INTERNATIONAL COAL GROUP, INC. Securities Registration Statement (S-1/A) Business

The following is an excerpt from a S-1/A SEC Filing, filed by INTERNATIONAL COAL GROUP, ... on 6/15/2005.

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OVERVIEW
We are a leading producer of coal in Northern and Central Appalachia with a broad range of mid to high Btu, low sulfur steam and metallurgical coal. Our Appalachian mining complexes, which include 11 of our mining complexes, are located in West Virginia, Kentucky and Maryland. We also have a complementary mining complex of mid to high sulfur steam coal strategically located in the Illinois Basin. We market our coal to a diverse customer base of largely investment grade electric utilities, as well as domestic and international industrial customers. The high quality of our coal and the availability of multiple transportation options, including rail, truck and barge, throughout the Appalachian region enable us to participate in both the domestic and international coal markets. Due to the decline in Appalachian coal production in recent years, these markets are currently characterized by strong demand with limited supply response and elevated spot and contract prices.
The company was formed by WLR and other investors in May 2004 to acquire and operate competitive coal mining facilities. As of September 30, 2004, ICG, Inc. acquired certain key assets of Horizon through a bankruptcy auction. These assets are high quality reserves strategically located in Appalachia and the Illinois Basin, are union free, have limited reclamation liabilities and are substantially free of other legacy liabilities. Due to our initial capitalization, we were able to complete the acquisition without incurring a significant level of indebtedness. Consistent with the WLR investor group's strategy to consolidate profitable coal assets, the Anker and CoalQuest acquisitions further diversify our reserves. On or about the same time as the Anker and CoalQuest acquisitions, we will complete a corporate reorganization. With the proceeds of this offering, we expect to retire substantially all of our debt, including debt assumed through the Anker and CoalQuest acquisitions, and, thus, we will be strategically well-positioned.
As of January 1, 2005 (pro forma for the Anker and CoalQuest acquisitions), we owned or controlled approximately 315 million tons of metallurgical quality coal reserves and approximately 572 million tons of steam coal reserves. Based on expected 2005 production rates, our Northern and Central Appalachian reserves (pro forma for the Anker and CoalQuest acquisitions) could support existing production levels for approximately 35 years and all of our reserves could support existing production levels for approximately 49 years. Further, we own or control approximately 707 million tons of coal resources, pro forma for the Anker and CoalQuest acquisitions.
Steam coal is primarily consumed by large electric utilities and industrial customers as fuel for electricity generation. Demand for low sulfur steam coal has grown significantly since the introduction of certain controls associated with the Clean Air Act and the decline in coal production in the eastern half of the United States. Metallurgical coal is primarily used to produce coke, a key raw material used in the steel making process. Generally, metallurgical coal sells at a premium to steam coal because of its higher quality and its importance and value in the steel making process. During 2004 and the first quarter of 2005, the demand for metallurgical coal increased substantially as the global demand for steel increased.
For the year ended December 31, 2004 (pro forma for the Anker and CoalQuest acquisitions), we sold 18.4 million tons of coal, of which 18.2 million tons were steam coal and 0.2 million tons were metallurgical coal. Our steam coal sales volume in 2004 consisted of mid to high quality, high Btu (greater than 12,000 Btu/lb.), low sulfur (1.5% or less) coal, which typically sells at a premium to lower quality, lower Btu, higher sulfur steam coal, pro forma for the Anker and CoalQuest acquisitions. Our three largest customers for the three months ended March 31, 2005 were Georgia Power Company, Carolina Power & Light Company and Duke Power and we derived approximately 49% of our coal revenues from sales to our five largest customers, pro forma for the Anker and CoalQuest acquisitions.

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OUR HISTORY
The Horizon acquisition
On February 28, 2002, Horizon (at that time operating as AEI Resources Holdings, Inc.) filed a voluntary petition for Chapter 11 and its plan of reorganization became effective on May 8, 2002. However, Horizon's profit margins and cash flows were negatively impacted in fiscal year 2002 by, among other things, the falling price of coal and continued increases in certain operating expenses. Due to capital and permit constraints, Horizon had to mine in areas which produced coal but at greatly reduced profit margins thus severely reducing cash flow. As a result of its continuing financial and operational difficulties, Horizon filed a second voluntary petition for relief under Chapter 11 on November 13, 2002. Horizon obtained a debtor-in-possession financing facility of up to $350.0 million and was effective in rationalizing its operations, selling non-core assets, paying down outstanding borrowings and generating substantial operating profit. With stabilized operations and a significantly improved coal market, Horizon filed a joint plan of reorganization and a joint plan of liquidation under Chapter 11.
ICG was formed by WL Ross & Co. LLC and other investors in May 2004. The Horizon assets were sold to us through a bankruptcy auction on August 17, 2004. Presented as a combined $290.0 million cash bid with A.T. Massey, ICG, Inc. agreed to pay $285.0 million in cash plus the assumption of up to $5.0 million in cure costs to acquire the assets plus ICG, Inc. also contributed a credit bid of second lien Horizon bonds, and A.T. Massey agreed to pay $5.0 million in cash to acquire a separate group of assets associated with two Horizon subsidiaries. The credit bid included the cancellation of $482.0 million of certain Horizon bonds in return for which those Horizon bondholders received the right to participate in a rights offering to purchase ICG common stock. Shares issued in connection with the rights offering are included in our outstanding stock. The former bondholders of Horizon that purchased shares of ICG, Inc. common stock in the rights offering were creditors of Horizon and received the shares in reliance on Section 1145 of the U.S. Bankruptcy Code, which in general provides for the limited exemption from the registration requirements of the Securities Act for securities issued in exchange for a claim against the debtor in bankruptcy. Since ICG's formation, some trading of ICG, Inc.'s common stock has occurred. See "Price range of ICG, Inc. common stock." ICG has not previously been a reporting company under the Securities Exchange Act of 1934, as amended. In addition, Lexington Coal Company, LLC, a newly formed entity, was organized by the founding ICG, Inc. stockholders to assume certain reclamation liabilities and assets not otherwise being purchased by A.T. Massey or ICG, Inc. In order to provide support to Lexington Coal in consideration for assuming these liabilities, we agreed to provide a $10.0 million letter of credit to support reclamation obligations and to pay a 0.75% royalty on the gross sales receipts for coal mined and sold from the assets we acquired from Horizon until the completion by Lexington Coal of all reclamation liabilities acquired from Horizon. Other than this support and a limited commonality of ownership of ICG and Lexington Coal Company, there is no relationship between the entities. The bankruptcy court confirmed the sale on September 16, 2004 as part of the completion of the Horizon bankruptcy proceedings. At closing, we increased the purchase price by $6.25 million, primarily to satisfy increased administrative expenses, and the sale was completed as of September 30, 2004.
The acquisition was financed through equity investments and borrowings under our senior secured credit facility, which we entered into at the closing of the Horizon acquisition. See "Description of indebtedness" for a discussion of our senior credit facility. We expect to repay a portion of the term loan facility with the proceeds of this offering.

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The Anker and CoalQuest acquisitions
On March 31, 2005, ICG, Inc. entered into a business combination agreement with Anker Coal Group, Inc., ICG (then known as ICG Holdco, Inc.), at that time a wholly owned subsidiary of ICG, Inc., ICG Merger Sub, Inc., an indirect wholly owned subsidiary of ICG, and Anker Merger Sub, Inc., an indirect wholly owned subsidiary of ICG. Under the terms of the business combination agreement, simultaneously with the effective time of the mergers under the CoalQuest business combination agreement, ICG Merger Sub will merge with and into ICG, Inc. and Anker Merger Sub will merge with and into Anker, with each of ICG, Inc. and, Anker surviving their respective mergers as indirect wholly owned subsidiaries of ICG and ICG will be the new parent holding company. The agreement was amended May 10, 2005 to allow the exchange ratio formula to be adjusted if ICG engages in a stock split.
The stockholders of Anker, collectively, are entitled to receive the lesser of
(i) 19,498,581 shares of ICG common stock and (ii) the number of shares of ICG common stock equal to the quotient of 173,250,000 divided by the price per share at which our stock is offered in this offering (the "base merger share number"), subject to the following possible adjustments. If certain events relating to the commencement of specified coal production and the execution of a coal purchase contract do not occur prior to the effectiveness of the merger, ICG will only issue shares equal to the lesser of (i) 18,373,122 shares of ICG common stock and (ii) the number of shares of ICG common stock equal to the quotient of 163,250,000 divided by the price per share at which our common stock is offered in this offering (the "adjusted merger share number") at the effective time of the merger and will reserve but not issue the number of shares equal to the difference between the adjusted merger share number and base merger share number (this difference, the "contingent shares"). These contingent shares are only issuable to the former stockholders of Anker if one of the following events occurs: (i) the commencement of the production of coal at Anker's Stoney River mine or (ii) the execution of a contract for the purchase of coal from the Glady's Fork mine; provided in either case that such event, at the time it occurs, could reasonably be expected (alone or with the other event) to generate at least $6.0 million of EBITDA during calendar years of 2005 and 2006. On March 31, 2005, ICG, Inc. also entered into a business combination agreement with CoalQuest, ICG and CoalQuest Merger Sub LLC, an indirect wholly owned subsidiary of ICG, and the members of CoalQuest. Under the terms of the business combination agreement, simultaneously with the effective time of the mergers under the Anker business combination agreement, the members of CoalQuest will contribute their interests in CoalQuest to us in exchange for shares of our common stock. As a result of this contribution, CoalQuest will become our wholly owned subsidiary. The agreement was amended May 10, 2005 to allow the exchange ratio formula to be adjusted if ICG engages in a stock split. The members of CoalQuest, collectively, will receive the lesser of
(i) 11,451,548 shares of ICG common stock and (ii) the number of shares of common stock equal to the quotient of 101,750,000 divided by the price per share at which our common stock is offered in this offering. The former stockholders of Anker and former members of CoalQuest will be granted certain piggyback registration rights with respect to the ICG common stock issued to them. For additional information on registration rights, see "Description of capital stock-Registration rights." The completion of both transactions is subject to various conditions, all of which have been fulfilled other than the approval by the ICG, Inc. stockholders of the corporate reorganization. In addition, the completion of the transactions under each business combination agreement is conditioned upon the satisfaction of the conditions precedent of the transactions under the other business combination agreement.

