About EDGAR Online | Login
Enter your Email for a Free Trial:
The following is an excerpt from a S-4 SEC Filing, filed by INTERNATIONAL COAL GROUP, INC. on 6/27/2005.
Next Section Next Section Previous Section Previous Section



     International Coal Group was formed in March 2005 to be ICG’s new top-tier parent holding company following the reorganization. International Coal Group has no operations and no significant assets. International Coal Group is a wholly owned subsidiary of ICG. Following the completion of the reorganization and acquisitions, International Coal Group will essentially be the same entity as ICG had ICG not undergone the reorganization. For a description of International Coal Group’s business after giving effect to the reorganization and acquisitions, see “Business” beginning on page 78 of the public offering preliminary prospectus.



     ICG, Inc. is a leading producer of coal in Central Appalachia, with a broad range of mid-to-high Btu, low sulfur steam. ICG’s Central Appalachian mining complexes, which include four of its mining complexes, are located in West Virginia and Kentucky. ICG also has a complementary mining complex of mid-to-high sulfur steam coal, strategically located in the Illinois Basin. ICG markets its coal to a diverse customer base of largely investment grade electric utilities, as well as domestic industrial customers. The high quality of International Coal Group’s coal, and the availability of multiple transportation options, including rail, truck and barge, throughout the Appalachian region, enable ICG 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.

     ICG was formed by WLR and other investors in May 2004 to acquire and operate competitive coal mining facilities. As of September 30, 2004, ICG acquired certain key assets of Horizon through a bankruptcy auction. These assets are high-quality reserves, are union free, have limited reclamation liabilities, and are substantially free of other legacy liabilities. Due to ICG’s initial capitalization, ICG was 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 ICG intends to consummate the Anker and CoalQuest acquisitions to further diversify ICG’s reserves.

     As of January 1, 2005, ICG owned or controlled approximately 510 million tons of steam coal reserves. Based on expected 2005 production rates, ICG’s Central Appalachian reserves could support existing production levels for approximately 16 years. Further, ICG owns or controls approximately 564 million tons of coal resources.

     For the year ended December 31, 2004, ICG sold 14.0 million tons of coal, all of which was steam coal. ICG’s 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. ICG’s three largest customers for the three months ended March 31, 2005 were Georgia Power Company, Carolina Power & Light Company and Duke Power and ICG derived approximately 63% of its coal revenues from sales to its five largest customers.


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 noncore assets, paying down outstanding


Table of Contents

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.

     The Horizon assets were sold to ICG 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 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 ICG’s outstanding stock. The former bondholders of Horizon that purchased shares of ICG 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” on page 36 of the public offering preliminary prospectus. ICG has not previously been a reporting company under the Securities Exchange Act of 1934.

     In addition, Lexington Coal Company, LLC, a newly formed entity, was organized by the founding ICG shareholders to assume certain reclamation liabilities and assets not otherwise being purchased by A.T. Massey or ICG. In order to provide support to Lexington Coal in consideration for assuming these liabilities, ICG 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 ICG 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, ICG 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 ICG’s senior secured credit facility, which ICG entered into at the closing of the Horizon acquisition. See “Description of indebtedness” on page 123 of the public offering preliminary prospectus for a discussion of ICG’s senior credit facility.


     “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.

     ICG estimates that there are approximately 183 million tons of coal reserves that can be developed by its existing operations which will allow ICG to maintain current production levels for an extended period of time. ICG Natural Resources, LLC owns and leases all of ICG’s reserves that are not currently assigned to or associated with one of its mining operations. These reserves contain approximately 327 million tons of mid-to-high Btu, low and high sulfur coal located in Kentucky, West Virginia and Illinois. ICG’s multi-region base and flexible product line allows ICG to adjust to changing market conditions and sustain high sales volume by supplying a wide range of customers.


Table of Contents

     ICG’s total coal reserves could support current production levels for more than 43 years. The following table provides the “quality” (average Btu content, sulfur content and ash content per pound) of its coal reserves as of January 1, 2005:

