Executives
Roger Nicholson – SVP, Secretary and General Counsel
Ben Hatfield – President and Chief Executive Officer
Brad Harris – Chief Financial Officer and Treasurer
Mike Hardesty – SVP of Sales and Marketing
Ira Gamm – Vice President of Investor & Public Relations
Analysts
Kalpesh Patel – Jefferies and Company
David Shapiro – BGB Securities
Jordan Teramo – Brigade Capital
Justine Fisher - Goldman Sachs
Luther Lu – FBR Capital Markets
Brett Levy – Jefferies & Company
Shneur Gershuni – UBS
International Coal Group, Inc. (ICO) Q2 2009 Earnings Call July 27, 2009 11:00 AM ET
Operator
Welcome to the second quarter 2009 International Coal Group Inc. conference call. (Operator Instructions) I would now turn the call over to your host for today, Mr. Roger Nicholson.
Roger Nicholson
Welcome to International Coal Group’s second quarter 2009 earnings conference call. I am Roger Nicholson, Senior VP, Secretary and General Counsel of International Coal Group. We released our second quarter 2009 earnings report earlier this morning before the market open. With me on the call today are Ben Hatfield, President and CEO of International Coal Group; Brad Harris, Senior Vice President, CFO & Treasurer; Mike Hardesty, Senior Vice President – Sales & Marketing; and Ira Gamm, Vice President of Investor & 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 the 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 these statements are 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 July 27, 2009.
Non-GAAP financial measures will also be discussed. You will find a reconciliation of the differences between the non-GAAP financial measures and the most directly comparable GAAP financial measures at the end of our press release, a copy of which has been posted on our web site.
At this time, I would like to turn the call over to Bennett Hatfield for his opening remarks.
Ben Hatfield
Today, we reported solid Q2 operating results despite extremely difficult market conditions and a very tough recession-driven economy. Operating margins increased 55%, to $11.32 per ton in the Q2 compared to $7.31 in the same quarter a year ago and $8.94 in the first quarter of 2009. Margins benefited primarily from favorably priced utility contracts executed during 2008. Our adjusted EBITDA, net income, and revenues also were strong considering weak demand and reduction of more than 600,000 tons in anticipated shipments during the quarter.
The reduction in shipments was driven by several factors. Demand for electricity dropped dramatically, falling 20% below normal in some regions which led to sizeable inventory growth at many utilities. This inventory glut caused some utilities to delay scheduled contract shipments as well as eliminate spot coal purchases. Also, three key customer facilities experienced unexpected operating difficulties during the second quarter which further reduced anticipated shipments from several of our mining operations, particularly Hazard and Vindex.
We responded to these challenges by selectively curtailing an aggregate of 1.4 million tons of annual production at our Raven, Hazard, and Eastern mining complexes. Our year-to-date production adjustments now total approximately 3.3 million annual tons. Amid the uncertain economic climate, we are cautiously optimistic that the bottom of the market was reached in late April 2009 as spot prices thereafter began a gradual recovery. By the end of June, spot pricing had rebounded by 10% to 20% from the April low-point.
We have also seen a recent increase in metallurgical coal shipping schedules as well as customer solicitations and are hopeful this is a sign that recovery is near. National gas prices also appear to have stabilized, although at a historically low price level. We expect natural gas prices will gradually increase due to rapid decline in new exploration activity as evidenced by the significant rig count drops in the U.S.
Coal demand, however, remains very weak and meaningful thermal price recovery may not occur until 2010. We intend to remain vigilant in our monitoring of costs and production levels. We expect that coal producers will continue to curtail production in response to soft demand. Recent weekly production comparisons indicate that deeper and accelerated production cuts are occurring in most U.S. producing basins. The Energy Information Agency reports that year-to-date production through July 18, 2009, is down 36 million tons compared to last year. We believe that total 2009 U.S. coal production could decline by 100 to 125 million tons compared to 2008.
At this time, I would like to turn the call over to Brad Harris, our Chief Financial Officer, to discuss our Q2 financial results.