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Our reorganization
On or about the same time as the Anker and CoalQuest acquisitions, we will complete a corporate reorganization. Prior to the reorganization, our current top-tier parent holding company is ICG, Inc. Upon completion of the reorganization, ICG will become the new top-tier parent holding company. In the corporate reorganization, the stockholders of ICG, Inc. are expected to receive one share of ICG common stock for each share of ICG, Inc. common stock. The shares of our common stock being issued to the ICG, Inc. stockholders are expected to be registered pursuant to a separate registration statement to be filed with the SEC. All stockholders of ICG, Inc., all Anker stockholders and all CoalQuest members will be stockholders of ICG after the reorganization and the Anker and CoalQuest acquisitions.
OUR COMPETITIVE STRENGTHS
We believe that the following competitive strengths enhance our prominent market position in the United States:
Ability to provide variety of high-quality steam and metallurgical coal. Our customers, which include largely investment grade electric utilities, as well as domestic and international industrial customers, demand a variety of coal products. Our variety of coal qualities also allows us to blend coal in order to meet the exact specifications of our customers. Our access to a comprehensive range of high Btu steam and metallurgical quality coal allows us to market differentiated coal products to a variety of customers with different coal quality demands, which allows us to benefit from particularly strong pricing dynamics in the current metallurgical coal market.
Concentration in highly valued Central Appalachian region. Our operations are primarily located in Central Appalachia, a region known for its high quality coal characterized by low sulfur and high Btu content. Production from Central Appalachian mines accounted for approximately 73.2% of our 2004 coal sales volume, pro forma for the Anker and CoalQuest acquisitions. Increased electricity generation and steel production both domestically and internationally has lead to a substantial increase in demand and a significantly improved pricing environment. In addition to general market factors creating a favorable environment, the Central Appalachian region has experienced production declines in five out of the last six years, primarily due to difficult mining conditions, yet demand continues to increase. We believe that generally favorable market dynamics and trends in Central Appalachian coal supply and demand, the high quality of Central Appalachian coal and the low transportation costs that result from the relative proximity of Central Appalachian producers and customers have created favorable pricing dynamics that provide us with an advantage over producers from other regions.
Significant reserve base providing internal expansion opportunities. We own approximately 613 million tons of reserves and control an additional 274 million tons of reserves through long-term leases, pro forma for the Anker and CoalQuest acquisitions. We own or control an additional 707 million tons of coal resources, pro forma for the Anker and CoalQuest acquisitions. We have not yet developed approximately 73% of these owned and controlled reserves. We believe these owned and controlled but as yet undeveloped reserves and resources would allow us to as much as double our existing production levels over the next several years. Our ownership and control of such a substantial portion of undeveloped reserves in both Northern and Central Appalachia and the Illinois Basin provides us with significant internal growth opportunities, this is in contrast to other U.S. coal producers who must acquire or lease new reserves to enable their growth. We also have coalbed methane reserves in our owned reserves in West Virginia, which provides us with additional growth opportunities in this complementary energy market.
Ability to capitalize on strong coal market dynamics. A significant portion of our coal supply contracts were renegotiated during the second half of 2004 in connection with Horizon's bankruptcy

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and were re-priced at that time to then-current (and more favorable) market prices and terms. On average, our coal supply contracts have a life of approximately five years, however, the majority of our contracts contain annual price reopeners. Our marketing effort is focused on maintaining a balance of longer-term contracts and spot sales. We typically have 50% of our production contracted by the early part of the previous year with another 35% contracted by the second half of the year with the remainder of our production used to take advantage of market dynamics and maximize value in the spot market. Diversity of reserves, resources and production. Our reserves, resources and production are located in three of the four major coal regions in the United States. Our production, reserves and resources in Northern and Central Appalachia and the Illinois Basin provide important geographical diversity in terms of markets, transportation and labor. The diversity of our operations and reserves provides us with a significant competitive advantage, allowing us to source coal from multiple operations to meet the needs of our customers and reduce transportation costs.
Minimal level of long-term liabilities. We believe that compared to other publicly-traded U.S. coal producers we have among the lowest legacy reclamation liabilities and post-retirement employee obligations. As of March 31, 2005 (pro forma for the Anker and CoalQuest acquisitions), we had total accrued reclamation liabilities of only $68.9 million, post-retirement employee obligations of only $8.4 million, "black lung" liabilities of approximately $10.6 million and Coal Act liabilities of only $4.7 million. We maintain a comprehensive mine reclamation plan which we believe ensures that all of our mining operations are current on reclamation requirements. In addition, our entire workforce is union free, which minimizes employee-related liabilities commonly associated with union-represented mines. As of March 31, 2005 (pro forma for the Anker and CoalQuest acquisitions), our total debt was $216.7 million and after this offering we expect to retire all of this debt, excluding $7.1 million of capitalized leases and other debt obligations. We believe that our financial leverage is among the lowest of the publicly traded U.S. coal producers. We believe this low leverage will afford significant financial and operational flexibility.
Highly skilled management team. The members of our senior management team have, on average, 23 years of industry work experience across a variety of mining methods, including longwall mining. We have substantial Appalachian mining experience in increasing productivity, reducing costs, enhancing work safety practices, and maintaining strong customer relationships. In addition, the majority of our senior management team has extensive mine development and expansion experience.
Recognized leadership in safety and environmental stewardship. The injury incident rates at our mines throughout 2004, according to MSHA, were below industry averages. We have been recognized by safety and environmental agencies with several prestigious awards for our safety and environmental record, such as the "Sentinels of Safety Award" from MSHA, The Department of Interior "Excellence in Surface Coal Mining and Reclamation Award" and a reclamation award for innovative methods from the West Virginia Coal Association. Our focus on safety and environmental performance results in the reduced likelihood of disruption of production at our mines, which leads to higher productivity and improved financial performance.
OUR BUSINESS STRATEGY
Our objective is to increase stockholder value through sustained earnings and cash flow growth. Our key strategies to achieve this objective are described below:
Maximize profitability through highly efficient and productive mining operations. We are continuing to evaluate and assess our current operations in order to maximize operating efficiency and returns on invested capital. We are focused on maintaining low-cost, highly productive operations by continuing to invest substantial capital in state-of-the-art equipment and advanced technologies. We expect to

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internally fund approximately $304 million of capital expenditures in the next two years. As we take advantage of planned expansion opportunities from 2007 through 2009 principally as a result of the Anker and CoalQuest acquisitions, we expect to spend approximately $627 million on capital expenditures, which may require external financing. We have developed and cultivated a productivity-focused culture through incentive programs that encourage employees to work efficiently, safely and productively. We intend to further leverage the scale of our purchasing power to obtain favorable pricing from suppliers of raw materials in addition to developing reserves and utilizing mining techniques, such as longwall mining and dragline operation, to enhance and streamline our operations.
Leverage owned and controlled reserve base to generate substantial internal growth. We own a large undeveloped reserve in Northern Appalachia containing approximately 194 million tons of high Btu, low sulfur steam and metallurgical quality coal, pro forma for the Anker and CoalQuest acquisitions. We currently expect underground longwall mining operations at this reserve to commence within the next four years, which will increase our production level by providing highly valued premium quality coal in an increasingly tight supply market. In addition, we have two substantial reserves in Central Appalachia (pro forma for the Anker and CoalQuest acquisitions), which contain 56.5 million tons of premium metallurgical coal and are expected to be developed in the next three to six years. Further, the substantial reserve position that we own in the Illinois Basin is expected to allow us to benefit from the expected increase in demand for high sulfur coal to generate electricity. We are in the process of developing and exploiting our coalbed methane reserves (the first such development and exploration in the region). Finally, we intend to opportunistically acquire new coal reserves and/or coal companies to expand our coal market opportunities and increase shareholder value.
Capitalize on favorable industry fundamentals by opportunistically marketing coal. U.S. coal market fundamentals are among the strongest in the last 20 years. We believe this generally favorable pricing environment will persist given systemic changes in market dynamics such as long-term supply constraints and increasing demand, particularly in Central Appalachia and for our metallurgical coal. Furthermore, because of the high quality of our coal, our access to a variety of alternative transportation methods, including truck, rail and barge, and our mix of long-term contract and spot market sales, we will be able to capitalize on the favorable industry dynamics to maximize our revenues and profits. We plan to extend the life of our longer-term contract arrangements and limit price reopeners in order to lock in margins and enhance our financial stability, while at the same time, we plan to maintain an uncommitted portion of planned production to allow for additional future pricing upside exposure. As of May 31, 2005 (pro forma for the Anker and CoalQuest acquisitions), we had entered into contracts to sell approximately 93% of 2005 planned production, approximately 69% of 2006 planned production and approximately 48% of 2007 planned production.
Continue to focus on improving workplace safety and environmental compliance. We have maintained and plan to continue to maintain an excellent safety and environmental performance record. We continue to implement safety measures and environmental initiatives that are designed to promote safe operating practices and improved environmental stewardship among our employees. Our ability to maintain a good safety and environmental record improves our productivity and lowers our overall cost structure as well as bolsters employee morale.
COAL MINING METHODS
We produce coal using two mining methods: underground room and pillar mining using continuous and longwall mining equipment, and surface mining, which are explained as follows:
Underground mining
Underground mines in the United States are typically operated using one of two different techniques: room and pillar mining or longwall mining. In 2004, approximately 36% of our produced and

