International Coal Group Q4 2007 Earnings Call Transcript

International Coal Group Inc. (ICO)

Q4 2007 Earnings Call

February 7, 2008 11:00 am ET

Executives

Roger Nicholson - SVP, Secretary and General Counsel

Ben Hatfield - President and CEO

Brad Harris - SVP and CFO

Mike Hardesty - SVP, Sales and Marketing

Analysts

Shneur Gershuni - UBS

Brett Levy - Jefferies & Company

Justine Fisher - Goldman Sachs

Luther Lu - FBR

Laurence Jollon - Lehman Brothers

Maxwell Vanderbilt - UBS

Julian Benscher - Sherwood Investments

John Selser - Maple Leaf

John Bridges - JPMorgan

Garrett Nelson - Davenport & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 International Coal Group Earnings Call. (Operator Instructions)

And now, I would like to turn the presentation over to your initial host for today's conference, Mr. Roger Nicholson, Senior Vice President, Secretary and General Counsel. Please proceed. Sir.

Roger Nicholson

Thank you. Welcome to International Coal Group's fourth quarter 2007 earnings conference call. I am Roger Nicholson, Senior Vice President, Secretary and General Counsel of International Coal Group.

We released our preliminary 2007 fourth quarter earnings this morning before the market opened. We apologize for the slight delay, but we were working through some last minute technical issues related to the goodwill matter as discussed in our press release.

With me on the call this morning are Ben Hatfield, President and CEO of International Coal Group; Brad Harris, Senior Vice President and CFO; 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 February 7, 2008.

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 would like to turn the call over to Ben Hatfield for his opening remarks

Ben Hatfield

Thank you for joining us this morning to discuss our preliminary fourth quarter and the full year results.

We felt it was important to the investment community to release those preliminary results even though they do not include an expected non-cash charge or impairment of goodwill. As a result, certain aspects of the 2007 results discussed today, including our net loss for the quarter and full year, are subject to change.

The charge is not expected to have any effect on 2008 operating results or cash flows. Brad Harris will discuss this matter in greater detail in a few minutes.

As expected, fourth quarter results reflected a year-long transition that was designed to strengthen our operating base and replace brokered coal income with three new strategic mining projects.

The fourth quarter saw us experience some production shortfalls as Beckley began staffing up operations in a very tight labor market and as we continue to expand production at our Sentinel mine. Additionally, our largest Illinois customer experienced a boiler explosion that disrupted shipments and restricted production at the Viper mine.

These issue, coupled with regulatory delays and increased costs for regulatory compliance, adversely affected our fourth quarter results. As coal was typically sold under contract for delivery in future periods, the fourth quarter did not benefit from the recent substantial increases in coal prices.

The good news is that we have seen recent performance improvement at several of our mining operations, particularly at Raven and Buckhannon as a result of operating changes that were implemented in the fourth quarter. We expect to see continued improvement at these and other ICG operations throughout the coming year.

Despite a difficult a year in 2007, we're nearing completion of our year-long transition to three new strategic mine projects that represent nearly 4 million annual tons of production, most of which is higher-margin metallurgical coal.

Our ramp-up in metallurgical production is particularly well timed. We have signed several attractive contracts with both domestic and international customers over the past few months. The Beckley complex, as an example, has sold almost 1.4 million tons of premium low-volatile metallurgical coal with contracts ranging from one to three years at average prices of nearly $0.90 per ton.

We also retained a substantial uncommitted position at both Beckley's low-volatile Sentinel's high-volatile metallurgical product that we believe will enable us to capture additional market upside, particularly in 2009.

Strong price growth for both steam and metallurgical coal is being driven by robust international demand. Supply problems have occurred in key co-producing countries such as Australia, South Africa, Russia and the Ukraine. China has recently become a net importer. Situation there has been exacerbated by severe winter storms there. Supply shortages are being reported in numerous foreign markets. In addition, the weak American dollar has made US coal market more attractive to European buyers.

Moreover, we are seeing signs of strengthened domestic coal prices due to a combination of increased export activity, higher utility demand and lower Central Appalachian coal production. This confluence of events represents significant opportunities for US coal suppliers.

To illustrate this point, as of January 31, 2008, Central App's spot prices were up more than $30 per ton since the end of the end of the third quarter of 2007, a 65% increase. We expect prices to remain strong in the foreseeable future, driven by the factors I just discussed.

We expect our overall 2008 operating performance to be much improved, particularly after the first quarter, as production from our new operations reaches planned capacity, higher price sales contracts kick in and the benefit from recent cost savings initiatives is realized.

The operating challenges we face as a company in 2008 will be about managing risks in a rising market. These risks include labor shortages, wage and commodity price inflation and delays in obtaining regulatory permits and approvals, all of which can negatively affect costs and production.

At this time, I'd like to turn the call over to Brad Harris, our Chief Financial Officer to talk about fourth quarter financial results.