Brad Harris
In the Q2 2009, we reported total revenues of $277.8 million including $254.7 million attributable to coal sales of 4.2 million tons. Total revenues comparable to Q2 2008 total revenues were $277.9 million of which $253.1 million were attributable to coal sales 4.9 million tons. We reported adjusted EBITDA of $52.2 million for the second quarter compared to adjusted EBITDA of $55.2 million for the same quarter of 2008.
Last year’s second quarter was included of one-time $24.6 million gain realized on an exchange from Kentucky coal reserves. This year’s second quarter results included a $7.7 million gain related to the termination of below-market coal supply agreements.
Net income for the quarter was $10.4 million or $0.07 per share on a diluted basis, compared to net income of $13.8 million or $0.08 per share on a diluted basis in Q2 2008. Average coal sale revenue per ton for the second quarter was $60.92 compared to $52.10 per ton for the same period last year, while cost per ton sold was $49.60 in the quarter versus $44.79 for the same period in 2008.
Margins were $11.32 per ton for the quarter, an increase of $4.01 per ton in last year’s second quarter. Depreciation, depletion, and amortization totaled $26 million for Q2 2009 compared to $24.7 million for Q2 2008. Corporate SG&A for Q2 was $8.7 million, compared to $10.1 million for the same period last year.
At June 30, 2009, total debt was $443.3 million consisting primarily $175 million in 10.25% senior notes and $225 million of 9% convertible senior notes. Our total debt to capitalization ratio was 46% at the end of the second quarter. Total assets for the company were $1.3 billion at both June 30, 2009 and June 30, 2008.
Cash spent on capital in Q2 totaled $16.9 billion, 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 solid performance over the balance of 2009 in light of near market term conditions.
At the end of Q2, we had $66.3 million in cash. Our borrowing capacity under $100 million credit facility as of June 30, 2009, was $26.4 million, and we have $73.6 million in letters of credit outstanding. The company is in compliance with all of its debt covenants.
At this time, I will turn the call back over to Ben.
Ben Hatfield
Now, I would like to provide an update on recent key developments. In June, the company realized a $7.7 million non-cash gain from the termination of a below-market coal supply agreement serviced from the Powell Mountain facility. This contract had a term extending through August 2010 with premium coal quality specifications. The termination of this contract is expected to allow more efficient and lower cost production at Powel Mountain facility while enhancing our market flexibility.
Also the West Virginia Department of Environmental Protection reinstated the permit to develop the Tygart #1 underground mine in Taylor County, West Virginia. The permit was remanded to the department last year to address certain technical issues. Anti-mining activists have again filed an appeal of the now-reinstated permit. Our current business plan projects resumption of construction at Tygart in 2011.
In July, one of our customers for both operational and economic reasons exercised a contractual option to terminate two coal supply agreements. Pursuant to the terms of a mutual termination and settlement agreement, the company will receive a $27 million payment on or before July 31, 2009. The payment is comprised of $18 million for contract termination and an additional $9 million for lost revenue on pre-termination shipments the customer was unable to accept. The contracts totaled approximately 1 million tons per year through 2011. The associated positive financial impact would be reflected in our Q3 results.
Turning now to our committed sales for the next two years, for 2009 committed and priced sales are approximately 18.3 million tons or essentially 100% of revised shipping projections. Priced 2009 sales average $59.50 per ton excluding freight and handling expenses. Approximately 1 million tons of 2009 production are expected to be sold as metallurgical coal.
For 2010, committed sales are approximately 13.9 million tons or 74% of planned shipments. Approximately 69% of planned shipments are priced, including 2.6 million tons subject to collared price adjustments. We expect the average price for the committed sales to be approximately $60.50 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.
Approximately 1.7 million tons of 2010 uncommitted sales are expected to be marketed as metallurgical coal. Total metallurgical coal sales for 2010 are projected at approximately 2.2 million tons. We have updated our guidance to reflect modifications to our production mix and the global economic conditions affecting the coal market. For the full year of 2009, we expect the sale of approximately 18 million to 18.5 million tons with an average selling price of $59.25 to $59.50 per ton. Coal production for 2009 is expected to be approximately 17 million to 17.5 million tons with an average cost in the range of $49 to $49.50 per ton, excluding selling and administrative expenses.
