6 million tons subject to collared price adjustments. We expect the average price for these committed sales to be approximately $61.40 per ton, excluding freight and handling expenses.
An additional 1 million tons of 2010 planned shipments are committed, but pricing is subject to a competitive market reopener. We have excluded these tons from our average price per ton estimates.
We’ve updated our guidance to reflect modifications to our production mix and the global economic conditions affecting the coal market. For full year of 2009 we expect to sell approximately 19.3 million to 19.9 million tons, with an average selling price in the range of $59.50 to $60 per ton. Coal production for the year is expected to be approximately 18.5 million to 19.1 million tons, with an average cost in the range of $49.25 to $50.75 per ton, excluding selling and administrative expenses.
For 2010, we now expect to sell 18.5 million to 19.5 million tons of coal. 2010 coal production is expected to total 18 million to 19 million tons. We are well positioned to increase production beyond these levels if market demand improves. 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. Additionally, we have a solid contractual foundation in place for 2010. Our focus remains on strengthening our liquidity and improving our cost position. We believe these moves will have a positive impact in 2009 and beyond.
At this time, I’ll open the call to your questions.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Michael Dudas from Jefferies. Please proceed.
Michael Dudas - Jefferies
Ben, couple of questions. First, you touched on taking some of your high-vol coal into the Northern App market. What kind of premium are you getting to a normal typical Northern App, given the better yield? And how much of a discount from what you would have sold that product towards? And is that more of a kind of a near-term three, six-month or is there a term involved in that type of business?
Ben Hatfield
I’ll let Mike Hardesty speak to that specific.
Mike Hardesty
On the yield question, we’re probably seeing the benefit of about six to 7% on the plant yield for making a steam product versus a met product. One of the things we have, we have some flexibility on some of our Central App contracts to move them between Northern App and Central App. They’re lower quality, which gives us even more of a yield benefit. And where we idled mines in Central App, we transferred some volume up there to offset the missed met shipments.
Michael Dudas - Jefferies
Understood. Ben, first quarter Central App costs were up, I guess, $10 a ton. I know price is up 16. How much of that is royalty and maybe just some of the year-over-year issues?
Ben Hatfield
Year-over-year, obviously, I think the cost difference is about $6.50 a ton. But, as you well know, about 12 or 13% of every dollar in revenue goes directly to the cost line, so with $11 improvement in revenue, nearly a fifth or more of that cost increase is directly sales related. Other areas of increases, obviously, labor year-over-year is up, even though looking at 2009 and going forward, we expect labor rates to be very much flat and possibly even declining in some respects.
The year-over-year labor cost is up significantly because of the sharp wage and salary escalation during 2008. So that is one factor, and we’re, of course, in some respects going forward improving that with productivity step-ups at various operations.
The bigger factor, if you try to identify one single issue, it’s the labor costs year-over-year, that’s probably the biggest piece of that. And we have offsets also from commodity cost, somewhat improved on our diesel position year-over-year and it’s going to improve going forward in 2009.
So, overall, the cost increase isn’t as material as it may seem. If you actually compare it to the previous quarter, fourth quarter of 2008, and take out the sales related impact, cost actually improved.
Michael Dudas - Jefferies
Thank you. Final question. Ben, looking at your operational mix going forward, maybe you can just refresh us on Tunnel Ridge, what ended up being the delay in the operation because of the permit? How much capital and time was spent dealing with those issues relative to what you would have thought otherwise? And as you analyze your profile going forward, any material issues relative to permit renewals or opportunities to shift the mix around because of regulatory issues?
Ben Hatfield
Yeah. I believe you’re referencing our Thunder Ridge permit in --
Michael Dudas - Jefferies
Thunder Ridge, yeah, correct.
Ben Hatfield
Yeah. That’s been quite a challenge actually. It’s an existing operation that’s actually performed well for the Hazard complex. And all we’re essentially seeking to do is continue doing what we’re doing and have been doing there for several years. So it’s a continuation of existing production. And, of course, it was challenged after the Corps issued the permit, and it has certainly diverted a lot of management and technical attention to essentially defend what’s not really an extraordinary circumstance at all.
It’s just a continuation of existing operation. But we were very pleased to see the Corps’ reaction as they initially suspended the permit, again, with our accommodation and agreement that certainly a reasonable review is in order. We’ve cooperated in that effort and they’ve now reissued the permit with a clean bill of health.