Brad Harris

Thanks, Ben. Before I address the results for the quarter, I would like to provide some additional detail on the impairment charge we anticipate related to goodwill. I'll try to explain how this charge came about without giving a detailed accounting lesson, but I think it's critical to understand the circumstances that required us to take this charge.

As Ben mentioned earlier, the preliminary fourth quarter and full year operating results do not include an anticipated non-cash charge earnings of approximately $170 million or approximately $110 million after income taxes for impairment of goodwill associated with some of our more mature operations, specifically North County, East Kentucky, Hazard and Eastern.

Generally accepted accounting principles or GAAP required a minimum annual impairment testing of goodwill. In accordance with the company's accounting policies, we last tested goodwill for impairment as of October 31, 2006. As this test must be performed at least once every 12 months, we will require to again perform this test as of October 31, 2007, using cash flow projections prepared as of that date.

As a result, the cash flow projections used in our testing did not reflect the benefit of substantial increases in coal prices that we have seen since October 31.

Additionally, GAAP requires that this impairment testing be performed at an operating complex level, not on a company-wide basis. So while we're expecting substantial increases in our cash flows related to new mining operations, these cannot, from an accounting perspective, be used to offset reduced cash flows at order mature operations.

The company will include the final amount of this charge in our Form 10-K to be filed with the SEC in the near future. We believe the impairment charge while difficult is the correct action to take in accordance with current accounting rules. We also believe that it's important to get this issue behind us as we do not expect it to affect our future operations or cash costs. As this is a non-cash charge, it will not impact our compliance with the existing loan covenants.

Turning to our preliminary 2007 fourth quarter results, ICG reported revenues of $205.6 million, including a $188.2 million attributable to coal sales of 4.4 million tons. This compares to revenue to $226.7 million, including $205.5 million attributable to coal sales of 4.8 million tons in the same quarter last year.

The decrease in tons sold is primarily due to the transitional nature of 2007 as we developed several new mining operations to replace expiring brokered coal contracts.

We reported adjusted EBITDA of $3.5 million for the fourth quarter of 2007 compared to adjusted EBITDA of $30.9 million for the fourth quarter of 2006. Average revenue per ton for the fourth quarter was $42.79 compared to $43.09 for the same period in 2006, while cost per ton sold was $40.99 for the fourth quarter versus $36.58 for the same period in 2006.

The decrease in adjusted EBITDA reflects fewer tons sold and a reduction in average margin per ton of $4.71. Average revenue per ton decreased by $0.30 and cost per ton increased by $4.41, primarily due to lower production and increased commodity prices.

For the fourth quarter of 2007, we reported a preliminary net loss prior to any impairment adjustment of $16 million or $0.11 per share on a fully diluted basis compared to a net loss of $97,000 or breakeven on a per share fully diluted basis for the same period in 2006.

Depreciation, depletion and amortization totaled $20.9 million for the quarter compared to $22 million for the fourth quarter of 2006. Corporate SG&A for the fourth quarter was $7.5 million compared to $8.8 million for the same period in 2006.

At December 31, 2007, total debt was $412.3 million, consisting primarily of $175 million of 10.25% senior notes and $225 million of 9% convertible notes. Excluding the impact of the impairment charge, our total debt to capitalization ratio was 39.7% at the end of the fourth quarter. Excluding the impact of the impairment charge, total assets for the company were 1.5 billion as of December 31, 2007, compared to 1.3 billion at the end of 2006.

Our capital spending for the fourth quarter of 2007 was $34.7 million compared to capital spending of $40.6 million for the same quarter a year ago. Approximately 78% of fourth quarter capital spending related to the development of new mining complexes and 22% related to support of existing mining operations.

Capital spending for 2007 was $181.3 million compared to capital of a $197 million for 2006. Approximately 69% of 2007 capital spending was related to new mine development and 31% related to maintenance of exiting operations.

ICG had $107.2 million in cash as of December 31, 2007. We retain a borrowing capacity of $100 million under our credit agreement, of which $70 million supports outstanding letters of credit.

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

Ben Hatfield

Thank you, Brad. I'd now like to provide an update on key developments in the fourth quarter.

As we mentioned earlier, two of our operations, Raven and Buckhannon, showed significant improvement in December and continuing into January as a result of operating changes that we initiated in the fourth quarter. These particular operations struggled through serious geologic issues throughout the year. We believe that these complexes are in much better position now, particularly in light of the improved market conditions.

The new Beckley underground complex in Raleigh County, West Virginia, is progressing towards full production of $1.4 million annual tons of high-quality, low-volatile metallurgical coal by mid-2008.

We estimate that Beckley contains approximately 30 million tons of recoverable coal reserves in the Pocahontas number 3 seam. Beckley's new state-of-the-art coal preparation plant and rail loading facility became operational in the fourth quarter of 2007.

The Sentinel complex is also progressing toward full production of 1.5 million annual tons of high-volatile metallurgical and premium utility coal in the second quarter of 2008. The third and final production section came online in January.