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processed coal volume came from underground mining operations generally using the room and pillar method with continuous mining equipment. Room and pillar mining
In room and pillar mining, rooms are cut into the coalbed leaving a series of pillars, or columns of coal, to help support the mine roof and control the flow of air. Continuous mining equipment is used to cut the coal from the mining face. Generally, openings are driven 20 feet wide and the pillars are generally rectangular in shape measuring 35-50 feet wide by 35-80 feet long. As mining advances, a grid-like pattern of entries and pillars is formed. Shuttle cars are used to transport coal to the conveyor belt for transport to the surface. When mining advances to the end of a panel, retreat mining may begin. In retreat mining, as much coal as is feasible is mined from the pillars that were created in advancing the panel, allowing the roof to cave. When retreat mining is completed to the mouth of the panel, the mined panel is abandoned. The room and pillar method is often used to mine smaller coal blocks or thinner seams. It is also employed whenever subsidence is prohibited. Seam recovery ranges from 35% to 70%, with higher seam recovery rates applicable where retreat mining is combined with room and pillar mining. Productivity for continuous room and pillar mining in the United States averages 3.3 tons per employee per hour, according to the EIA.
Longwall mining
The other underground mining method commonly used in the United States is the longwall mining method. ICG does not currently have any longwall mining operations, but expects to use this mining method in the development for two of its undeveloped mining properties in West Virginia. In longwall mining, a rotating drum is trammed mechanically across the face of coal and a hydraulic system supports the roof of the mine while it advances through the coal. Chain conveyors then move the loosened coal to an underground mine conveyor system for delivery to the surface.
Surface mining
Surface mining is used when coal is found close to the surface. In 2004, approximately 64% of our produced and processed coal volume came from surface mines. This method involves the removal of overburden (earth and rock covering the coal) with heavy earth moving equipment and explosives, loading out the coal, replacing the overburden and topsoil after the coal has been excavated and reestablishing vegetation and plant life and making other improvements that have local community and environmental benefit. Overburden is typically removed at our mines using large, rubber-tired diesel loaders. Seam recovery for surface mining is typically between 80% and 90%. Productivity depends on equipment, geological composition and mining ratios and averages 4.2 tons per employee per hour in eastern regions of the United States, according to the EIA. We use the following four types of surface mining methods. Truck-and-shovel/loader mining
Truck-and-shovel/loader mining is a surface mining method that uses large shovels or loaders to remove overburden which is used to backfill pits after coal removal. Shovels or loaders load coal into haul trucks for transportation to a preparation plant or unit train loadout facility. Seam recovery using the truck-and-shovel/ loader mining method is typically 85% or more. Dragline mining
Dragline mining is a surface mining method that uses large capacity draglines to remove overburden to expose the coal seams. Shovels load coal in haul trucks for transportation to a preparation plant or unit train loadout facility. Seam recovery using the dragline method is typically 85% or more and productivity levels are similar to those for truck-and-shovel/loader mining.

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Highwall mining
Highwall mining is a surface mining method generally utilized in conjunction with truck-and-shovel/ loader surface mining. At the highwall exposed by the truck-and-shovel/ loader operation a modified continuous miner with an attached beltline system cuts horizontal passages from the highwall into a seam. These passages can penetrate to a depth of up to 1,600 feet. This method typically can recover up to 65% of the reserve block penetrated. Auger mining
Auger mining is a surface mining method generally utilized in conjunction with truck-and-shovel/ loader operations. At the highwall exposed by a truck-and-shovel/ loader operation, a spiral steel auger bit is used to bore a horizontal hole into the coal seam up to a depth of 400 feet. The auger also conveys the coal to the highwall. Seam recovery using auger mining is typically 33%.
Coal preparation and blending
Depending on coal quality and customer requirements, raw coal may in some cases be shipped directly from the mine to the customer. Generally, raw coal from mountaintop removal, contour and strip mines can be shipped in this manner. However, the quality of most underground raw coal does not allow it to be shipped directly to the customer without processing in a preparation plant. Preparation plants separate impurities from coal. This processing upgrades the quality and heating value of the coal by removing or reducing sulfur and ash-producing materials, but entails additional expense and results in some loss of coal. Coals of various sulfur and ash contents can be mixed or "blended" at a preparation plant or loading facility to meet the specific combustion and environmental needs of customers. Coal blending helps increase profitability by reducing the cost of meeting the quality requirements of specific customer contracts, thereby optimizing contract revenue.
COAL CHARACTERISTICS
In general, coal of all geological composition is characterized by end use as either steam coal or metallurgical coal. Heat value and sulfur content are the most important variables in the profitable marketing and transportation of steam coal, while ash, sulfur and various coking characteristics are important variables in the profitable marketing and transportation of metallurgical coal. We mine, process, market and transport bituminous and sub-bituminous coal, characteristics of which are described below. Heat value
The heat value of coal is commonly measured in Btus per pound of coal. A Btu is the amount of heat needed to raise one pound of water one degree Fahrenheit. Coal found in the Eastern and Midwestern regions of the United States tends to have a heat content ranging from 10,000 to 14,000 Btus per pound, as received. As received Btus per pound includes the weight of moisture in the coal on an as sold basis. Most coal found in the Western United States ranges from 8,000 to 10,000 Btus per pound, as received.
Lignite coal
Lignite coal is a brownish-black coal with a heat content that generally ranges from 4,000 to 8,000 Btus per pound. Major lignite operations are located in Louisiana, Montana, North Dakota and Texas. Lignite is used almost exclusively in power plants located adjacent to or near these mines because any significant transportation costs, coupled with mining costs, would render its use uneconomical.

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Sub-bituminous coal
Sub-bituminous coal is a black coal with a heat content that ranges from 8,300 to 11,500 Btus per pound. Most sub-bituminous reserves are located in Alaska, Colorado, Montana, New Mexico, Washington and Wyoming. Sub-bituminous coal is used almost exclusively by electricity generators and some industrial consumers. Bituminous coal
Bituminous coal is a relatively soft black coal with a heat content that ranges from 10,000 to 14,000 Btus per pound. This coal is located primarily in Appalachia, Arizona, Colorado, the Midwest and Utah, and is the type most commonly used for electricity generation in the United States. Bituminous coal is also used for industrial steam purposes by utility and industrial customers, and as metallurgical coal in steel production. Coal used in metallurgical processes has higher expansion/contraction characteristics than steam coal. Anthracite coal
Anthracite coal is a hard coal with a heat content that can range from 14,000 to 15,000 Btus per pound. There is a limited number of anthracite deposits primarily located in the Appalachian region of Pennsylvania. Anthracite is used primarily for utility, industrial and home heating purposes. Sulfur content
Sulfur content can vary from seam to seam and sometimes within each seam. When coal is burned, it produces sulfur dioxide, the amount of which varies depending on the chemical composition and the concentration of sulfur in the coal. Compliance coal is coal which, when burned, emits 1.2 pounds or less of sulfur dioxide per million Btus and complies with the requirements of the Clean Air Act Acid Rain program. Low sulfur coal is coal which, when burned, emits approximately 1.6 pounds or less of sulfur dioxide per million Btus. Sub-bituminous coal typically has a lower sulfur content than bituminous coal, but some of our bituminous coal in West Virginia also has a low sulfur content. High sulfur coal can be burned in electric utility plants equipped with sulfur-reduction technology, such as scrubbers, which can reduce sulfur dioxide emissions by up to 90%. Plants without scrubbers can burn high sulfur coal by blending it with lower sulfur coal, or by purchasing emission allowances on the open market, which credits allow the user to emit a ton of sulfur dioxide. Each emission allowance permits the user to emit a ton of sulfur dioxide. By 2000, 90,000 megawatts of electric generation capacity utilized scrubbing technologies. According to the EIA, by 2025, an additional 27,000 megawatts of electric generation capacity will have installed scrubbers. Additional scrubbing will provide new market opportunities for our mid sulfur coal. All new coal-fired electric utility generation plants built in the United States will use clean coal-burning technology.
Other characteristics
Ash is the inorganic residue remaining after the combustion of coal. As with sulfur content, ash content varies from coal seam to coal seam. Ash content is an important characteristic of coal because it increases transportation costs and electric generating plants must handle and dispose of ash following combustion.
Moisture content of coal varies by the type of coal, the region where it is mined and the location of coal within a seam. In general, high moisture content decreases the heat value per pound of coal, thereby increasing the delivered cost per Btu. Moisture content in coal, as sold, can range from approximately 5% to 30% of the coal's weight.

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COAL RESERVES
"Reserves" are defined by SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. "Proven (Measured) Reserves" are defined by SEC Industry Guide 7 as reserves for which (1) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (2) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. "Probable reserves" are defined by SEC Industry Guide 7 as reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.
We estimate that there are approximately 242 million tons of coal reserves (pro forma for the Anker and CoalQuest acquisitions) that can be developed by our existing operations which will allow us to maintain current production levels for an extended period of time. ICG Natural Resources, LLC and CoalQuest own and lease all of our reserves that are not currently assigned to or associated with one of our mining operations. These reserves contain approximately 645 million tons of mid to high Btu, low and high sulfur coal located in Kentucky, West Virginia, Maryland, Illinois, Pennsylvania and Virginia. Our multi-region base and flexible product line allows us to adjust to changing market conditions and sustain high sales volume by supplying a wide range of customers.

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Our total coal reserves could support current production levels for more than 49 years. The following table provides the "quality" (average Btu content, sulfur content and ash content per pound) of our coal reserves as of January 1, 2005:

Quality characteristics

(as received)
Recoverable reserves proven Total tons and probable (in millions Tons by market as of 1/1/2005 of tons) Reserve Heat classification (in millions life content Sulfur Ash Mining companies State of tons)(1) Owned Leased (years) (Btu/lb) (%) (%) Steam Metallurgical(4)(5)

Northern Appalachia:
Vindex Energy Corporation MD 10.64 0.00 10.64 14.2 11,500- 1.2%- 7.0%- 13,000 2.0% 19.0% 7.98 2.66 Patriot Mining Company WV, PA 1.05 0.71 0.34 1.4 11,700 2.1% 16.2% 1.05 0.00 Spruce Fork Division WV 48.57 46.70 1.88 19.4 13,000 1.2% 9.0% 1.30 47.27 Philippi Development Division WV 40.97 32.34 8.63 20.5 13,100 1.4% 8.3% 0.00 40.97 Harrison Division WV 17.51 0.23 17.28 9.7 12,500 3.2% 12.5% 17.51 0.00 Mount Storm Division WV, MD 6.01 0.47 5.54 10.0 13,200 1.0% 9.0% 0.00 6.01 Sycamore Group, LLC WV 1.21 0.17 1.04 2.4 12,500 3.2% 12.0% 1.21 0.00 CoalQuest Development LLC WV 194.30 194.30 0.00 21.6 13,000 1.3% 9.8% 32.70 161.60