So we expect to move the Thunder Ridge complex mining – or that operation mining that direction over the next few years. That will be a cost improvement because what we’ve essentially been forced to do over the last several quarters is essentially haul the Thunder Ridge material further to other valley fills to avoid going into this new permit area. So we’ve been operating under some adverse cost constraints there that I think certainly will improve as we move forward on to the new permitted area.
Michael Dudas - Jefferies
And about the rest of your operations?
Ben Hatfield
You mean with respect to permit issues?
Michael Dudas - Jefferies
Yes. Correct.
Ben Hatfield
Generally we’re in pretty good shape. We will have some constrictions certainly by mid-2010 at locations like our ICG Eastern operation in Webster County, West Virginia. There we’re certainly looking very closely at the need to get permit approvals done in a timely fashion.
In the short term, we’re in reasonably good shape. There is a few areas where we could certainly anticipate some cost improvements if we get more timely permit approval. But we’re being realistic in both our forecast and the conduct of our business that permit approvals are just going to take a longer time and we’ve tried to forecast our business requirements to meet that new timeline.
As an ongoing matter, I think the industry just has to deal with a new reality that there are going to be challenges to virtually every new permit that is issued. Environmental activists are using the courts to delay and influence regulatory changes. And so we just have to react to that as an ongoing piece of our business. At the end of the day, what it’s going to do is constrain supply. And that’s certainly going to generally lead us to price recovery.
So the overall industry, I think, will certainly feel the effect of these permit challenges. But at the end of the day it just becomes a supply constraint that we’ll have to manage through and will certainly favor those that have planned further ahead rather than those that tend to live day-to-day on permit approvals.
Operator
Your next question comes from the line of [Jeff Kramer]. Please proceed.
Jeff Kramer
It looks like most of the ‘09 production either idled or delayed is in Central App, Flint Ridge, Raven and Hazard. Can you comment on your Northern App operation? It looks like ‘09 guidance came down about five to seven a ton on the revenue side and cost per ton dropped significantly from the second half of last year. What’s driving this?
Ben Hatfield
Well, several things are driving the general margin improvement. We’re seeing better cost performance, particularly in the Northern App operations, as some of our developing operations have kind of found their pace and are strengthening output, and we’re certainly seeing a lot of improvement on the labor turnover side. So stronger productivity, better cost performance in the Northern App region.
Of course, the other piece of that, obviously as you referenced, is the revenue drop that makes it a little bit tougher in the bottom line [and it’s essentially big] the loss of met business or the anticipation that met demand is going to be weak.
So that moves a lot of the met tons, particularly at operations like Sentinel, over to the steam coal market, particularly the Northern App utility market, as Mike Hardesty was discussing earlier. We do get a significant yield improvement when we do that and we have some advantages in that regard. But that’s essentially the driver on the lower revenue and, of course, our reaction to improve costs.
Jeff Kramer
Okay. Do you think then, I guess, costs per ton will stay in that range then for the balance of the year at Northern App?
Ben Hatfield
We expect to have cost levels at that level or even somewhat improved, because we still have some projects that we’re trying to move forward that will I think strengthen performance. So we’re targeting better performance, frankly, than what we saw even in the first quarter.
Jeff Kramer
Okay, great. Last quarter, just kind of going back to last quarter, a couple of things you mentioned. You thought you’d be selling about 1.5 million tons of met coal this year and that first quarter would be the weakest quarter in terms of revenues. Do you still expect this to be the case?
Ben Hatfield
I think the first quarter still is the weakest quarter in terms of revenue. But certainly the difference between first quarter and future quarters has been diminished somewhat by the weakened metallurgical market. But there’s no question the first quarter had the burden of a lot of carryover business from 2008 that did depress revenue compared to the latter three quarters.
Jeff Kramer
Okay. I guess the 1.5 million that was expected to go to the met market. Is there kind of an updated number for that for the year?
Ben Hatfield
Yeah. For the year we’re now expecting about 1 million tons of met sales. We only shipped about 200,000 tons in first quarter, so we do expect the pace to improve somewhat. But we’re being pretty conservative in that regard. Again, it’s a tough thing to predict. We just don’t know how quickly the steel industry is going to find their base and begin to see some recovery and work down inventories.
So it may be a somewhat conservative prediction, but that’s our current outlook. And, of course, that puts a lot of the Sentinel type production into the utility market and, therefore, somewhat lower revenue expectation than we would’ve had a quarter ago.
Operator
Your next question comes from the line of Bruce Klein from Credit Suisse. Please proceed.