Both Beckley and Sentinel are competing for miners with other coal producers in a very tight labor market. We're using advertising, job payers, and generous benefit packages to attract experience miners. We also have developed a thorough on-the-job training program for inexperienced miners.

At Tygart number 1 complex, site construction is expected to get underway in mid-2008. Production is expected to begin in late 2009. At full output, Tygart is expected to produce 3.5 million tons annually of high-volatile metallurgical and premium utility coal. The pricing outlook for the product is particularly encouraging in the current market environment.

The ICG Illinois Viper mine complex is planning construction of a new portal facility that will provide more direct access to the mine's remaining 32.9 million tons of reserves. The project is expected to be completed in 2010. Favorable market demand is expected to result in 15% production increase in 2008 versus 2007.

Last fall, we made the difficult decision not to renew certain Central Appalachian coal contracts, coal supply agreements. That decision turned out to be the right one as those contracts would have been priced in the mid-$40 per ton range, which is of course much less than the prices that we're seeing right now.

ICG Illinois also exercised its contractual right to terminate the coal supply agreement with Secure Energy in January of 2008. ICG Illinois had contracted to sell coal to the firm's proposed coal gasification plant slated for 2009 startup. While the Company remained interested in participating in this innovative project, it is acting on favorable market opportunities post-contract terminations to lock in alternative customers.

The Sandlick rail-load out facility in Eastern Kentucky began shipping coal during the fourth quarter of 2007. This facility, which ICG East Kentucky purchased in July from a Massey Energy subsidiary, is designed to significantly reduce trucking coals from Eastern Kentucky's new Mt. Sterling surface mine.

A new shareholder lawsuit was recently filed under the 34 act, which is in addition, but based on allegations similar to the claims raised in the first shareholder action filed in 2007.

We are actively engaged with the Army Corp of Engineers in its defense of the section 404 permit that was issued to ICG Hazard's Thunder Ridge surface mine. The lawsuit filed by several environmental groups will be vigorously contested.

We were very pleased that our ICG Eastern subsidiary received the State of West Virginia's highest honor for environmental excellence in coal mining. West Virginia Department of Environmental Protection awarded the ICG Eastern the Greenlands Award for overall environmental stewardship in 2007. The award represents our commitment to complying with environmental regulations at all of our operations.

Turning now to our committed sales for 2008-09; for 2008, the company's committed sales are approximately 18.2 million tons or 89% of current planned shipments. The committed tonnage is priced at an average of $44.80 per ton, excluding freight and handling expenses. Approximately 42% of 2008, unpriced tonnage consists of metallurgical coal.

For 2009, committed sales are approximately 11.4 million tons or 55% of our current planned shipments. For 2010, priced sales represent only 29% of planned shipments.

Turning now to the outlook for 2008, for the full year, we expect sales between 19.5 million and 20.5 million tons at an average selling price of $47 to $48 per ton. Coal production is expected to total 18.5 million to 19.5 million tons, of which 1.9 million tons is projected to be sold as metallurgical quality coal. We expect our average cost per ton sold in 2008 to be in the range of $40 to $41.25, excluding selling, general and administrative expenses.

For 2009, we expect to sell between 20 million and 21 million tons at an average selling price of $51 to $53 per ton based on recent price indications. Coal production is expected to total 19 million to 20 million tons, of which 2.2 million tons is projected to be sold as a metallurgical quality coal.

As we indicated in our press release, we expect to see significantly improved coal pricing in our Central and Northern Appalachian regions in 2008 and 2009 compared with 2007. In Central Appalachia, we're forecasting an average price per ton range of $51 to $52 in 2008 and $56 to $59 in 2009.

In Northern Appalachia we're looking at average pricing of $44.50 to $45.50 per ton in 2008 and $47 to $49 per ton in 2009. In 2008, we expect to export approximately 3 million tons split evenly between metallurgical and steam coal. Exports are expected to remain strong in 2009 as well.

Capital expenditures in 2008 are expected to total approximately $157 million and $192 million in 2009. We believe our outlook for 2008 is encouraging. We expect that demand for metallurgical and steam coals will continue to be strong, that demand from international markets will continue to positively affect the price of steam coal and the domestic production will be constrained by regulatory issues.

Taken together, we expect these favorable conditions will support continued price strength and improved operating results for ICG in 2008, particularly after the first quarter of the year.

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

Question-and-Answer Session

Operator

(Operator Instructions)

Gentlemen, your first question will come from the line of Shneur Gershuni with UBS. Please proceed.

Shneur Gershuni - UBS

Hi. Good morning, guys.

Ben Hatfield

Good morning.

Shneur Gershuni - UBS

Just a couple of quick questions. Just with respect to your outlook for 2008 and 2009, kind of what are your pricing assumptions for your uncontracted net Central App and Northern Appalachian product and so forth? We are seeing some of them [ph] are pretty high these days and is that something that you can realize like kind of what's reported in price and so forth?