Northern Appalachia Total 320.27 274.92 45.35 61.75 258.52 Central Appalachia:
ICG - Knott Country KY 6.73 5.81 0.92 5.2 12,700 1.3% 8.4% 6.73 0.00 ICG - Hazard KY 71.38 0.23 71.15 11.9 12,000 1.6% 11.2% 71.38 0.00 ICG - East Kentucky KY 2.62 0.00 2.62 2.0 12,400 1.2% 12.2% 2.62 0.00 ICG - Eastern WV 23.69 7.27 16.42 7.4 12,300 1.1% 12.2% 23.69 0.00 ICG - Natural Resources(2) WV 44.90 2.20 42.70 NA 12,000 0.8% 12.2% 44.90 0.00 ICG - Natural Resources(3) KY 5.9 4.4 1.5 NA 12,000 1.1% 12.0% 4.40 0.00 Beckley-Smokeless Division(4) WV 28.97 1.28 27.70 29.0 13,800 0.7% 4.8% 0.00 28.97 Anker Virginia Mining Company VA 27.50 0.00 27.50 27.5 14,000 0.6% 4.0% 0.00 27.50

Central Appalachia Total 211.69 21.19 190.51 153.72 56.47 Other:
ICG - Illinois IL 29.63 11.38 18.25 12.9 10,500 3.2% 9.5% 29.63 0.00 ICG - Natural Resources 325.21 305.10 20.1 NA 11,000 3.0% 9.0% 326.71 0.00

Other Total 354.84 316.48 38.35 356.34 0.00

Total Reserves 886.81 612.51 274.3 571.81 314.99

(1) Recoverable reserves represent the amount of coal reserves that can actually be recovered taking into account all mining and preparation losses involved in producing a saleable product using existing methods under current law. The reserve numbers set forth in this table exclude reserves for which we have leased our mining rights to third parties. Reserve information reflects a moisture factor of approximately 6.0%. This moisture factor represents the average moisture present on our delivered coal.

(2) ICG - Natural Resources (Jenny's Creek)

(3) ICG - Natural Resources (Mount Sterling)

(4) Beckley Smokeless and Anker Virginia meet historical metallurgical coal quality specifications.

(5) Currently, ICG reports selling coal with ash and sulfur contents as high as 10% and 1.5%, respectively into the current metallurgical market from the Vindex Energy, Spruce Fork, and Phillipi Divisions. Similarly, all production Mount Storm and portions of Hillman could be sold on this metallurgical market when production begins.

Our reserve estimate is based on geological data assembled and analyzed by our staff of geologists and engineers. Reserve estimates are periodically updated to reflect past coal production, new drilling information and other geologic or mining data. Acquisitions or sales of coal properties will also change the reserve base. Changes in mining methods may increase or decrease the recovery basis for a coal seam as will plant processing efficiency tests. We maintain reserve information in secure computerized databases, as well as in hard copy. The ability to update and/or modify the reserve base is restricted to a few individuals and the modifications are documented.

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Actual reserves may vary substantially from the estimates. Estimated minimum recoverable reserves are comprised of coal that is considered to be merchantable and economically recoverable by using mining practices and techniques prevalent in the coal industry at the time of the reserve study, based upon then-current prevailing market prices for coal. We use the mining method that we believe will be most profitable with respect to particular reserves. We believe the volume of our current reserves exceeds the volume of our contractual delivery requirements. Although the reserves shown in the table above include a variety of qualities of coal, we presently blend coal of different qualities to meet contract specifications. See "Risk factors-Risks relating to our business." Periodically, we retain outside experts to independently verify our coal reserve base. The most recent review was completed during the first quarter of 2005 and covered all of our reserves. The results verified our reserve estimates, with very minor adjustments, and included an in-depth review of our procedures and controls. As of January 1, 2005 (pro forma for the Anker and CoalQuest acquisitions), Marshall Miller & Associates, Inc. confirmed our reserve base of 887 million tons on a consolidated basis.
We currently own approximately 69% of our coal reserves, with the remainder of our coal reserves subject to leases from third-party landowners. Generally, these leases convey mining rights to the coal producer in exchange for a percentage of gross sales in the form of a royalty payment to the lessor, subject to minimum payments. Leases generally last for the economic life of the reserves. The average royalties paid by us for coal reserves from our producing properties was $1.48 per ton in 2004, representing approximately 4.2% of our coal sales revenue in 2004, pro forma for the Anker and CoalQuest acquisitions. Consistent with industry practice, we conduct only limited investigations of title to our coal properties prior to leasing. Title to lands and reserves of the lessors or grantors and the boundaries of our leased priorities are not completely verified until we prepare to mine those reserves.

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Coal Resources
Coal resources are coal-bearing bodies that have been sufficiently sampled and analyzed in trenches, outcrops, drilling, and underground workings to assume continuity between sample points, and therefore warrants further exploration stage work. However, this coal does not qualify as a commercially viable coal reserve as prescribed by SEC standards until a final comprehensive evaluation based on unit cost per ton, recoverability, and other material factors concludes legal and economic feasibility. Resources may be classified as such by either limited property control or geologic limitations, or both.
The following table provides the "quality" (average Btu content, sulfur content and ash content per pound) of our coal resources as of January 1, 2005:

Quality characteristics

(as received)

Recoverable Tons by market resources Resource Heat classification as of 1/1/2005 life content Sulfur Ash Mining company State (in millions of tons)(1) (years) (Btu/lb) (%) (%) Steam Metallurgical(4)

Northern Appalachia:
Patriot Mining Company WV, PA 1.89 2.5 1.89 0.00 Spruce Fork Division WV 2.42 1.0 13,000 1.2 % 9.0 % 2.42 0.00 Philippi Development
Division WV 2.40 1.2 13,100 1.4 % 8.3 % 2.40 0.00 Harrison Division WV 1.28 0.7 12,500 3.2 % 12.5 % 1.28 0.00 CoalQuest Development
LLC WV 37.04 4.1 37.04 0.00 Upshur Property WV 92.96 46.5 8,000 2.0 % 43.0 % 92.96 0.00

Northern Appalachia Total 137.99 137.99 0.00 Central Appalachia:
ICG - Knott County KY 0.00 12,700 1.3 % 8.4 % 0.00 0.00 ICG - Hazard KY 3.00 12,000 1.6 % 11.2 % 3.00 0.00 ICG - East Kentucky KY 0.00 12,400 1.2 % 12.2 % 0.00 0.00 ICG - Eastern WV 0.02 12,300 1.1 % 12.2 % 0.02 0.00 ICG - Natural
Resources(2) WV 0.22 12,000 0.8 % 12.2 % 0.22 0.00 ICG - Natural
Resources(3) KY 0.01 12,000 1.1 % 12.0 % 0.01 0.00 Beckley - Smokeless
Division(4) WV 1.88 1.9 13,800 0.7 % 4.8 % 0.00 1.88 Anker Virginia Mining
Company VA 2.57 5.1 13,500 0.6 % 7.4 % 2.57 0.00

Central Appalachia Total 7.70 5.82 1.88 Other:
ICG - Illinois IL 38.47 10,500 3.2 % 9.5 % 38.47 0.00 ICG - Natural Resources 522.52 11,000 3.0 % 9.0 % 522.52 0.00

Other Total 560.99 560.99 0.00 Total Resources 706.68 704.80 1.88

(1) Currently, ICG reports selling coal with ash and sulfur contents as high as 10% and 1.5%, respectively into the current metallurgical market from the Vindex Energy, Spruce Fork, and Philippi Divisions. Similarly, all of Mount Storm and portions of Hillman can be sold on this metallurgical market.

(2) ICG - Natural Resources (Jenny's Creek)

(3) ICG - Natural Resources (Mount Sterling)

(4) Beckley Smokeless and Anker Virginia meet historical metallurgical coal quality specifications.

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OPERATIONS
As of December 31, 2004, we operated a total of 13 surface and 10 underground coal mines located in Kentucky, Maryland, West Virginia and Illinois. Historically, approximately 64% of our production has come from surface mines, and the remaining production has come from our underground mines. These mining facilities include eight preparations plants, each of which receive, blend, process and ship coal that is produced from one or more of our 23 active mines. Our underground mines generally consist of one or more single or dual continuous miner sections which are made up of the continuous miner, shuttle cars, roof bolters and various ancillary equipment. Our surface mines are a combination of mountain top removal, dragline, highwall contour and cross ridge operations using truck/loader equipment fleets along with large production tractors. Most of our preparation plants are modern heavy media plants that generally have both coarse and fine coal cleaning circuits. We currently own most of the equipment utilized in our mining operations. We employ preventive maintenance and rebuild programs to ensure that our equipment is modern and well maintained. The mobile equipment utilized at our mining operation is scheduled to be replaced on an on-going basis with new, more efficient units during the next five years. Each year we endeavor to replace the oldest units, thereby maintaining productivity while minimizing capital expenditures. The following table provides summary information regarding our principal mining complexes as of December 31, 2004.

Number and type of mines Tons Preparation Under- Mining produced Mining complex Location plant(s) ground Surface Total method(a) Transportation in 2004

(in thousands)
ICG Eastern, LLC Cowen, WV 1 0 1 1 MTR-DL-TSL Rail 2,712.1 ICG Hazard, LLC Hazard, KY 1 (1) 0 6 6 R&P-CM, HW Rail 3,978.0 ICG Knott County, LLC Kite, KY 1 4 0 4 MTR-TSL CM Rail 1,386.6 ICG East Kentucky, LLC Pike Co., KY 0 0 1 1 MTR-TSL Rail 1,576.3 ICG Illinois, LLC Williamsville, IL 1 1 0 1 R&P-CM Truck 2,117.6 Vindex Energy Corporation Garrett Co., MD 1 0 2 2 CRM & CTR Truck, Rail (2) 170.7 Patriot Mining Company Monongalia Co., WV 0 0 3 3 CTR Barge, Rail 921.3 (3) Spruce Fork Division Upshur Co., WV 1 2 0 2 R&P Rail 1,213.9 Philippi Development Division Barbour Co., WV 1 (4) 1 0 1 R&P Rail 255.4 Beckley-Smokeless Division Raleigh Co., WV 1 0 0 0 R&P Rail 0.0 (2) Sycamore Group Harrison Co., WV 0 2 0 2 R&P Truck 259.3 (5)(6) CoalQuest Development LLC Taylor Co., WV 0 0 0 0 R&P & LW Rail 0.0 (7) Juliana Complex Webster Co., WV 1 0 0 0 R&P & CTR Rail 0.0

(a) CRM = Cross Ridge Mining; CTR = Contour Mining; R&P = Room and Pillar; LW = Longwall; MTR = Mountain Top Removal; DL = Dragline; HW = Highwall; CM = Continuous Miner; TSL = Truck and Shovel/ Loader

(1) Expected to begin operation in second half of 2005

(2) Utilizing third-party loadout

(3) Including waste-fuel

(4) Currently utilizing one circuit

(5) Mine permitted but undeveloped

(6) Represents Anker's 50% share in The Sycamore Group LLC joint venture plus the Sycamore No. 2 mine, expected to begin production in 2005

(7) Undeveloped, permit in progress

The following provides a description of the operating characteristics of the principal mines and reserves of each of our mining operations.