Bruce Klein - Credit Suisse
Hi. Good morning. I was trying to get some more color just on the CapEx and what’s normalized. And I’m wondering was there any productivity obviously was much better this quarter. Were you in a particularly sweet spot of where you’re mining and is that changed? Or do you think that’s sustainable, those kind of cost numbers you think are sustainable? And then directionally in 2010m I’m wondering what your view might be on the cost number.
Ben Hatfield
Well, again, first quarter was not in what I would regard as any kind of sweet spot with respect to productivity, but you do see certainly some improvement versus 2008. Some of the operations have had a lot of development challenges, particularly Sentinel, Beckley, and a lot of employee turnover issue. High employee turnover is just death to productivity improvements, as I’m sure you well understand.
So much of the improvement versus 2008 performance goes directly to productivity at operations that were ramping up. I would anticipate for the balance of 2009 productivity to be at or better than levels we saw in first quarter, in part because we’re essentially trimming our highest cost, weakest performers. Trimming out high cost, low productivity Central App production, as you saw us doing in March and very early April will generally improve cost performance on the average, going forward. And that continues to be our focus.
Bruce Klein - Credit Suisse
And then the CapEx question, just sort of normal or maintenance or…
Ben Hatfield
It’s nearly all maintenance at this point. We still expect to spend 90 to $95 million for the year, and virtually all of that is maintenance related except for a few million related to permitting costs associated with new operations, like our Tygart complex and even a smaller scale expansion. So generally we’re continuing, as we talked about last quarter, efforts to permit and get ready new production opportunities so that we’re fully able to react to market opportunities when they develop.
Bruce Klein - Credit Suisse
And on the mountain top surface mining issue and the EPA initiatives, I mean, you guys are exposed like lots of other guys. But what’s the best way you would sort of gauge or how would you recommend thinking about that issue in terms of measuring your permit approvals now versus the delays on a percentage basis? Or what’s the best way do you think to think about it in the next 18 months in terms of how much exposure risk you might have in terms of the permits?
Ben Hatfield
I would just have to be honest with you that that is just nearly impossible to predict at this point, because the answer just keeps changing with – we get relief in one respect from the administration and then it seems that EPA kind of steps the other direction with further constriction. So because of the mixed signals that we’re getting from the federal administration, frankly it’s just very hard to predict. But at the end of the day, what we do anticipate is that the permitting process is not going to be accelerated.
It’s not going to become more timely. We’re going to have to plan further ahead with all our permit requirements. And we’re going to see situations where some production is shut in simply because the next permit that they need to move to is going to continue to be challenged and perhaps not approved.
So I think speaking about it from an industry wide perspective, it’s supply constraint and it’s going to continue to be a significant supply constraint. It’s also going to be somewhat adverse on cost in some corners. But we feel that we’re in pretty good shape with respect to 2009. We do have a few operations we’re a little concerned about in mid-2010. But, overall, I think we’re as well positioned as anyone in the peer group with respect to where the impact is going to fall.
It’s ironically talked about largely as a mountain top mining kind of issue. But if you’ll note the language in the tools of prohibition that are being applied here, it’s actually going to have a very adverse effect, if implemented as described on even underground mining, because the anti-mining activists are essentially attacking valley fills, and even deep mining operations need valley fills for refuse disposal, for road construction, for portal development.
So that same tool that they’re chasing mountain top mining operations with is going to have an adverse effect on underground mining, if it’s not countered in some respect through negotiations. So the short answer is it’s kind of a wild card right now. It’s hard to predict.
Bruce Klein - Credit Suisse
Okay. Thanks. And my last question is, just your latest take in terms of the inventory overhang in the system and what does your crystal ball tell you when the inventory works down? And how do you sort of work or think about that in the context of what’s not priced out for 2010? When do you start to layer that in, in terms of contract pricing? Is it late ‘09 or do you wait until 2010? And what if the inventory overhangs are not abated by then?
Ben Hatfield
I think, I mean, essentially all the marketing teams can pretty much take their vacation during second quarter, because I think you’re going to see virtually nothing happening in the second quarter, because the pricing that you’re seeing reflected in these indices frankly is just unrealistically low.
I don’t think producers are going to make commitments at those levels, and indeed it’s fallen seven or $8 a ton since the beginning of this month. So that kind of decline obviously is just not supportable, not creditable from the standpoint of its connection with what true producer will sell to true consumers.
So I don’t believe the indices, first and foremost, and I think you’re going to see very little or no contracting activity in second quarter as a result of that distortion. We like our position of being about 72% committed for 2010. We normally target by fourth quarter of the year being in the 80 to 85% committed range, so we still have a lot of time to get there thanks to some timely commitments that were made last year.