For 2010, due to the continued weakness in coal demand, we now expect to sell between 18 million and 19 million tons. Coal production in 2010 is expected to total 17.3 million to 18.3 million tons. We believe the company is well positioned to increase production beyond these levels if market demand improves. Due to high degree of market uncertainty, we are not providing revenue or cost guidance for 2010 at this time.
In summary, we believe ICG has positioned itself to weather the difficult 2009 economic climate. Economic signals from Asia are somewhat encouraging, and we are hopeful that the US economy will begin to recover during the second half of the year. Moreover, we have a solid contractual foundation in place for 2010, and our focus remains on strengthening our liquidity and closely managing production and cost levels.
At this time, I will open the call to your questions.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Justine Fisher with Goldman Sachs.
Justine Fisher – Goldman Sachs
I’m wondering if you can give us a bit more color around your costs just because one of your competitors reported on Friday, and they reduced Central App production and their costs were up, and they said that they expected costs to stay up for the year, so in the context of this retrenchment of production, can you give us a bit more color around where you expect to your costs to trend?
Ben Hatfield
We’d generally predicated that our costs are going to be flat to improving at this point. Generally speaking, as you would expect, the production units that are being curtailed are the higher cost production units, so as you trim those higher cost units, it’s generally bring down the average. You didn’t see as much of that impact during the second quarter because several of our production adjustments occurred mid to late June, so going forward, we would generally expect somewhat improving trend and cost for the balance year.
Justine Fisher – Goldman Sachs
More broadly, if we talk about when utilities might start needing to get more coal, you said that you think that you could bring back some of your curtailed tonnage, which I guess is the higher cost tonnage, in a reasonable amount of time, if the utilities start needing more coal. I guess that would require prices to be high enough at that point to cover the cost of that production, obviously, right, so you would require a higher market pricing in order to get that done?
Ben Hatfield
Absolutely. In the current environment certainly. There wouldn’t be any interest in bringing any of that production online even if you saw modest improvement in pricing because you need a material shift frankly both to show profitability and an acceptable rate of return, so when we focus on the possibility of bring back some of the production, we would not do so unless we see a pretty meaningful improvement in price, and at this point I would say that’s more likely to be a 2010 event.
Justine Fisher – Goldman Sachs
The last question is just on the contract that you recently renegotiated, are there other contracts that have that kind of terms where the counterparty can break it, and is the guidance going forward pro forma for the renegotiation of that contract?
Ben Hatfield
Let me first address the terminology. It wasn’t a renegotiation. It was a termination. A mutual termination and settlement document was executed, and both parties agreed that there are no further obligations of them paying the agreed financial settlement amounts, so there is no anticipated reactivation as such with that customer or that tonnage, we are anticipating that some of that tonnage will not be resold in the near term, and going forward, we would only mark to market it, again, much like the discussion we had a few moments ago, if we see opportunities that justify reactivating some of those production units. So again for clarification, there was no renegotiation. It was a termination, and all of our guidance and outlook comments anticipate that our tons are sold into the marketplace without any presumption of going back to that same customer.
Justine Fisher – Goldman Sachs
Okay, so when you say that you have X amount committed or X amount uncommitted for 2010, that’s already assuming that that one million tons is either not going to be mined or at least it’s not committed to this particular company?
Ben Hatfield
No. It’s has been shut in during our second quarter adjustments, and then whatever was not shut in is going to be marketed as the opportunities are identified with other utility customers.
Operator
Your first question comes from the line of Brett Levy with Jefferies & Company.
Brett Levy – Jefferies & Company
Just refresh our memories as to where the covenants lie with respect to the second half of the year and whether or not you guys feel comfortable with you bank covenant that you’re going to be onside for the debt leverage and the EBITDA to interest covenants for late 2009 and 2010.
Ben Hatfield
As I think we noted during the earlier comments, we feel comfortable at this point that we’ll be in compliance with our covenants for the balance of 2009. There is a step-up in the covenants in 2010. At this point, we’re still looking at 2010 and where market pricing is going to settle. It’s just too early to talk much about where the revenue is going to settle on unsold tons, but we feel very good about where are for the balance of this year and don’t anticipate any problems.