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MINING OPERATIONS
Northern and Central Appalachia mining operations Our Northern and Central Appalachian mining facilities are strategically located across West Virginia, Kentucky, Maryland, Pennsylvania and Virginia and are used to produce and ship coal to its customers located primarily in the eastern half of the United States. We believe that the quality and experience of our workforce in Northern and Central Appalachia are among the highest in the coal mining industry. All of our Northern and Central Appalachia mining operations are union free.
Our mines in Central Appalachia produced 9.7 million tons of coal in 2004 and our mines in Northern Appalachia produced 2.8 million tons of coal in 2004, pro forma for the Anker and CoalQuest acquisitions. The coal produced in 2004 was, on average, 12,207 Btu/lb, 1.2% sulfur and 12.4% ash by content. This year we estimate that our mines in Central Appalachia region will produce approximately 10.5 million tons, pro forma for the Anker and CoalQuest acquisitions. This year we estimate that our mines in the Northern Appalachian region will produce approximately 4.5 million tons, pro forma for the Anker and CoalQuest acquisitions. This high Btu, low sulfur coal is very marketable to major utility customers throughout the eastern United States. Shipments to electric utilities, accounted for approximately 78% of the coal shipped by these mines in 2004, compared to 80% of shipments in 2003. Within each mining complex, mines have been developed at strategic locations in proximity to our preparation plants and rail shipping facilities. The mines located in Central Appalachia ship the majority of their coal by the Norfolk Southern and CSX rail lines, although production may also be delivered by truck or barge, depending on the customer. ICG Natural Resources, LLC owns two idle river docks along the Kanawha River from which we could ship coal to our customers. As of March 31, 2005, these mines had 1,481 employees. ICG Eastern, LLC
ICG Eastern, LLC operates the Birch River surface mine, located 60 miles east of Charleston, near Cowen in Webster County, West Virginia. Birch River started operations in 1990 under Shell Mining Company, was purchased by Zeigler Coal Holding Company, or "Zeigler," in 1992, and was subsequently acquired by AEI Resources, Inc. from Zeigler in 1998.
Birch River is extracting coal from five distinct coalbeds: (i) Freeport;
(ii) Upper Kittanning; (iii) Middle Kittanning; (iv) Upper Clarion and (v) Lower Clarion. Coal mined from this operation has an average sulfur content of 1.1%, an average ash content of 12.2% and an average Btu content of 12,300. We estimate that Birch River controls 23.7 million tons of coal reserves. Approximately 69% of the coal reserves are leased, while approximately 31% are owned in fee. Most of the leased reserves are held by four lessors. The leases are retained by annual minimum payments and by tonnage-based royalty payments. All leases can be renewed until all mineable and merchantable coal has been exhausted. Overburden is removed by a dragline, shovel, front-end loaders, end dumps and bulldozers. Approximately one-third of the coal can be marketed run-of-mine, while the other two-thirds is washed at Birch River's preparation plant. Coal is transported by conveyor belt from the preparation plant to Birch River's rail loadout, which is served by CSX. The loadout is a batch weigh system capable of loading unit trains in less than four hours. The preparation plant is rated at 800 raw tons per hour. The preparation plant is comprised of heavy media vessels, heavy media cyclones, and spirals. The plant, overland conveyor system, and rail loadout are in excellent condition.

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ICG Hazard, LLC
ICG Hazard, LLC is currently operating six surface mines, a unit train loadout (Kentucky River Loading) and other support facilities in eastern Kentucky, near Hazard. The coal reserves and operations were acquired in late-1997 and 1998 by AEI Resources.
ICG Hazard's six surface mines include: (i) County Line; (ii) Flint Ridge;
(iii) Vicco; (iv) Rowdy Gap; (v) Tip Top; and (vi) Thunder Ridge. The coal from these mines is being extracted from the Hazard 11, Hazard 10, Hazard 9, Hazard 8, Hazard 7 and Hazard 5A seams, and has an average sulfur content of 1.2%, an average ash content of 12% and an average Btu content of 12,000. Nearly all of the coal is marketed run-of-mine. We estimate that ICG Hazard controls 71.4 million tons of coal reserves, plus 3.0 million tons of coal that is classified as resources. Most of the property has been adequately explored, but additional core drilling will be conducted within specified locations to better define the reserve base. Approximately 99.7% of ICG Hazard's reserves are leased, while 0.3% are owned in fee. Most of the leased reserves are held by seven lessors. In several cases, ICG Hazard has multiple leases with each lessor. The leases are retained by annual minimum payments and by tonnage-based royalty payments. Most leases can be renewed until all mineable and merchantable coal has been exhausted. Overburden is removed by front-end loaders, end dumps, bulldozers and blast casting. Coal is transported from the mines to the Kentucky River Loading rail loadout by on-highway trucks. The loadout is served by CSX, and is a batch weigh system capable of loading 120-car trains in less than three hours. Most of the coal is transported by rail, but some coal is direct shipped to the customer by truck from the mine pits. An existing preparation plant structure is being extensively upgraded. It will process coal from ICG Hazard's new Flint Ridge underground mine complex. Flint Ridge will be a room and pillar mine, producing coal from the Hazard 8 coalbed. It will utilize continuous miners and shuttle cars. Both the plant and the underground mine are scheduled to begin operation in July 2005. ICG Knott County, LLC
ICG Knott County, LLC operates four underground mines, the Supreme Energy preparation plant and rail loadout, and other facilities necessary to support the mining operations in eastern Kentucky, near Kite. ICG Knott County was acquired by AEI Resources, Inc. from Zeigler in 1998.
ICG Knott County is producing coal from the Hazard 4 and the Elkhorn 3 coalbeds. Three mines are operating in the Hazard 4 coalbed: Calvary, Clean Energy and Elk Hollow. The Classic mine is operating in the Elkhorn 3 coalbed. The coal produced from the four mines has an average sulfur content of 1.3%, an average ash content of 9%, and an average Btu content of 12,700. We estimate these properties contain 6.7 million tons of coal reserves. Most of the property has been extensively explored, but additional core drilling will be conducted within specified locations to better define the reserve base.
Approximately 86% of ICG Knott County's reserves are owned in fee, while approximately 14% are leased. The leases are retained by annual minimum payments and by tonnage-based royalty payments. The leases can be renewed until all mineable and merchantable coal has been exhausted.
ICG Knott County's four underground mines are room and pillar operations, utilizing continuous miners and shuttle cars. Nearly all of the run-of-mine coal is processed at the Supreme Energy preparation plant; some of the Hazard 4 run-of-mine coal is blended with the washed coal.
Nearly all of ICG Knott County's coal is transported by rail. The loadout is a batch weigh system that is served by CSX.

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ICG East Kentucky, LLC
ICG East Kentucky, LLC is a surface mining operation located in Pike County, Kentucky, near Phelps. ICG East Kentucky currently operates the Blackberry surface mine and the Phelps Loadout. ICG East Kentucky was acquired by AEI Resources in the second quarter of 1999.
Blackberry is an area surface mine that produces coal from three separate coalbeds: (i) Taylor; (ii) Fireclay; and (iii) Lower Fireclay. All of the coal is sold run-of-mine, with an average sulfur content of 1.2%, an average ash content of 12% and an average Btu content of 12,400.
We estimate that the Blackberry mine controls 2.6 million tons of coal reserves; no additional exploration is required.
After Blackberry is depleted, ICG East Kentucky will begin mining the Mount Sterling property, which contains an additional 5.9 million tons of coal reserves. Mount Sterling is located in Martin and Pike Counties, Kentucky near the Tug Fork River. Although Mount Sterling is expected to be mined by ICG East Kentucky, the property is held by ICG Natural Resources, LLC. The leases are retained by annual minimum payments and by tonnage-based royalty payments. The leases can be renewed until all mineable and merchantable coal has been exhausted.
Overburden at the Blackberry mine is removed by front end loaders, end dumps, bull dozers and blast casting. Coal from the pits is transported by truck to the Phelps Loadout, which is a batch weigh system. Vindex Energy Corporation
Vindex Energy Corporation operates two surface mines, the Island mine and the Douglas mine, in the Potomac Basin in Garrett County, Maryland. The reserves at Vindex are leased primarily from one major landowner. The lease expires in 2010 and is renewable on a year-by-year basis with a minimum annual holding cost. Vindex Energy is a cross-ridge mining operation extracting coal from the Upper Freeport, Middle Kittanning and Upper Kittanning seams. Both mines are truck-and-shovel/loader mining operations utilizing dozers, hydraulic excavators, loaders and trucks. Operations are conducted with relatively new equipment and exploration and development is conducted on a continual basis ahead of mining.
Vindex has been operating its mines at full production since the first quarter 2005, and it is projected that the mines will produce a combined 654,000 tons in 2005. Approximately 20% of the raw coal production is screened at the Island Mine for sales directly to the customers. Such an arrangement increases our margins by reducing transportation costs to and from preparation plants, resulting in cost savings. The remainder of the coal is processed at our 200 TPH heavy media preparation plant located near Mount Storm, West Virginia, where the product is shipped to the customer by either truck or rail using a third-party rail loading facility.
Four new surface mines are under development in the Potomac Basin in Garrett County, Maryland. Anker anticipates mining to commence at one of these operations in 2007, an additional two in 2008 and the last mine producing by 2009. Like the Island and Douglas mines, these four mines will utilize truck-and-shovel/loaders and will be extracting coal from the Bakerstown, Upper Freeport, Mahoning, Upper Kittanning and Middle Kittanning seams. These future reserves are currently being explored and permitted for mining. Patriot Mining Company
Patriot Mining Company consists of three active surface mines near Morgantown, West Virginia: Crown No. 2 and New Hill East located in Monongalia County, West Virginia and Keener located in