So we’re going to take a hard look at perhaps securing new commitments in third quarter and early fourth quarter, but I think generally industry wide you can expect that we’re going to move more slowly toward boosting that contracted position than we would normally in previous years, because of what we believe is an aberration, if you will, in the current market outlook.
Operator
Your next question comes from the line of [Lawrence Jolin] from Barclays Capital. Please proceed.
Lawrence Jolin - Barclays Capital
Good morning. Brad, I was hoping you could help me with a housekeeping question real quick. I noticed that your debt declined 27 million on a sequential basis. Was that repayment of the equipment notes, the Caterpillar notes?
Ben Hatfield
We’ll let Brad Harris, our CFO, speak to that.
Brad Harris
The effective January 1 there was new accounting pronouncement that was out. There’s been a little bit of discussion and some circulars put around about that. But FSP APB 14-1 is the reference, but it had to do with changing the accounting for convertible notes. And what that pronouncement required is that you would restate your convertible note balance at a market level and effectively you would increase the interest rate for accounting purposes on those to what the interest rate would have been if that issuance did not have the convertible debt feature.
So what happens there is on a go-forward basis your interest expense increases, but the current debt balance on your financial statements decreases, effectively you’re booking a discount. So the balances that you’re comparing are the 12/31 balance that was in our Form 10-K, which was the pre-adjusted balance, if you will. And now after the restatement, those balances are included in the 10-Q, including restatement of last year’s balance.
So in effect what you’re seeing here is a combination of two things. The restatement of the balance, which reflected a $17 million discount, so that is the reduction in the debt balance you saw. And then we did, as we talked about in our last conference call, we purchased some large trucks at the end of last year that we paid for in cash and then refinanced about January 15. Again, we talked about on that last call, so there was actually some increase offsetting that discount reduction in the equipment notes. So it’s a combination of discount and some additional financing on equipment.
Operator
Your next question comes from the line of Brett Levy from Jefferies & Company. Please proceed.
Brett Levy - Jefferies & Company
Hey, guys. I know you guys have gotten waivers of, I believe, it’s the 3.5 times interest coverage tests for Q1 and Q2 and you said that you’d be able to make it for Q3 and Q4 and for the year, et cetera. Based on this revised guidance, it looks like you might be kind of cutting it close. Can you talk about kind of where you stand with respect to some of these waivers with your banks? Well, that’s the question.
Ben Hatfield
I think, the short answer is we’re very confident that we’ll be in compliance with our covenants over the balance of the year, and that’s been our focus, obviously, with that being the area of highest volatility with respect to revenue. As far as looking beyond that, it’s just too early to try to predict what 2010 revenues and costs are going to be, because there’re just too many things in the air at this point. But we feel very good about our position with respect to 2009.
Brett Levy - Jefferies & Company
And then to put a finer point on the whole, future of Tygart 1. [It says] you may not resume construction until 2011. I mean, is it possible you may not resume construction ever? And, I guess, what I’m asking is, kind of what’s the game plan? How are you going to appeal what? And why did you guys use 2011 as a possible resumption date?
Ben Hatfield
That’s a good question. The game plan, if you will, is to first get to a point of clarity and resolution on the permit delays. We’ve had a court action, a challenge, if you will, to the Tygart permit approval, and we’re working through some highly technical issues, frankly, that have twice received approval from all the regulators. But were subsequently challenged, and we’re back in that corner again.
We fully expect that permit to get approved, again because of the nature of the issue on that permit isn’t one of the nature of it being not a mineable area or not a viable project. It’s a fairly technical water treatment issue. So we expect to get that satisfied and our current prediction is that the Tygart permit’s going to be approved and available for development, available for restart of construction certainly before the end of 2009.
Now, the prediction we’re making internally right now is that certainly 2010 is going to be a period of recovery and growing market strength. But I’m not as confident yet that we would want to be negotiating long-term contracts on Tygart quality tons in 2010. So we essentially targeted 2011 as a window of, I think, much higher confidence that the market strength will be such that we will want to go into the marketplace with that quality of coal, selling both the met tons and the utility tons, what we think will be a much more attractive market.
So, if you will, it’s essentially our internal prediction of when we want to go out to the coal contracting parties, utility and the steel side, offering up those tons. Until then we’d rather keep our powder dry on the Tygart project because it’s an exceptionally attractive project, we think very favorable returns. It is a significant capital investment, overall project costs probably on the order of $270 million. We fully expect to develop it. But at this point our prediction is that we would rather be moving toward contracting those tons in 2011 rather than 2010.