Brett Levy – Jefferies & Company
Was that 3.5 tons interest coverage going to 4 or, just refresh our memories?
Brad Harris
The interest coverage at the end of last quarter of 2009 is 3.75 times and it’s going to 4 on January 1st.
Brett Levy – Jefferies & Company
As a further refinement of what Justine asked, do you see any other customers doing something similar to what that one customer did where the contract was negotiated to end for a cash payment?
Ben Hatfield
Let me address that more clearly because Justine asked a good question, and I probably didn’t address that part of it very effectively, but the clause that was activated if you will that brought about the negotiations for termination and settlement of those two contracts, the July event, was very much unique, that kind of termination right doesn’t exist in any of our other contracts, and this customer was in a situation where they wanted to terminate initially maybe some focus on the economic terms, but then they developed some serious operating issues essentially was going to dramatically reduce the number of tons they needed and also created some issues with respect to quality that they were obligated to buy, and so it was a mutual agreement to terminate that was kind of triggered by contractual right that they possessed. That is certainly not common of our other contracts and not at all representative of our portfolio.
Brett Levy – Jefferies & Company
With respect to met coal, we’re starting to hear some pretty positive things about what 2010 and even with the spot market this year looks like. Have you guys started to think about starting to lock in some contracts for met coal or you think with all the news out of China starting to turn somewhat more bullish? Can you give us a sense as to what you’re hearing in the spot market and then sort of a sense as to where contract prices might go, could it be $200 a ton for 2010?
Ben Hatfield
We’re seeing pricing for 2010 that’s better than many of the numbers that you heard bantered about earlier this year, so we’re encouraged by where the number is settling. It’s certainly well below the peaks that we saw in 2008, but conversely also significantly favorable to the 2007 pricing levels, so it’s somewhere in the middle, but certainly somewhat favorable to some of the early dialog that we were hearing for the first quarter of this year, so we like where we are with our uncommitted position on metallurgical sales. We’re having some early discussions on the potential 2010 commitments, but we’re trying to be pretty cautious to make sure we don’t pull the trigger early, but I would expect that we will be settling 2010 business during third quarter.
Operator
Your first question comes from the line of Shneur Gershuni – UBS.
Shneur Gershuni – UBS
I was wondering if you can kind of talk about your interest expense in the first and second quarter and if that includes payments against the waiver that was needed with respect to the covenant issues, and I guess if you foresee going forward for the back half of this year, do you interest expense jumping back down?
Brad Harris
The interest expense does not include any cost related to the waiver. Those costs are included in the deferred financing costs and amortized over the period of the waiver so that lump sum payment if you will is not included there, and perhaps the adjustment that you’re seeing from prior time is now under the new accounting rules. The convertible notes if you’ll require a market rate interest that’s adjusted to it and will look a little different from what you saw in the past, so it includes amortization on the market rate of interest from the convertible notes, so I think what you’re seeing now probably is a fairly reasonable representation of where you can see interest expense going forward.
Shneur Gershuni – UBS
I don’t want to beat the bush about this contract that much further, and I think Brett has kind of got the point out, but I want to understand if there were some opportunities for you to renegotiate some of your below-market contracts where you could potentially enter into an arrangement where you actually make the payment to get out of some of your below-market contracts just given the fact probably some people are more agreeable at this point right now due to tough inventory situations. If I remember correctly, you had one at the Vindex complex.
Ben Hatfield
You’re correct that we do have a below-market agreement at the Vindex complex. To this point we haven’t seen an opportunity to go down that road with that particular customer. We certainly are going to be open to those opportunities if we have a situation where a utility customer [inaudible] term that may open a window but nothing has happened to this point. The customers that have gotten more in a bind so to speak thus far this year that have brought about those kinds of opportunities have typically been resellers of coal or brokers, not as much on the consuming end, so we did have the situation with the June termination where [inaudible] of coal was in a difficult situation having to buy our coal and sell it into a challenging market and so that gave us an opportunity to terminate the agreement for a true win-win. The other situations with below-market contracts, we have some that are falling off during the course of this year anyhow, and we certainly are looking forward to those opportunities, but to this point, I don’t have any on my scope that are going to set up a buyout opportunity, but we’re certainly looking for them.