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Green County, Pennsylvania. The majority of the coal and surface is leased under renewable contracts with small annual minimum holding costs. Patriot's mines are extracting coal from the Waynesburg seam using contour mining methods with dozers, loaders and trucks. As mining progresses, reserves are being acquired and permitted for future operations. The mining equipment is maintained in good condition.
We have projected that Patriot's three mines will produce approximately 750,000 tons in 2005. Patriot is planning six new mines on property currently being acquired, explored and permitted that will begin phasing into production starting next year through 2009. These mines will also extract coal from the Waynesburg seam using contour mining methods with dozers, loaders and trucks. Spruce Fork Division- Anker West Virginia Mining Company The Spruce Fork Division currently consists of two active underground mines; Spruce No. 1 and Sago located in Upshur County, West Virginia, near the town of Buckhannon. The Spruce No. 1 Mine is extracting coal from the Upper Freeport seam and the Sago mine is extracting coal from the Middle Kittanning seam. Nearly all of the reserves in the Spruce Fork Division are owned by ICG. The Spruce No. 1 Mine opened in 1997 and we anticipate that its reserves will be depleted sometime during the third quarter of 2005. The Sago mine, which was originally opened in 1999 as a contract mine, closed in 2002, and then reopened as a captive operation in the first quarter of 2004. Sago is expected to reach full production by the fourth quarter of 2005.
Both operations utilize the room-and-pillar mining method with continuous miners and shuttle cars for coal removal from the face. The Sago mine was re-opened using brand new mining equipment and infrastructure from the original portal location. All of the coal extracted from these mines is processed at a rate of nearly 750 TPH through the nearby Sawmill Run heavy media preparation plant where coal is then primarily shipped by CSX rail, although some coal is trucked to local industrial customers.
We have projected that the Spruce Fork Division will produce approximately 1.3 million tons of coal in 2005. The Sago 3 mine, scheduled for production in 2007, is a replacement for the Spruce No. 1 Mine. The reserves at Spruce Fork have characteristics that make it marketable to both steam and metallurgical coal customers.
Sycamore Group
Sycamore Group consists of The Sycamore Group LLC and the Harrison Division. The Sycamore Group LLC is a joint venture between ICG and Emily Gibson Coal Company. The joint venture operates one underground mine, the Sycamore No. 1 Mine (a.k.a. the Fairfax No. 3 Mine), in Harrison County, West Virginia, approximately ten miles west of Clarksburg, where coal is extracted from the Pittsburgh seam by room-and-pillar mining methods with continuous miners and shuttle cars for coal extraction.
The majority of the coal is leased with an annual minimum holding cost. It is anticipated that this reserve will be depleted and the mine closed during the second quarter of 2006. Operations are conducted utilizing the room and pillar mining method. Newly rebuilt mining equipment was recently installed to facilitate the complete extraction of the remaining reserves. We expect that ICG's 50% share of the 2005 production to be approximately 210,000 tons, all of which is sold on a raw basis and shipped to Allegheny Power Service Corporation's Harrison Power Station by truck.
The Harrison Division consists of the Sycamore No. 2 Mine, which is located in Harrison County, West Virginia, approximately ten miles west of Clarksburg The Sycamore No. 2 Mine is expected to begin producing coal from the Pittsburgh seam using room-and-pillar mining methods with continuous miners and shuttle cars in the second quarter of 2005. The reserve is primarily leased from one major

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landowner with an annual minimum holding cost and an automatic renewal based on an annual minimum production of 250,000 tons. The coal is being accessed with a box-cut and will be mined utilizing room and pillar mining methods with new mining equipment.
The planned annual production is expected to increase from approximately 430,000 tons in 2005 to over 1.6 million tons in 2006. The coal produced from the Sycamore No. 2 mine will be sold on a raw basis and shipped to Allegheny Power Service Corporation's Harrison Power Station by truck under a new life of mine, total production coal supply agreement.
Philippi Development Division- Anker West Virginia Mining Company The Philippi Development Division operates the Sentinel mine, in Barbour County, West Virginia near the town of Philippi. The mine was acquired by Anker in 1990 and has been operating ever since. Historically, coal was extracted from the Lower Kittanning seam; however, mining is currently conducted in the Upper Kittanning seam by room-and-pillar mining method with a new low-seam continuous haulage mining system which was installed in the fourth quarter of 2004. The current operations are expected to be supplemented with a second continuous haulage mining system in the first quarter of 2007.
Coal is fed directly from the mine to a 600 TPH heavy media preparation plant and loadout facility served by the CSX railroad. The product can be shipped on steam or metallurgical markets. The Sentinel Mine is projected to produce approximately 317,000 tons in 2005. Production is expected to increase to 634,000 tons by 2008 with the addition of the second continuous haulage mining system.
New Appalachian mine developments
Hillman property
The Hillman property, located in Northern Appalachia, includes 194 million tons of deep coal reserves of both steam and metallurgical quality coal in the Lower Kittanning seam covering approximately 65,000-acres located predominantly in Taylor County, West Virginia, near Grafton. The reserve extends into parts of Barbour, Marion, and N. Harrison Counties as well. ICG owns the Hillman coal reserve in addition to nearly 4,000 acres of surface property to accommodate the development of three projected mining operations. In addition to the Lower Kittanning reserves, we also own significant coal resources in the Kittanning, Freeport, Clarion and Mercer seams on the Hillman property.
The Hillman reserves are currently being permitted for the development of three mining operations; two longwall and one room and pillar. Production from the first complex is projected to begin in 2007 with a full annual production of 9 million tons expected from the three mines by 2010. Upshur property
The Upshur Property, located in Northern Appalachia, is a 88 million tons of resource owned or controlled by us in the Middle and Lower Kittanning seams. The resource is surface mineable at a ratio of slightly greater than 2 to 1. Both Kittanning seams will be mined as a 7,500 Btu fuel by extracting all of the coal splits and associated partings. The low product heat content limits the distance over which the fuel can be transported and sold; however, the low mining cost makes Upshur an attractive location for an on-site power plant. Some preliminary research, including air quality monitoring, has been completed in association with the future construction of a circulating fluidized bed power plant at Upshur.

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Big Creek property
Our Big Creek reserve, located in Central Appalachia, covers 10,000 acres of leased coal lands located north of the town of Richlands in Tazewell County, Virginia. Total recoverable reserves are 27.5 million tons in the Jawbone, Greasy Creek and War Creek seams. The largest coal block is a deep reserve in the War Creek seam, which is a high-quality metallurgical coal ranging from low to mid vol. The Big Creek reserve is all leased from Southern Regional Industrial Reality. Production from the permitted War Creek Mine is expected to begin in 2007 utilizing the room and pillar mining method with continuous haulage. The mine is expected to reach full production of nearly 1 million tons per year by 2008. The coalbed methane at Big Creek is currently leased to and being produced by Pocahontas Gas Partnership with an overriding royalty paid to us.
Bay Hill property
The Bay Hill reserve, located in Central Appalachia, is a 29 million-ton deep reserve of high quality low-vol metallurgical coal in the Pocahontas No. 3 seam in Raleigh County west of Beckley, West Virginia. The southwest portion of the reserve underlies part of the recently closed BayBeck Mine in the Beckley seam. Most of the 16,800 acre Bay Hill reserve is leased from three land companies:
Western Pocahontas Properties, Crab Orchard Coal Company and Beaver Coal Company. We have permitted a portion of the Bay Hill reserve for deep mine development.
Juliana Complex
Mining on the Juliana property, located in Central Appalachia, in Webster County, WV, began in 1979 and was stopped in December 1999. Contour and mountain top removal stripping methods were utilized to produce coal from the Kittanning and Upper Freeport seams. In addition, a substantial amount of deep-mined coal was produced from the Middle Kittanning seam. A 500 TPH preparation facility with 100,000 tons of raw and clean coal storage and a unit-train loadout was used to process and load coal on the CSX railroad.
Currently at Juliana, there are two Kittanning deep mine permits and one surface mine permit in place. Permitted deep and surface coal resources are 1.2 million tons and 1.9 million tons, respectively. The ratio for the surface reserve is 17.3 to 1 bulk cubic yard per clean ton. The projected clean coal quality for deep and surface-mined coal combined is 7.5 ash, 0.82% sulfur and 13,100 Btu, on an as received basis.
Illinois Basin mining operations
ICG Illinois, LLC operates one large underground coal mine, the Viper mine, in central Illinois. Viper commenced mining operations in 1982 as a union free operation for Shell Oil Company. Viper was acquired by Ziegler in 1992 and subsequently acquired by Horizon in 1998.
The Viper Mine is working the Illinois No. 5 Seam, also referred to as the Springfield Seam, with all raw coal production washed at Viper's preparation plant. Coal mined from this operation has an average sulfur content of 3.2%, an average ash content of 9.5% and an average Btu content of 10,500. We estimate that Viper controls approximately 29.6 million tons of coal reserves, plus an additional 38.5 million resource tons. Viper has an ongoing exploration program to accurately assess floor and roof conditions within the immediate mine plan. Approximately two-thirds of the coal reserves are leased, while one-third is owned in fee. The leases are retained by annual minimum payments and by tonnage-based royalty payments. The leases can be renewed until all mineable and merchantable coal has been exhausted.