Operator
Your next question comes from the line of Justine Fisher from Goldman Sachs. Please proceed.
Justine Fisher - Goldman Sachs
The first question I have is on your outlook for the mix, or if not the mix then the trajectory of the met and the steam coal markets in 2010. Because one of your competitors on the conference call yesterday said they actually expect a better rebound in met volumes in 2010 versus steam volumes, just because they expect inventories to be pretty high at utilities exiting 2009.
So I know you guys aren’t giving 2010 guidance beyond just total tons, but how do you see that mix shifting in 2010? And do you have any other qualitative comments on the performance of the met market versus the steam market in 2010?
Ben Hatfield
I would say it’s a tough call at this point as to whether we’re going to see a relief on the met side earlier than the utility side. It’s not a clear answer. But we’re expecting significant improvement in both corners toward the latter part of this year. I’ll let Mike Hardesty speak to his assessment on that market outlook for 2010.
Mike Hardesty
I think first of all our met production should grow, met sales should grow in 2010. And of the unsold tons, I think about 30% of that is metallurgical coal. So when you look at the pricing information we put out there, I think that casts it in a better light. I saw the comments from our competitor, and frankly as Ben said, it’s conjecture at this point. I tend to share the view that the utility market will rebound quicker than the met market just because of the amount of metallurgical coke that’s on the ground right now.
But again I think it depends on how fast the industry responds to production cuts and how quickly demand returns. I think our industry is responding rapidly. And if you look at the last three weeks of data provided by EIA, the cuts are accelerating. I’d like to see a few more weeks of it to make sure that the PRB side is not masked by the snow delays that they had, but the trends are certainly favorable.
Justine Fisher - Goldman Sachs
Okay. And then I guess in terms of your met capacity, just to remind us, so you were going to do 1.5 tons in ’09. You’re now going to do like 1 million, so I guess we’ll have to sort of estimate what percentage of your capability you’d use in 2010. But what’s your total net ton capability again just to remind us?
Ben Hatfield
Approximately 1 million tons.
Justine Fisher - Goldman Sachs
Okay. So you’ll be at about 50% capacity utilization this year of your met capability, and next year you expect it to be probably a little higher?
Ben Hatfield
It’s about 75%.
Justine Fisher - Goldman Sachs
Okay. And then in terms of the cancelled contracts, so the 5.8 million that you received from the cancelled contracts, that’s included in revenues, so that’s obviously a one-time payment for the contract cancellation, right?
Ben Hatfield
I’ll attempt this, but Brad, you correct me if I’m wrong. It is not in our revenue number, and that’s partially why our committed price that we gave has changed from our last release.
Brad Harris
Just to clarify, it’s in our other revenues. It is not in coal sales revenue, but rather in other revenues.
Justine Fisher - Goldman Sachs
Okay. But you did include it in EBITDA though?
Brad Harris
Yes, we did.
Justine Fisher - Goldman Sachs
Okay. And do you guys anticipate more of that type of revenue coming forward in the year? I mean, I guess it’s hard to say now, but are you still getting more knocks on the door from guys who want to renegotiate their contracts?
Ben Hatfield
Not really. I mean, we have a few thermal customers that we’re working with to re-time shipments, which is why this served to partially mitigate some of the impacts we had from this shipment. On the metallurgical side, we’re in discussions with all of our customers, and frankly for the most part it’s going pretty well.
Justine Fisher - Goldman Sachs
Okay. And then my last question, which I’m going to guess that you won’t be able to tell at this point. But in terms of 2010 and liquidity, assuming that in the second half of 2009 you guys are able to meet the interest coverage covenant and retain the capacity under your revolver, in 2010 if the tonnage goes down and pricing is going to soften, do you guys have any plans yet to address liquidity in 2010 or would you just draw on the revolver at this point?
Ben Hatfield
Well, again, it’s just too early to speculate, because on one hand you may see us reducing volume because of the market situation. But the counter to that is the more high cost production you shut in, the lower your costs and generally the better the margins on your contracted positions. And that’s what we’re focused on, is essentially protecting the margin that we’ve already fought to achieve with our contracted position. So it’s really too early to look much beyond that at this point.
Operator
At this time there are no further questions in queue. I would now like to turn the call back over to Mr. Ben Hatfield for closing remarks.
Ben Hatfield
Thank you. International Coal Group is looking forward to building on our first quarter success during the balance of the year. We look forward to joining you again next quarter. Have a good day.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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