Shneur Gershuni – UBS
I realized that you didn’t give out 2010 guidance, and Justine kind of asked the question, but you did have some decent performance in the second quarter in some of your regions. I was wondering if this was kind of a onetime benefit or if this is something that does flow through to the end of the year and possibly into 2010 and could impact 2010 cost trend?
Ben Hatfield
We’re seeing improving cost performance at several of our major operations, particularly in the Northern Appalachian region, and as I noted to one of the analysts earlier, we generally expect that improvement trend to continue, and we’re cautiously optimistic that we’re going to be able to continue to improve our cost. We didn’t see as much impact from some of our production curtailments in second quarter, but I think a full quarter with some of those higher cost units out would have yielded a better cost result in the Central Appalachian region. We’re very focused on cost and strengthening margins, and I think it wasn’t just a unique situation in the second quarter. I think you are going to see continued cost improvement as we consolidate our operations and run the lowest cost ones most effectively.
Shneur Gershuni – UBS
So basically if you increased your tonnage next year, then some of those more expensive tons would effectively come online, and so that’s why you’re hesitant to give out cost guidance?
Ben Hatfield
Yes.
Operator
Your first question comes from the line of Ankush Aggarwal – JP Morgan.
Ankush Aggarwal – JP Morgan
On met coal, could you just give us a bit of sense of how much met coal you did in Q2 and what is the amount of met coal you have in your guidance for ’09 and ’10?
Ben Hatfield
Let me restate it for clarity. We expect to ship about 1 million of met coal in 2009. That’s significantly below normal pace essentially because the first half of the year was pretty low with many of our steel customers not being in a position to take any coal at all in the first quarter, so the pace thus far this year is probably below the million ton pace, but from what we’ve seen looking into 2010, we’re seeing stronger opportunities both on the low volt end and the high volt side, and at this point, we’re expecting to sell approximately 2.2 million tons of met coal in 2010.
Ankush Aggarwal – JP Morgan
And what was the volume for Q2?
Brad Harris
Approximately 200,000 tons.
Ankush Aggarwal – JP Morgan
The $7.7 million gain, how much was the post-tax amount and I’m just checking, it shows in the gain on asset sales in the income statement?
Brad Harris
Post-tax would be [inaudible].
Operator
Your next question comes from the line of Kalpesh Patel – Jefferies and Company.
Kalpesh Patel – Jefferies and Company
On the met coal, I didn’t quite hear everything there. I guess you have 1 million sold in 2009. In 2010, you’re expecting 2.2?
Ben Hatfield
Yes.
Kalpesh Patel – Jefferies and Company
What is the committed portion for 2010?
Mike Hardesty
Approximately 500,000.
Kalpesh Patel – Jefferies and Company
That is a big jump in your capacity. What is your total capacity for met coal?
Ben Hatfield
It would be about 2.2 million tons.
Kalpesh Patel – Jefferies and Company
So it’s not like you’re selling a lot less this year. Is it 2.2 this year?
Mike Hardesty
Our capacity would be slightly less this year. You have to keep in mind that Beckley is just now hitting its full production, and we’ve been very limited on the amount of Vindex, Powel Mountain, and Sentinel that we’ve sold this far this year. We have a lot of room to expand the percentage of coal sold in the met market with those operations.
Kalpesh Patel – Jefferies and Company
So there’s a lot just coming on over the next 6 to 9 months.
Ben Hatfield
That and quite a bit of the 2009 production at Sentinel for instance is moving into the utility market because of the weaker high volt met demand, whereas 2010 we’re anticipating more of that coal will have opportunities in the high volt metallurgical market. So it’s not a matter of huge production growth as such. It’s more a focus of some low volt production growth, particularly at Beckley, and on the high volt side, more of an opportunity to simply to move into more favorable market versus utility sector that we’re servicing in 2009.