Ben Hatfield

I'm going to ask Mike Hardesty to address that question. I think that we're certainly staying on the conservative side of current pricing, but I'm going to let Mike speak to it more specifically.

Mike Hardesty

I think the simplest way to answer that is that the uncommitted projected prices to support our range are very conservative and are nowhere near the recent numbers published in the press of $140 for low-vol and as high as $120 for a high-volatile product. Our numbers were more in the $80 to $90 range for high-vol and in the $100 to $105 range for uncommitted low-vol, so we clearly have much down there.

Shneur Gershuni - UBS

Okay. And second question just with respect to the goodwill impairment and so forth, is that going to have any impact on any covenants, on any of your bonds and so forth? Is it going to push a test at all?

Brad Harris

No, will not. Our convents provide for an exclusion of non-cash charges and will remain in compliance with our debt covenants at yearend.

Shneur Gershuni - UBS

Okay. And then one final question. In the past, you sort of talked about an issue serving one of your legacy contracts in Northern App, if remember correctly, and you were looking to convert from trucking to pull over to a belt-type facility and so forth. I was wondering if you can give us an update with respect to that.

Ben Hatfield

Yes, that would be at our Vindex operation in Western Maryland, and we are in active discussions with those real companies and the customer on that opportunity, because we see upside frankly for both of us in diversifying their transportation options. So, there is an active discussion, no conclusion reached, but we expect that something more would come to fruition in the next few quarters.

Shneur Gershuni - UBS

Is it something that could materially change your cost outlook for next year if something was to be realized sooner rather than later?

Ben Hatfield

I wouldn't speculate as to the impact yet. I mean the important point is to give us some flexibility, so that we're not committed to running or to exclusively servicing that commitment from only those mines that are within close trekking distance. There is a lot of obviously volatility associated with the geologic issues of that area and some are reserve-depleted area.

So, we need the flexibility just for the long-term security of servicing that contract, to go that direction to get more diversity of supply options and also for what we believe will be significant cost improvement. But it's just too early to speculate on whether there is a lot of upside there or not.

Shneur Gershuni - UBS

Okay, great. Thank you very much.

Operator

And gentlemen, your next question will come from the line of Brett Levy with Jefferies & Company. Please proceed.

Brett Levy - Jefferies & Company

Hi, guys. Just strategically as you look at your open book going into mostly 2009, 2010, is your inclination of locking at this point? I mean prices are pretty darn good. Can you talk a little bit about kind of the strategy with pricing from this point forward?

Ben Hatfield

The answer is somewhat complicated, because the market is moving so quickly. What was an urge to lock in a month ago would have been a mistake. So, at this point, we've tried to temper our enthusiasm for the opportunities by the recognition that this is clearly a supply situation is going to continue to be constrained and the market price continues to move up.

So, we're taking a more layered approach. We are making some commitments certainly now for second half or beginning to make for second half of 2008 and some in 2009. So, we're being very cautious. We're not making any big tonnage commitments until we have a better feel for where the market is headed. So, I would call it a pretty cautious and layered approach and layering in increments of tonnage at each operation and trying to keep some spot upside across the company.

Brett Levy - Jefferies & Company

All right. And then without sort of addressing a forecast or something like that, it looks as if somewhere in 2009, you guys might have a bit of a funding gap based on where your cash is and where your revolver availability is relative to the costs of continuing to ramp up these three projects. Some thoughts about sort of how you would address that or whether that's something you are even thinking about at this point?

Brad Harris

We'll, I think we've acknowledged in repeated conversations that in order to complete funding of the Tygart complex, which is obviously near the $300 million kind of investment, we expect to have to raise additional capital somewhere near the second quarter of 2009.

So, we have several options available to us, and we are continuing to monitor those options. We'll make a decision soon. We even have recent increases from different parties that would very much like to joint venture on that project. So, we may look at opportunity as well.

So, I don't think we are at the point where we have to make a decision on it, but we recognize that the commitment to build the Tygart project in that timeframe is going to stretch our capital resources, but we aren't particularly concerned about it at this point.

Brett Levy - Jefferies & Company

And then last question. For the 3 million tons of export, is pricing locked in for any of that for the 1.5 of steam and 1.5 of met or is that stuff that we should strictly start thinking about as spot market priced?

Mike Hardesty

This is Mike. On the steam side, the bulk of that has been locked in. We have focused on selling into the prompt market. That market has been continually backward-dated, so we've been laying in a cargo at a time or a couple of cargos at a time, and we've seen prices move for prompt cargos in June of last year from $40 net to the mine an hour approaching to $70 number.

On the met side, there is a fair amount of that that is uncommitted, so we've upside there. But on the steam, it's basically committed.

Brett Levy - Jefferies & Company

And would you say where it's committed?

Mike Hardesty

Say, on average…

Ben Hatfield

You mean the prospective shipping destination or --?

Brett Levy - Jefferies & Company

No, dollars.

Mike Hardesty

Dollars. (inaudible) plus range.