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The Viper mine is a room and pillar operation, utilizing continuous miners and shuttle cars. ICG Illinois is one of the lowest cost and highest productivity mines in the Illinois Basin. All of the raw coal is processed at Viper's preparation plant. The clean coal is transported to the customers by on highway trucks. A major rail line is located a short distance from the plant, giving Viper the option of constructing a rail loadout.
ICG Illinois ships by independent trucking companies to utility and industrial customers located in North Central Illinois. Shipments to electric utilities account for approximately 71% of coal sales. Currently 1.7 million tons (80%) of ICG Illinois' 2005 production is under contract. The City of Springfield Water, Light and Power purchases nearly 50% of Viper's production and the contract does not expire until 2020.
The preparation plant is rated at 800 raw tons per hour. It is comprised of heavy media vessels, heavy media cyclones, and spirals.
The underground equipment, infrastructure, and preparation plant are well maintained. The underground equipment will be replaced or rebuilt over the next five years.
OTHER OPERATIONS
Coal sales
In addition to the coal we mine, from time to time we also opportunistically secure coal purchase agreements with other coal producers to take advantage of differences in market prices.
ICG ADDCAR Systems, LLC
In our highwall mining business, we operate or lease six systems using our patented ADDCAR highwall mining system and intend to build additional ADDCAR systems as required. The ADDCAR highwall mining system is an innovative and efficient mining system. The system is often deployed at reserves that cannot be economically mined by other methods.
In a typical ADDCAR highwall mining system, there is a launch vehicle, continuous miner, conveyor cars, a stacker conveyor, electric generator, water tanker for cooling and dust suppression and a wheel loader with forklift attachment.
A five person crew operates the entire ADDCAR highwall mining system with control of the continuous miner being performed remotely by one person from the climate-controlled cab located at the rear of the launch vehicle. Our system utilizes a navigational package to provide horizontal guidance, which helps to control rib width and thus roof stability. Also, the system provides vertical guidance for control out of seam dilutions. The ADDCAR highwall mining system is also equipped with high quality video monitors to provide the operator with visual displays of the mining process from inside each entry being mined. The mining cycle begins by aligning the ADDCAR highwall mining system onto the desired heading and starting the entry. As the remotely controlled continuous miner penetrates the coal seam, ADDCAR conveyor cars are added behind it, forming a continuous cascading conveyor train. This continues until the entry is at the planned full depths of up to 1,200 to 1,500 feet. After retraction, the launch vehicle is moved to the next entry, leaving a support pillar of coal between entries. This process recovers as much as 65% of the reserves while keeping all personnel outside the coal seam in a safe working environment. A wide range of seam heights can be mined with high production in seams as low as 3.5 feet and as high as 15 feet in a single pass. If the seam height is greater than 15 feet, then multi lifts can be mined to create an unlimited entry height. The navigational features on the

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ADDCAR highwall mining system allow for multi lift mining while ensuring that the designed pillar width is maintained.
During the mining cycle, in addition to the tractive effort provided by the crawler drive of the continuous miner the ADDCAR highwall mining system bolsters the cutting capability of the machine through an additional pumping force provided by hydraulic cylinders which transmit thrust to the back of the miner through blocks mounted on the side of the conveyor cars. This additional energy allows the continuous miner to achieve maximum cutting and loading rates as it moves forward into the seam.
We currently have the exclusive North American distribution rights for the ADDCAR highwall mining system.
Coalbed methane
Through a planned joint operating agreement still under negotiation, CoalQuest will exploit and develop coalbed methane which is pipeline quality gas that resides in coal seams. In the eastern United States, conventional natural gas fields are typically located in various sedimentary formations at depths ranging from 2,000 to 15,000 feet. We believe this is the first such development and exploration in the region. Exploration companies often put their capital at risk by searching for gas in commercially exploitable quantities at these depths. By contrast, gas in coal seams that we anticipate drilling is typically in formations less than 2,500 feet deep which are usually better defined than deeper formations. We believe that this contributes to lower exploration costs than those incurred by producers that operate in deeper, less defined formations. We have not filed reserve estimates with any federal agency.
CUSTOMERS AND COAL CONTRACTS
Customers
Our primary customers are investment grade electric utility companies primarily in the eastern half of the United States. The majority of our customers purchase coal for terms of one year or longer, but we also supply coal on a spot basis for some of our customers. Our three largest customers for the three months ended March 31, 2005, pro forma for the Anker and CoalQuest acquisitions, were Georgia Power Company, Carolina Power & Light Company and Duke Power and we derived approximately 49% of our coal revenues from sales to our five largest customers, pro forma for the Anker and CoalQuest acquisitions. Long-term coal supply agreements
As is customary in the coal industry, we enter into long-term supply contracts (exceeding one year in duration) with many of our customers when market conditions are appropriate. These contracts allow customers to secure a supply for their future needs and provides us with greater predictability of sales volume and sales price. For the three months ended March 31, 2005 (pro forma for the Anker and CoalQuest acquisitions), approximately 70% of our revenues were derived from long-term supply contracts. We sell the remainder of our coal through short-term contracts and on the spot market. We have also entered into certain brokered transactions to purchase certain amounts of coal to meet our sales commitments. The purchase coal contracts expire between 2006 and 2010 and provide us a minimum of approximately 10.7 million tons of coal through the remaining lives of the contracts.
As a result of the Horizon bankruptcy process, we were able to renegotiate certain contracts at significantly higher prices that reflected the current pricing environment and not purchase unfavorable contracts. However, we do have certain contracts which are set below current market rates because

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Anker entered into these contracts before the recent rise in the coal prices. As the net costs associated with producing coal have risen, such as higher energy, transportation and steel prices, the price adjustments within several of our long-term contracts have not caught up to the new coal prices. This has resulted in certain counterparties to these contracts benefiting from below market prices for our coal.
The terms of our coal supply agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these contracts vary significantly by customer, including price adjustment features, price reopener terms, coal quality requirements, quantity parameters, permitted sources of supply, future regulatory changes, extension options, force majeure provisions and termination and assignment provisions.
Some of our long-term contracts provide for a pre-determined adjustment to the stipulated base price at times specified in the agreement or at other periodic intervals to account for changes due to inflation or deflation. In addition, most of our contracts contain provisions to adjust the base price due to new statutes, ordinances or regulations that impact our costs related to performance of the agreement. Also, some of our contracts contain provisions that allow for the recovery of costs impacted by modifications or changes in the interpretations or application of any applicable government statutes. Price reopener provisions are present in most of our long-term contracts. These price reopener provisions may automatically set a new price based on prevailing market price or, in some instances, require the parties to agree on a new price, sometimes between a specified range of prices. In a limited number of agreements, failure of the parties to agree on a price under a price reopener provision can lead to termination of the contract. Under some of our contracts, we have the right to match lower prices offered to our customers by other suppliers. These price reopener provisions have enabled us to negotiate higher selling prices in several contracts over the last several months.
Quality and volumes for the coal are stipulated in coal supply agreements, and in some instances buyers have the option to vary annual or monthly volumes. Most of our coal supply agreements contain provisions requiring us to deliver coal within certain ranges for specific coal characteristics such as heat content, sulfur, ash, hardness and ash fusion temperature. Failure to meet these specifications can result in economic penalties, suspension or cancellation of shipments or termination of the contracts. Assuming steady or increasing coal prices over the near-term, we expect to renew many of our expiring sales contracts at significantly higher prices. Transportation/logistics
We ship coal to our customers by rail, truck or barge. We typically pay the transportation costs for our coal to be delivered to the barge or rail loadout facility, where the coal is then loaded for final delivery. Once the coal is loaded in the barge or railcar, our customer is typically responsible for the freight costs to the ultimate destination. Transportation costs vary greatly based on the customer's proximity to the mine and our proximity to the loadout facilities. We use a variety of independent companies for our transportation needs and typically enter into multiple non-contract agreements with trucking companies throughout the year.
In 2004, approximately 85% of our coal from our Central Appalachian operations was delivered to our customers by rail on either the Norfolk Southern or CSX rail lines, with the remaining 15% delivered by truck. For our Illinois Basin operations, 100% of our coal was delivered by truck to customers, generally within an 80 mile radius of our Illinois mine.
We believe we enjoy good relationships with rail carriers and barge companies due, in part, to our modern coal-loading facilities and the experience of our transportation and distribution employees.

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SUPPLIERS
We have historically spent more than $188 million per year to procure goods and services in support of our business activities, excluding capital expenditures. Principal commodities include maintenance and repair parts and services, electricity, fuel, roof control and support items, explosives, tires, conveyance structure, ventilation supplies and lubricants. We use suppliers for a significant portion of our equipment rebuilds and repairs both on- and off-site, as well as construction and reclamation activities.
Each of our regional mining operations has developed its own supplier base consistent with local needs. We have a centralized sourcing group for major supplier contract negotiation and administration, for the negotiation and purchase of major capital goods, and to support the business units. The supplier base has been relatively stable for many years, but there has been some consolidation. We are not dependent on any one supplier in any region. We promote competition between suppliers and seek to develop relationships with those suppliers whose focus is on lowering our costs. We seek suppliers who identify and concentrate on implementing continuous improvement opportunities within their area of expertise.
COMPETITION
The coal industry is intensely competitive. Our main competitors are Massey Energy Company, Alpha Natural Resources and Foundation Coal Holdings. The most important factors on which we compete are coal price at the mine, coal quality and characteristics, transportation costs and the reliability of supply. Demand for coal and the prices that we will be able to obtain for our coal are closely linked to coal consumption patterns of the domestic electric generation industry which has accounted for approximately 92% of domestic coal consumption in recent years. These coal consumption patterns are influenced by factors beyond our control, including the demand for electricity which is significantly dependent upon economic activity and summer and winter temperatures in the United States, government regulation, technological developments and the location, availability, quality and price of competing sources of coal, alternative fuels such as natural gas, oil and nuclear and alternative energy sources such as hydroelectric power.
EMPLOYEES
As of March 31, 2005, we had 1,926 employees of which 21% were salaried and 79% were hourly. We believe our relationship with our employees is good. All of our workforce is union free.
LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings arising in the ordinary course of business. We believe we have recorded adequate reserves for these liabilities and that there is no individual case or group of related cases pending that is likely to have a material adverse effect on our financial condition, results of operations or cash flows. With respect to any claims relating to Horizon which arose prior to November 12, 2002, such claims are subject to an automatic stay of the U.S. Bankruptcy Code. In limited circumstances, the Bankruptcy Court has lifted the stay but only to the extent of insurance coverage relating to Horizon. In any event, we believe all or substantially all of the claims will be resolved in accordance with Horizon's plan of reorganization.
EQUIPMENT AND CAPITAL EXPENDITURES
As of December 31, 2004, our leased equipment was, on average, 8.5 years old. We believe that a significant portion of our equipment needs to be upgraded in the near-term. Accordingly, we expect to retire much of our current equipment and invest approximately $304 million in new equipment and for mining development operations in the next two years. We believe our capital investment plan will

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provide us with a cost-effective fleet of equipment and enable us to improve production efficiencies. As we take advantage of planned expansion opportunities from 2007 through 2009 principally as a result of the Anker and CoalQuest acquisitions, we expect to spend approximately $627 million on capital expenditures which may require external financing.
While we currently operate our mines with a high percentage of leased equipment due primarily to Horizon's preference for leasing, we will be purchasing equipment in the future. Current equipment is leased primarily from Caterpillar Finance, GE Capital and other leasing companies. Our operating leases typically have a term of three to five years, with us having the right to purchase the equipment at the end of the lease at fair market value.
RECLAMATION
Reclamation expenses are a significant part of any coal mining operation. Prior to commencing mining operations, a company is required to apply for numerous permits in the state where the mining is to occur. Before a state will approve and issue these permits, it typically requires the mine operator to present a reclamation plan which meets regulatory criteria and to secure a surety bond to guarantee performance of reclamation in an amount determined under state law. These bonding companies, in turn, require that we backstop the surety bonds with cash and/or letters of credit. While bonds are issued against reclamation liability for a particular permit at a particular site, collateral posted in support of the bond is not allocated to a specific bond, but instead is part of a collateral pool supporting all bonds issued by that particular insurer. Bonds are released in phases as reclamation is completed in a particular area.