            Reserves     Total tons in millions             Quality characteristics        
            Proven and     of tons             (as received)        
            Probable as                                                
            of 1/1/2005                     Reserve     heat                    
            (in millions                     life     content     Sulfur              
Mining companies   State     of tons) (1)     Owned     Leased     (years)     (Btu/lb)     (%)     Ash(%)     Steam  
Central Appalachia:
ICG — Knott County
    KY       6.73       5.81       0.92       5.29       12,700       1.3 %     8.4 %     6.73  
ICG — Hazard
    KY       71.38       0.23       71.15       11.9         12,000       1.6 %     11.2 %     71.38  
ICG — East Kentucky
    KY       2.62       0.00       2.62       2.0         12,400       1.2 %     12.2 %     2.62  
ICG — Eastern
    WV       23.69       7.27       16.42       7.4         12,300       1.1 %     12.2 %     23.69  
ICG — Natural Resources (2)
    WV       44.90       2.20       42.70     NA     12,000       0.8 %     12.2 %     44.90  
ICG — Natural Resources (3)
    KY       5.9         4.4         1.5       NA     12,000       1.1 %     12.0 %     4.40  
Central Appalachia Total
            155.22       19.91       135.31                                       153.72  
ICG Illinois
    IL       29.63       11.38       18.25       12.9         10,500       3.2 %     9.5 %     29.63  
ICG Natural Resources
            325.21       305.10       20.1       NA     11,000       3.0 %     9.0 %     326.71  
Other Total
            354.84       316.48       38.35                                       356.34  
Total Reserves
            510.06       336.39       173.66                                       510.06  
(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 ICG has leased its mining rights to third parties. Reserve information reflects a moisture factor of approximately 6.0%. This moisture factor represents the average moisture present on ICG’s delivered coal.
(2)   ICG — Natural Resources (Jenny’s Creek)
(3)   ICG — Natural Resources (Mount Sterling)

     ICG’s reserve estimate is based on geological data assembled and analyzed by its 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. ICG maintains 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.


Table of Contents

     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. ICG uses the mining method that it believes will be most profitable with respect to particular reserves. ICG believes the volume of its current reserves exceeds the volume of its contractual delivery requirements. Although the reserves shown in the table above include a variety of qualities of coal, ICG presently blends coal of different qualities to meet contract specifications. See “Risk factors—Risks relating to our business” beginning on page 13 of the public offering preliminary prospectus.

     Periodically, ICG retains outside experts to independently verify its coal reserve base. The most recent review was completed during the first quarter of 2005 and covered all of ICG’s reserves. The results verified ICG’s reserve estimates, with very minor adjustments, and included an in-depth review of ICG’s procedures and controls. As of January 1, 2005, Marshall Miller & Associates, Inc. confirmed ICG’s reserve base of 510 million tons on a consolidated basis.

     ICG currently owns approximately 66% of its coal reserves, with the remainder of its 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 ICG for coal reserves from its producing properties was $1.35 per ton in 2004, representing approximately 3.9% of its coal sales revenue in 2004. Consistent with industry practice, ICG conducts only limited investigations of title to its coal properties prior to leasing. Title to lands and reserves of the lessors or grantors and the boundaries of its leased priorities are not completely verified until ICG prepares to mine those reserves.


     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.


Table of Contents

     The following table provides the “quality” (average Btu content, sulfur content and ash content per pound) of ICG coal resources as of January 1, 2005:

                    Quality characteristics        
            Recoverable     (as received)        
            resources as                          
            of 1/1/2005     Heat                    
            (in millions     content     Sulfur     Ash        
Mining companies   State     of tons)     (Btu/lb)     (%)     (%)     Steam  
Central Appalachia:
ICG - Knott County
    0.00       12,700       1.3 %     8.49 %     0.00  
ICG - Hazard
    3.00       12,000       1.6 %     11.29 %     3.00  
ICG - East Kentucky
    0.00       12,400       1.2 %     12.29 %     0.00  
ICG - Eastern
    0.02       12,300       1.1 %     12.29 %     0.02  
ICG - Natural Resources(1)
    0.22       12,000       0.8 %     12.29 %     0.22  
ICG - Natural Resources(2)
    0.01       12,000       1.1 %     12.09 %     0.01  
Central Appalachia Total
            3.25                               3.25  
ICG Illinois
    38.47       10,500       3.2 %     9.59 %     38.47  
ICG Natural Resources
            522.52       11,000       3.0 %     9.0 %     522.52  
Other Total
            560.99                               560.99  
Total Resources
            564.24                               564.24  
(1)   ICG – Natural Resources (Jenny’s Creek)
(2)   ICG – Natural Resources (Mount Sterling)


     As of December 31, 2004, ICG operated a total of eight surface and five underground coal mines located in Kentucky, West Virginia and Illinois. Historically, approximately 70% of ICG’s production has come from surface mines, and the remaining production has come from its underground mines. These mining facilities include three preparations plants, each of which receive, blend, process and ship coal that is produced from one or more of ICG’s 13 active mines. ICG’s 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. ICG’s surface mines are a combination of mountain top removal, dragline, truck/loader equipment fleets along with large production tractors. Most of ICG’s preparation plants are modern heavy media plants that generally have both coarse and fine coal cleaning circuits. ICG currently leases most of the equipment utilized in its mining operations. ICG employs preventive maintenance and rebuild programs to ensure that its equipment is modern and well maintained. The mobile equipment utilized at ICG’s mining operation is scheduled to be replaced on an on-going basis with new, more efficient units during the next five years. Each year ICG endeavors to replace the oldest units, thereby maintaining productivity while minimizing capital expenditures. The following table provides summary information regarding ICG’s principal mining complexes as of December 31, 2004.