Brad Harris

I would characterize our average in the upper 50s.

Brett Levy - Jefferies & Company

Thanks very much, guys.

Brad Harris

Thanks.

Operator

And gentlemen, your next question will come from Justine Fisher with Goldman Sachs. Please proceed.

Justine Fisher - Goldman Sachs

Good morning.

Ben Hatfield

Good morning, Justine.

Justine Fisher - Goldman Sachs

The first question I have is about the contract that you may be signing for '08 and '09. And you guys, and I'll try and get Matthew later are probably banking on your increased tonnage coming from new projects. And places out at the [phi] end of the curve are pretty high. And so, I understand why you guys want to commit to that.

However, my question is, are the counterparties that you're committing to, either domestically or foreign buyers, are they putting stipulations into these contracts depending on whether the mines actually ramp up to full production when you expect? I mean if you're committing Sentinel coal, let's say, or even Beckley coal, I mean are there any stipulations in those contracts that say if production doesn't come on when we expect then you have to comply with other coal or --?

Ben Hatfield

No, I think the contracts that we're signing are not different from more or less the standard form of agreement. We make the commitment to sell a certain number of tons over a certain period of time, and all the contracts include protections for both the buyer and the seller in any event that you have unanticipated change in circumstances, whether it's buyer flood, price disruption or regulatory issues that the delayed production on our end or delay in acceptance of the coal on their end.

So, I would characterize this form as really not different from the traditional agreement and type of standard protections for both buyer and seller.

Justine Fisher - Goldman Sachs

And is there a consequence for your terminating that contract with, I think it was, Secure Energy? Is there a consequence you have to face with that or not at all, like a breakup fee or anything?

Ben Hatfield

There is absolutely no breakup fee. There was deadline in the contract for them to specify certain aspects of their commitment. They weren't able to fully satisfy that deadline and so we were in position where we had the option to terminate.

And while we're very much liked their project and hope they are successful with it, and frankly want to sell them coal, we had some attractive market opportunities that we wanted to act on given that flexibility. And so, we're going to act on those attractive opportunities and also keep the door open and hopefully conclude the deal with Secure once they get everything in order.

Justine Fisher - Goldman Sachs

And then can you also talk a little bit more about what you are doing to attract labor, because Massey spoke last week about how they've offered a substantial amount of money to people to stay at the company. Are you guys offering anything on the order of magnitude that they are?

Ben Hatfield

Well, I think the Massey approach, as I understand it and its all word of mouth, is pretty unique and certainly creative with respect to employment contracts. I'm not sure what level of success they are enjoying. That is not something we're doing at this point.

We are focused certainly on making sure that our wages and benefits are competitive for the area and that we have appropriate retention incentives with our workforce. So, we believe we're addressing it more from the market standpoint rather than a contractual standpoint and expect to continue on that course.

But I think there are unknowns that lie ahead of us as an industry has never seen such a dramatic upturn in the market that seems to have such extended strength. So, all the rules that we've normally relied on that could quickly change depending on what happens, because certainly everything we see indicates that this theory of enjoyable [pricing], certainly favorable pricing is going to have some legs on it.

So, we're going to have to be sure that we're positioned to continue drilling and retaining our workforce and we expect we will.

Justine Fisher - Goldman Sachs

Would you characterize that current labor market as being as tight as it was a couple of years ago or tighter or do you think it's getting tighter or --?

Ben Hatfield

I think it's approaching the time that we saw in the 2006 timeframe. What I hope is also the case, though, is that many of our competitors have learned lessons as we did about trying to ramp up too quickly with inexperienced miners and essentially defeating our own purposes, because it raises the cost of labor in the region. And frankly, it tends to hurt productivity for everybody. So, I think you will generally see hopefully a more disciplined industry with respect to just trying to grow at all costs.

So, many companies did that in 2006, and we made a few of those mistakes ourselves, and we're certainly taking a more tempered approach in the current market. The production growth that we've laid out for you is not anything that arrived us from the recent upturn in pricing. It's a plan that we started well over a year ago, and we're going to stick with that plan and try to deliver on it.

Justine Fisher - Goldman Sachs

Okay. And then the last question is, with current prices looking like they're going to stick at least in Central App and Northern App for the next couple of years based on where the curve is, do you think there might be foreign buyers of Central App companies?

I would think more exclusively Central App companies rather than companies that are big in Appalachia and then also maybe in the PRB. But do you guys think we might start seeing foreign buyers trying to look at Central App companies?

Ben Hatfield

That's a good question, Justine, because we're in unprecedented territory here. I mean we certainly haven't seen this kind of fervor in the export market in a couple of decades. So it's certainly not impractical to say that export companies maybe or companies that need coal offshore may look at an investment in the Appalachian coal region to essentially hedge it or be in it and ensure a stable supply.

It would certainly make sense from the standpoint of hedging the risk, so I think that could indeed happen. I can't say that I've seen it show up yet in the marketplace, but I think it's certainly a viable reaction that could develop.