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Environmental and other regulatory matters Federal, state and local authorities regulate the U.S. coal mining industry with respect to matters such as permitting and licensing requirements, employee health and safety, air quality standards, water pollution, plant and wildlife protection, the reclamation and restoration of mining properties after mining has been completed, the discharge of materials into the environment, surface subsidence from underground mining, and the effects of mining on groundwater quality and availability. These laws and regulations have had and will continue to have a significant effect on our costs of production and competitive position. Future legislation, regulations or orders may be adopted or become effective which may adversely affect our mining operations, cost structure or the ability of our customers to use coal. For instance, new legislation, regulations or orders, as well as future interpretations and more rigorous enforcement of existing laws, may require substantial increases in equipment and operating costs to us and delays, interruptions, or a termination of operations, the extent of which we cannot predict. Future legislation, regulations or orders may also cause coal to become a less attractive fuel source, resulting in a reduction in coal's share of the market for fuels used to generate electricity. We endeavor to conduct our mining operations in compliance with all applicable federal, state and local laws and regulations. However, due in part to the extensive and comprehensive regulatory requirements, violations during mining operations occur from time to time in the industry.
MINING PERMITS AND APPROVALS
Numerous governmental permits or approvals are required for mining operations. In connection with obtaining these permits and approvals, we may be required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed production or processing of coal may have upon the environment. The requirements imposed by any of these authorities may be costly and time consuming and may delay commencement or continuation of mining operations. Regulations also provide that a mining permit or modification can be delayed, refused or revoked if an officer, director or a stockholder with a 10% or greater interest in the entity is affiliated with or is in a position to control another entity that has outstanding permit violations. Thus, past or ongoing violations of federal and state mining laws could provide a basis to revoke existing permits and to deny the issuance of additional permits. In order to obtain mining permits and approvals from state regulatory authorities, mine operators must submit a reclamation plan for restoring, upon the completion of mining operations, the mined property to its prior condition, productive use or other permitted condition. Typically, we submit our necessary mining permit applications several months before we plan to begin mining a new area. In our experience, mining permit approvals generally require 12 to 18 months after initial submission.
SURFACE MINING CONTROL AND RECLAMATION ACT The Surface Mining Control and Reclamation Act of 1977, or SMCRA, which is administered by the Office of Surface Mining Reclamation and Enforcement, or OSM, establishes mining, environmental protection and reclamation standards for all aspects of surface mining as well as many aspects of deep mining. Mine operators must obtain SMCRA permits and permit renewals from the OSM or the appropriate state regulatory agency for authorization of certain mining operations that result in a disturbance of the surface. If a state regulatory agency adopts federal mining programs under SMCRA, the state becomes the regulatory authority. States in which we have active mining operations have achieved primary control of enforcement through federal authorization. SMCRA permit provisions include requirements for coal prospecting, mine plan development, topsoil removal, storage and replacement, selective handling of overburden materials, mine pit backfilling and

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grading, protection of the hydrologic balance, subsidence control for underground mines, surface drainage control, mine drainage and mine discharge control and treatment and revegetation.
The mining permit application process is initiated by collecting baseline data to adequately characterize the pre-mine environmental condition of the permit area. This work includes surveys of cultural resources, soils, vegetation, wildlife, assessment of surface and ground water hydrology, climatology and wetlands. In conducting this work, we collect geologic data to define and model the soil and rock structures and coal that it will mine. We develop mine and reclamation plans by utilizing this geologic data and incorporating elements of the environmental data. The mine and reclamation plan incorporates the provisions of SMCRA, the state programs and the complementary environmental programs that impact coal mining.
Also included in the permit application are documents defining ownership and agreements pertaining to coal, minerals, oil and gas, water rights, rights of way and surface land, and documents required by the OSM's Applicant Violator System, including the mining and compliance history of officers, directors and principal owners of the entity.
Once a permit application is prepared and submitted to the regulatory agency, it goes through a completeness review and technical review. Public notice and opportunity for public comment on a proposed permit is required before a permit can be issued. Some SMCRA mine permits take over a year to prepare, depending on the size and complexity of the mine and may take six months to two years or even longer to be issued. Regulatory authorities have considerable discretion in the timing of the permit issuance and the public has rights to comment on and otherwise engage in the permitting process including through intervention in the courts.
Before a SMCRA permit is issued, a mine operator must submit a bond or otherwise secure the performance of reclamation obligations. The Abandoned Mine Land Fund, which is part of SMCRA, requires a fee on all coal produced. The proceeds are used to reclaim mine lands closed or abandoned prior to 1977. This program is currently set to expire September 30, 2005, and Congress is considering various reauthorization proposals.
SMCRA stipulates compliance with many other major environmental statues, including: the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, or RCRA, and the Comprehensive Environmental Response, Compensation and Liability Act, or either CERCLA or Superfund.
SURETY BONDS
Federal and state laws require us to obtain surety bonds to secure payment of certain long-term obligations including mine closure or reclamation costs, federal and state workers' compensation costs, coal leases and other miscellaneous obligations. Many of these bonds are renewable on a yearly basis. Surety bond costs have increased in recent years while the market terms of such bonds have generally become more unfavorable. In addition, the number of companies willing to issue surety bonds has decreased.
CLEAN AIR ACT
The federal Clean Air Act, and comparable state laws that regulate air emissions, directly affect coal mining operations, but have a far greater indirect affect. Direct impacts on coal mining and processing operations may occur through permitting requirements and/or emission control requirements relating to particulate matter, such as fugitive dust or fine particulate matter measuring 2.5 micrometers in diameter or smaller. The Clean Air Act indirectly affects coal mining operations by extensively regulating the air emissions of sulfur dioxide, nitrogen oxides, mercury and other compounds emitted

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by coal-fired electricity generating plants and coke ovens. The general effect of such extensive regulation of emissions from coal-fired power plants could be to reduce demand for coal.
Clean Air Act requirements that may directly or indirectly affect our operations include the following:
Acid rain
Title IV of the Clean Air Act required a two-phase reduction of sulfur dioxide emissions by electric utilities. Phase II became effective in 2000 and extended the Title IV requirements to all coal-fired power plants with generating capacity greater than 25 Megawatts. The affected electricity generators have sought to meet these requirements by, among other compliance methods, switching to lower sulfur fuels, installing pollution control devices, reducing electricity generating levels or purchasing sulfur dioxide emission allowances. We cannot accurately predict the effect of these provisions of the Clean Air Act on us in future years. At this time, we believe that implementation of Phase II has resulted in an upward pressure on the price of lower sulfur coals, as coal-fired power plants continue to comply with the more stringent restrictions of Title IV.
Fine particulate matter and ozone
The Clean Air Act requires the EPA to set standards, referred to as National Ambient Air Quality Standards, or NAAQS, for certain pollutants. Areas that are not in compliance (referred to as "non-attainment areas") with these standards must take steps to reduce emissions levels. In 1997, the EPA revised the NAAQS for particulate matter and ozone; although previously subject to legal challenge, these revisions were subsequently upheld but implementation was delayed for several years.
For ozone, these changes include replacement of the existing one-hour average standard with a more stringent eight-hour average standard. On April 15, 2004, the EPA announced that counties in 32 states fail to meet the new eight-hour standard for ozone. States which fail to meet the new standard will have until June 2007 to develop plans for pollution control measures that allow them to come into compliance with the standards. For particulates, the changes include retaining the existing standard for particulate matter with an aerodynamic diameter less than or equal to 10 microns, or PM10, and adding a new standard for fine particulate matter with an aerodynamic diameter less than or equal to 2.5 microns, or PM2.5. On December 17, 2004, the EPA announced that regions in 20 states and the District of Columbia did not achieve the fine particulate matter standard. Following identification of non-attainment areas, each individual state will identify the sources of emissions and develop emission reduction plans. These plans may be state-specific or regional in scope. Under the Clean Air Act, individual states have up to twelve years from the date of designation to secure emissions reductions from sources contributing to the problem. In addition, on April 25, 2005, the EPA issued a finding that states have failed to submit State Implementation Plans that satisfy the requirements of the Clean Air Act with respect to the interstate transport of pollutants relative to the achievement of the 8-hour ozone and the PM2.5 standards. Because of this finding, the EPA must promulgate a Federal Implementation Plan for any state which does not submit its own plan. Meeting the new PM2.5 standard may require reductions of nitrogen oxide and sulfur dioxide emissions. Future regulation and enforcement of these new ozone and PM2.5 standards will affect many power plants, especially coal-fired plants and all plants in "nonattainment" areas.
The EPA continues to review these ambient air standards. For example, EPA is under a court imposed deadline to decide by the end of 2005 whether to propose a revision to the fine particulate matter standard. EPA is also considering whether to revise the ozone standard.

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Ozone
Significant additional emissions control expenditures will be required at coal-fired power plants to meet the current NAAQS for ozone. Nitrogen oxides, which are a by-product of coal combustion, can lead to the creation of ozone. Accordingly, emissions control requirements for new and expanded coal-fired power plants and industrial boilers will continue to become more demandin