Kalpesh Patel – Jefferies and Company
On the same subject there, how easy it for ICO and possibly even your competitors in the industry to bring on production? Everybody keeps talking about the metals improving in the next 6 to 9 months and pricing rebounding a lot faster because production can’t come on. How fast can ICO bring on volumes?
Ben Hatfield
As has been demonstrated over the recent years, when the market is stronger certainly you can add production units and add tons, but for the most part, what we’re focused on doing in 2010 is running our lower cost operations and optimizing margin and particularly pushing hard on the metallurgical side where we see an opportunity for stronger margins versus utility sales, so it’s not as much a function of how much tonnage we can grow as it is where is the better market to pursue.
Kalpesh Patel – Jefferies and Company
On the Tygart, what other permitting challenges do you see there?
Ben Hatfield
At this point, we believe we’ve seen the worse of it. We have a state permit that has been approved now three times, I believe, by the lead state agency, and it certainly satisfied their standards each time, but in each case, we have a very active anti-mining group that has challenged the permit on long-term technical issues related to post-mining water treatment that in each case the state was satisfied with our answer during the hearing, but they essentially asked us to take a lot of the hearing evidence and incorporate that into the permit so there is clarity as to what the long-term plan is. We believe the technical issue has been well addressed and don’t anticipate anymore surprises in that regard. At this time, we’d put Tygart more in the category of waiting for the right market opportunity before we start trying to lock up long-term sales positions, so it’s more a factor of looking for the right window for market development rather than anything else.
Operator
Your next question comes from the line of David Shapiro – BGB Securities.
David Shapiro – BGB Securities
On your other revenue outlook, if you exclude the termination payments that I assume will be clean there in the third quarter, what’s the current run rate that we should be looking for? Is this quarter representative of the current run rate when we back out the $7 million gain?
Brad Harris
In each and every quarter, we have minor equipment sales or land transactions, so I don’t think the second quarter level of other income so to speak is anomalous. I think that’s pretty much a normal level.
David Shapiro – BGB Securities
On your cost outlook for 2010, you alluded to the fact that you should see improvement. Again there was discussion about the permitting issues and what not, especially I think towards the back half of 2010. Could that not cause significant problems for you in cost management?
Ben Hatfield
I’m sorry; I didn’t understand your question. Could you repeat?
David Shapiro – BGB Securities
Relating to permitting delays regarding dumping waste and what not, on the last call you said that there could be some issues regarding waste dumpage and what not towards the back half of 2010 that could cause problems for you at some of your mines.
Ben Hatfield
The way the regulatory delays on the surface mining portion of our production, the way they appear so to speak in our numbers are essentially higher costs at our surface mining operations because when you’re late in getting valley fields approved, then you’re forced to haul the material a longer distance to an existing field or to another back stack, so it does translate generally speaking to higher costs, particularly for our Central Appalachian production, but I don’t at this point see anything that’s materially different than what we’re current seeing in our Central Appalachian operations in that regard. We believe we’re reasonably well positioned permit-wise for the production that’s now in our forecast, and we’re monitoring very closely what may happen in the long-term periods, but I would not conclude at this point that we envision a significant spike in costs, so to speak, because of permit delays, certainly not in 2010.
David Shapiro – BGB Securities
On Tygart and the strategy going forward in general, you have cap in trade coming through. You have a lot of other uncertainties as to how welcoming the climate is going to be for coal going forward on the macrolevel as a fuel. I would assume that you would wait for at least some sort of political settlement and then for a lot of the future to become to more clear as to the attractiveness of coal vis-à-vis natural gas and other fuels before you would commit capital to Tygart or any other significant project?
Ben Hatfield
Yes, and as I iterated earlier, the key driver on our Tygart timing at this point is definition of the market and assurance internally that there is a clear return on investment in the market timeframe that we’re focused on. It’s a great project, but we certainly don’t want to start spending money on a plus $250 million project and be put in a position where we’re having to sell that coal on long-term contracts when we’re ahead of the market so to speak, and we anticipate stronger outlook going forward, so we’re trying to choose the timing to where we’re better positioned to sell the coal at the optimum point, and right now our business plan anticipates that that’s a 2011 startup.