Justine Fisher - Goldman Sachs

So, the person you approach for the potential debut at Tygart was domestic, not foreign?

Ben Hatfield

That's correct.

Justine Fisher - Goldman Sachs

Okay, thank you very much.

Operator

(Operator Instructions)

Your next question will come from the line of Luther Lu with FBR. Please proceed.

Luther Lu - FBR

Thank you. Good Morning.

Ben Hatfield

Good Morning.

Luther Lu - FBR

I have a few quick follow-up questions on the exothermal coal. What type of coal is it? Is that Central App or Northern App?

Ben Hatfield

The bulk of it is coming from our Birch River operation, which sort of falls on the line between Central App and Northern App. We characterize it as Northern App, and it's basically a 12 to mid-sulfur coal. It's not the super-premium near compliance coal that you see published.

Luther Lu - FBR

Wow. So, 12 to mid-sulfur coal can get some $70 range. That's pretty impressive. And then on your price forecast, you mentioned a little bit about being conservative on the high-vol, low-vol side. What about the steam coal, for instance, on Illinois basin, what are your assumptions there?

Ben Hatfield

For our Illinois basin product: number one, we do not have a lot of volume exposed to the market right now. And that's why our range is much tighter on that product versus our other product. And in fact, I really don't want to put out what the price is. I'm comfortable with the range for competitive reasons.

Luther Lu - FBR

Okay, got you. And another follow-up is on the labor turnover issue. Massey mentioned for their underground mining operations, their labor turnover ratio was about 22%. Do you guys have a similar number or do you see lower or higher?

Brad Harris

I don't recall as being broken out underground versus surface. But overall, our number is certainly below that. That question, I should analyze that maybe on the individual operations. But looking overall, I think our number is under the 15% range.

Luther Lu - FBR

Under 15, that's great. Okay. And last one is could you guys give us an update on the surface mining issue at the Thunder Ridge? And also, if the permitting issue is not turned over by the Fourth Circuit Court, how much production do you see could be affected next year?

Ben Hatfield

Well, at this point, obviously we're continuing to produce as we were before the issue with the Corp of Engineers permit approval being challenged does not have a near-term impact. It has a potential impact that could come to play in the mid-2009 timeframe.

Luther Lu - FBR

Okay. How much production roughly?

Ben Hatfield

Overall, Thunder Ridge, I think we're talking about 400,000 to 500,000 annual tons, but we expect to be successful and we expect to have the mine permit developed.

What's ongoing essentially, if you will, to put it in Layman's terms, is you are having a challenge to the kind of the Kentucky region permitting process to kind of try to force them to apply the rules that were implemented in West Virginia. That's essentially raised the standard and required more stringent scrutiny on Valleyfield sizes and approvals.

So if you go to the logical course before this litigation win in West Virginia, the outcome could be a heightened level of scrutiny on approval of Valleyfield that makes it a little tougher and requires you to minimize the size there, but it still doesn't do anything on the large scale to prevent surfacing mining of an area. So, we still expect to move forward with that permit and develop it as we address the challenge that's been placed before us.

Luther Lu - FBR

Okay, great. Thank you.

Operator

And gentlemen, your next question will come from the line of Laurence Jollon with Lehman Brothers. Please proceed.

Laurence Jollon - Lehman Brothers

Good morning. Just on your Northern App operations, your costs seem to decline pretty significantly on a sequential basis. Could you provide a little color there? I know these have been underperforming operations in recent times.

Ben Hatfield

Yes, we did see significantly improved performance in fourth quarter, and that's one where we expect again continued improvement. We made a reference to the Buckhannon operation, which is a significant piece of that Northern App production now essentially performing far better than it has through the course of 2007.

Laurence Jollon - Lehman Brothers

Should we expect to see cash costs continue to improve there as volumes pick up a little bit or is your fourth quarter performance reflective of where you think '08 will turnout?

Ben Hatfield

We are expecting continued improvement, because you are still not seeing the benefit of Sentinel running as a three-section operation at 1.5 million tons per year. It's still running in a constrained mode, a big coal mine that essentially only ramped about to two-thirds of its sized capacity.

So, we expect continued cost improvement as we are able to bring those operations up to the anticipated level of performance. So, yes, we would expect continued improvement.

Laurence Jollon - Lehman Brothers

And you didn't disclose your EBITDA by region in the press release. I think you've done that in the Qs historically in the third quarter EBITDA. Northern App was roughly $8 million loss. Can you give us a sense for what was in the fourth quarter? Was it breakeven?

Brad Harris

The EBITDA by region will be included in our 10-K filing in a couple of weeks here.

Laurence Jollon - Lehman Brothers

Okay. And then moving on to your revolver, am I correct to assume that there are no borrowings currently outstanding under the $100 million revolver?

Brad Harris

That's correct. There is no draws on that at all. The only thing we have is the support related to the letters of credit outstanding.

Laurence Jollon - Lehman Brothers

Okay. And then related to that, you've referenced that you haven't tripped any covenants. Am I correct to assume that if you had drawn on the revolver, you would have tripped the covenants?

Brad Harris

No, no we would not have. We have the capacity, the availability to borrow the $30 million at this point.

Laurence Jollon - Lehman Brothers

Because when I look at your maximum leverage covenant of 8 in three quarters times and your minimum interest coverage covenant of 1 in a quarter times. My [knowledge] if math suggests that you've tripped them by a wide margin? I can follow-up offline.

Brad Harris

Good. We'll look into that, but I think our analysis has been that we did not trip any covenants, but we'll follow-up with you offline and clear about that calculation.

Laurence Jollon - Lehman Brothers

Okay. And then moving on to the potential capital markets transaction that you referenced near the second quarter of '09, if we just take the midpoint of your '08 guidance, whether I am right or I am wrong, that implies at least in my opinion roughly a $100 million EBITDA for '08 and then you back out $157 million of CapEx, roughly $45 million of cash interests and you assumed cash taxes in working capital are zero, it's showing a significant cash burn.

I know you do have $100 million of cash and the $30 million under your revolver. But my background estimates imply that you burn all of your cash and have to draw down on your revolver, wouldn't you try to access the market sooner than second quarter of '09?

Brad Harris

Yes, I won't rule that out again. Our current forecast indicates that we don't need to go into the marketplace until the second quarter of 2009. And that assumes that we fund the Tygart project 100% on our own. So, lots of different opportunities there between that point and today to arrive at a different conclusion, particularly with respect to capital sharing or partnership on Tygart on whatever the case may be.

So, I am not suggesting that we won't do anything until second quarter of 2009. I am only pointing out that we don't have to do anything today and between today and till second quarter of 2009. We are going to look at our options and figure out what makes the most sense.

Laurence Jollon - Lehman Brothers

Do you also still have access to the Caterpillar equipment facility?

Brad Harris

Yes, we do.

Laurence Jollon - Lehman Brothers

And is that roughly $45 million or $50 million?

Brad Harris

$50 million for [tower] facility.

Laurence Jollon - Lehman Brothers

And your availability is $50 million or --?

Brad Harris

We have some outstanding now in the mid-teens, I believe, at this point. So, we probably have in the mid-30s of capacity lift.

Laurence Jollon - Lehman Brothers

Thanks. And then last question, just as we look at '08 and your price position, I understand that a lot of your contracts historically get indexed. Can you help us think about when you say 89% for '08 is priced, are some of those re-indexed or as well as for '09? I just want help thinking about that.

Mike Hardesty

For '08, we have a few contracts that are not technically re-indexed. They are tied to a basket of alternative markets and prices. So, we should see some benefit there. For '09, we have a couple of contracts that are re-indexed completely. And as we've disclosed earlier, we terminated a couple of contracts in the fall that had that feature and those terms are now totally exposed to new pricing.

Ben Hatfield

What Mike is describing there is that it's wide open. There is not limitation or constraint if we don't like the price, we can go to the market. And so, we would regard that tonnage as unpriced at this point.

Laurence Jollon - Lehman Brothers

Okay, that's very helpful. Thanks for your time.

Operator

And gentlemen, your next question will come from the line of [Maxwell Vanderbilt] with UBS. Please proceed.

Maxwell Vanderbilt - UBS

I am sorry, because this probably known by everybody else. But when you give your estimated forecast for pricing for Central App and Northern App that is a blend between steam and metallurgical coal?

Ben Hatfield

Yes.

Maxwell Vanderbilt - UBS

Thank you.

Operator

And gentlemen, your next question will come from the line of Julian Benscher with Sherwood Investments. Please proceed.

Julian Benscher - Sherwood Investments

Good morning, gentlemen.

Ben Hatfield

Good morning.

Julian Benscher - Sherwood Investments

A quick question for Brad first. You mentioned the covenants weren't affected by the impairment charge. Will it have any impact on the conversion price of the convertible preferred?

Brad Harris

I do not believe so, but it's something [mechanical] we need to go through, but at this point, the initial assessment is no.

Julian Benscher - Sherwood Investments

Okay. And then also just on my modeling proposes, looking forward in 2008, you didn't mention so far ADDCAR revenue or the tonnage from the Massey settlement. Is it reasonable to presume those are moving forward along similar lines previously discussed?

Ben Hatfield

Yes, there is no change in those. The Massey tons would be captured in our prediction of total tons sold and the pricing is established.

Julian Benscher - Sherwood Investments

And you're still quite exited about the prospects for ADDCAR revenue?

Ben Hatfield

Yes, we are. We believe there is significant upside there and are very encouraged by the market interest we've seen in the recent quarters.

Julian Benscher - Sherwood Investments

And then just to touch back on the labor shortage potentially that might be looming out there, is it reasonable to assume the sort of turmoil you managed to navigate through following the exit from the bankruptcies? Has it got you focused perhaps earlier than your competitors on making sure that there were incentives in place to get perhaps previously somewhat upset comfortable so that you are better positioned to deal these challenges moving forward than your competitors might be?