David Shapiro – BGB Securities
On the financing of that, you’re looking at senior note maturities in 2012, and the credit markets are still relatively tight right now, and let’s assume that they stay maybe somewhat looser than now, but still relatively tight to where they’ve historically been. What sort of the plans are the company looking at?
Ben Hatfield
You mean with respect to financing the Tygart development?
David Shapiro – BGB Securities
And the senior note maturity in 2012.
Ben Hatfield
That’s something we will be dealing with in the coming quarters. That’s an active discussion, and really I’d rather not get into too many details at this point, but we’re focused on it, and we have several options particularly on project financing. We have options to even consider leaseback or reserve sale transactions where we would develop the project as a joint venture with the land owner or some other party, possibly even a customer development, so there are several things we’re looking at, and it’s really too early to say which direction we’re going with it, but we like the project. We think it’s well positioned, perhaps more so than most that are ready to go in the Appalachian region. We particularly like the fact that it services both the metallurgical as well as the premium utility market, so we like it from a marketing standpoint. We like the fact that it’s a low cost long-haul operation, and we’re anxious to do something with it when we have internal assurance that the return on investment is adequate.
Operator
Your next question comes from the line of Jordan Teramo – Brigade Capital.
Jordan Teramo – Brigade Capital
Did you guys buy back any debt in the quarter or pay down any cap leases or anything of that nature in the quarter?
Brad Harris
No. We did not buy back any notes. Any reduction in principal would just be related to the normal principal payments. There were no note repurchase or acceleration of paydown.
Operator
Your next question comes from the line of Justine Fisher - Goldman Sachs.
Justine Fisher - Goldman Sachs
I have a question on the pricing in the first half versus the guidance. In the first half, your Northern App pricing was $54 and change in the first quarter and $51 and change in the second quarter, but the guidance for the year is still $55 to $56, and then in Central App, it’s actually like $66 and change and $70, and then the guidance is $66 to $67, so it seems like the guidance is assuming a pop in Northern App prices and then a reduction, a pretty reasonable one, in Central App prices in order to get within the range. Are there any dynamics there that we’re missing? Are there any contracts or any particular sales that have been deferred to lead those to happen?
Mike Hardesty
There are actually two issues going on. One, we should have more metallurgical shipments out of Sentinel in the second half, and secondly we have a couple of contracts that we can move between Northern App and Central App, and because our costs are lower in Northern App, we’ve been moving some of that business in that direction, so it’s causing the shift in our regional metrics.
Justine Fisher - Goldman Sachs
So, where you clarify the coal between Northern and Central, that’s determined by where you ship it to, not where it’s mined? I guess if the mine is a certain location, how can you switch it from region to region?
Mike Hardesty
We classify it as where the coal was loaded.
Operator
Your next question comes from the line of Luther Lu – FBR Capital Markets.
Luther Lu – FBR Capital Markets
In met coal, you’re seeing the inquiries picking up. Is that mostly from international customers or from domestic customers?
Ben Hatfield
I would say in the second quarter what we saw was essentially heavier schedules from our domestic customers which gave us a lot of encouragement that their order book is firming up, and they’ve now got a better feel for how things are looking over the balance of the year, so the short answer is domestic and some Canadian.
Luther Lu – FBR Capital Markets
Do you typically do your met coal business in the US or what’s your international to domestic split?
Ben Hatfield
We’re almost all domestic. We have a small piece that goes to Brazil, and we do some with partners that we use on an international side, but we’re very heavy on the domestic side.
Luther Lu – FBR Capital Markets
On the Tygart mine, if you were to start the construction again in 2011, how soon can you finish the project and begin production?
Ben Hatfield
Going from memory, I believe that it would take 12 to 18 months to get development production. That would be fairly low level of output as we’re essentially connecting the shafts and slopes, and you’d be looking at possibly 24 months to get to substantial output or more or less normalized operating phase.
Operator
At this time, there are no further questions in the queue, and I would like to turn the call back over to management for closing.
Ben Hatfield
I apologize for some of the audio issues we’re having today. I’m not sure what’s going on with that. Regardless, International Coal Group is looking forward to building on our second quarter performance during the balance of the year. We look forward to joining you again next quarter.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
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