Ben Hatfield

I think that's exactly correct, particularly in the areas where we've got a long established presence in East Kentucky, for instance. That's one of our lowest turnover areas and one of the areas where we feel more secured with respect to the overall labor market.

The areas where we have the greatest challenges are the more recent expansions, in the areas that we haven't been previously established, but we believe we've got a wage and benefits package and a growth profile that will help us continue to attract workers who are having significant success about Beckley and Sentinel.

So, we believe we are well positioned to do exactly what we've described.

Julian Benscher - Sherwood Investments

Excellent. I wish you the very best of luck. Thank you.

Ben Hatfield

Thank you.

Operator

And gentlemen, your next question will come from the line of John Selser of Maple Leaf. Please proceed.

John Selser - Maple Leaf

Yes, thank you. And you've addressed part of it already. But the CapEx for '09, what was that number again?

Brad Harris

192. Let me look it up.

John Selser - Maple Leaf

And with the Tygart project you mentioned, how large of a component was that of that number?

Ben Hatfield

Yes, for clarification, I think we said 2008 is $157 million; and 2009, 192 million projected capital expenditures. And your question is what portion is Tygart?

John Selser - Maple Leaf

Right. You are saying that that would be, I guess, discretionary.

Ben Hatfield

The Tygart is in those numbers, and I don't remember this precise breakout in 2008. It's perhaps $25 million to $30 million range. I don't remember the 2009 component, but it would certainly be the largest component of the expansion capital.

John Selser - Maple Leaf

Okay. And I know you've guidance for '08 and '09. Would you care to maybe take even a rough stab? I mean you're looking for continued growth in coal production beyond 2009, right, 2010 '11?

Ben Hatfield

I think the numbers that we have put out there pretty much speak for themselves. The fact that we are bringing in a new mining complex, which is going to do 3.5 million annual tons that comes online late 2010, suggests that we're expecting forward growth. You'll have some effect fall off of depleting operations, but I think it's certainly a safe statement that our growth profile is positive and continuing through the 2011 timeframe.

John Selser - Maple Leaf

Right. And if I might, the logistics of exploring your coal, how does that transact, out of what ports is that leaving?

Ben Hatfield

I'm going to ask Mike Hardesty to address that for you.

Mike Hardesty

Bulk of our coal is coming from the operation I mentioned earlier, and it goes through the port of Baltimore and [CSA].

John Selser - Maple Leaf

Birch River?

Mike Hardesty

So, our Birch River operation, and we do a limited amount out of Central App to New [Jersey] ports.

John Selser - Maple Leaf

Okay. All right, thank you.

Operator

And gentlemen, your next question will come from the line of Bob Chewning with Davenport & Company. Please proceed.

Garrett Nelson - Davenport & Company

This is Garrett Nelson actually. How are guys doing?

Ben Hatfield

Good morning, Garrett.

Garrett Nelson - Davenport & Company

Good morning. Regarding the sale of the 1.4 million tons of the high-quality low-vol coal under the one to three year contracts that you mentioned, we are wondering if you might provide a breakdown of the volumes you've sold forward for each year?

Ben Hatfield

We are not prepared to do that at this point for a variety of reasons and many of them competitive. This is a pretty small universe of suppliers and buyers. And so, for competitive reasons, we'd prefer not to get into greater detail on that.

Garrett Nelson - Davenport & Company

Okay, thanks.

Ben Hatfield

You're welcome.

Operator

And gentlemen, your next question will come from the line of John Bridges with JPMorgan. Please proceed.

John Bridges - JPMorgan

Hi, Ben and everybody. Just a follow-on from the other question with respect to your exports. That's a consul terminal. I was just wondering do you have a long-term access tonnage allowance there or how are those tons handled?

Ben Hatfield

Yes. What we have is an arrangement with two or three international trading companies that manage the space, take the freight risk, take the merge risk, and we sell directly to them.

John Bridges - JPMorgan

Okay. So, it's on a space available basis?

Ben Hatfield

They have arrangements in place for the terminal through good end storage space.

John Bridges - JPMorgan

Okay. So, how long are your contracts going through Baltimore?

Ben Hatfield

All of our contracts currently for thermal coal in 2008. Early discussions for 2009 business, but nothing has been booked.

John Bridges - JPMorgan

Okay. Thanks for that. Good luck, guys.

Ben Hatfield

Welcome, John.

Operator: And gentlemen, at this time, I show we have no further questions within the queue. I'd like to turn the conference back over to management for the closing comments.

Ben Hatfield

Thank you. International Coal Group expects to see improved financial performance in 2008 as we benefit from improved coal markets and production increases at our Sentinel and Beckley mines.

We thank you for your interest in International Coal Group. We look forward to joining you again next quarter. Have a good day.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This does concludes the presentation and you may now disconnect. Have a wonderful day.

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