Table of Contents

                    Number and                        
                    type of mines                        
            Preparation     Under-                     Mining             produced  
Mining complex   Location     plant(s)     ground     Surface     Total     method (1)     Transportation     in 2004  
ICG - Eastern, LLC
  Cowen, WV     1       0       1       1     MTR-DL-TSL   Rail     2,712.1  
ICG - Hazard, LLC
  Hazard, KY     1 (2)     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  
(1)   R&P = Room and Pillar; MTR = Mountain Top Removal; DL = Dragline; HW = Highwall; CM = Continuous Miner; TSL = Truck and Shovel/Loader
(2)   Expected to begin operation in second half of 2005

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


Central Appalachia mining operations

     ICG’s Central Appalachian mining facilities are strategically located across West Virginia and Kentucky and are used to produce and ship coal to its customers located primarily in the eastern half of the United States. ICG believes that the quality and experience of its workforce in Central Appalachia are among the highest in the coal mining industry. All of ICG’s Central Appalachia mining operations are union free.

     ICG’s mines in Central Appalachia produced 9.7 million tons of coal in 2004. The coal produced in 2004 was, on average, 12,174 Btu/lb, 1.1% sulfur and 12.5% ash by content. This year ICG estimates that its mines in Central Appalachia region will produce approximately 10.3 million tons. 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 73% of the coal shipped by these mines in 2004, compared to 75% of shipments in 2003. Within each mining complex, mines have been developed at strategic locations in proximity to ICG’s 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 ICG could ship coal to its customers.

     As of March 31, 2005, these mines had 943 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


Table of Contents

of 1.1%, an average ash content of 12.2% and an average Btu content of 12,300. ICG estimates 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.

      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. ICG estimates 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. ICG estimates these properties contain 6.7 million tons of coal reserves.


Table of Contents

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.

      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.

     ICG estimates 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.

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 AEI Resources 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. ICG estimates 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.

     The Viper mine is a room and pillar operation, utilizing continuous miners and shuttle cars. Management believes that ICG Illinois is one of the lowest cost and highest productivity mines in the Illinois Basin. All of the


Table of Contents

raw coal is processed at Viper’s preparation plant. The clean coal is transported to the customers by 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.


Coal sales

     In addition to the coal ICG mines, from time to time ICG also opportunistically secures coal purchase agreements with other coal producers to take advantage of differences in market prices.


     In ICG’s highwall mining business, ICG operates or leases six systems using its patented ADDCAR highwall mining system and intends 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. ICG’s 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 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.

     ICG currently has the exclusive North American distribution rights for the ADDCAR highwall mining system.


Table of Contents



     ICG’s primary customers are investment grade electric utility companies primarily in the eastern half of the United States. The majority of ICG’s customers purchase coal for terms of one year or longer, but ICG also supplies coal on a spot basis for some of its customers. ICG’s three largest customers for the three months ended March 31, 2005, were Georgia Power Company, Carolina Power & Light Company and Duke Power and ICG derived approximately 63% of ICG’s coal revenues from sales to its five largest customers.

Long-term coal supply agreements

     As is customary in the coal industry, ICG enters into long-term supply contracts (exceeding one year in duration) with many of its customers when market conditions are appropriate. These contracts allow customers to secure a supply for their future needs and provides ICG with greater predictability of sales volume and sales price. For the three months ended March 31, 2005, approximately 67% of ICG’s revenues were derived from long-term supply contracts. ICG sells the remainder of ICG’s coal through short-term contracts and on the spot market. ICG has also entered into certain brokered transactions to purchase certain amounts of coal to meet ICG’s sales commitments. The purchase coal contracts expire at the end of 2006 and provide ICG a minimum of approximately 4.6 million tons of coal through the remaining lives of the contracts.

     As a result of the Horizon bankruptcy process, ICG was able to renegotiate certain contracts at significantly higher prices that reflected the current pricing environment and not purchase unfavorable contracts. As the net costs associated with producing coal have risen, such as higher energy, transportation and steel prices, the price adjustments within several of ICG’s 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 ICG’s coal.

     The terms of ICG’s 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 ICG’s 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 ICG’s contracts contain provisions to adjust the base price due to new statutes, ordinances or regulations that impact ICG’s costs related to performance of the agreement. Also, some of ICG’s 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 ICG’s 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 ICG’s contracts, ICG has the right to match lower prices offered to ICG’s customers by other suppliers. These price reopener provisions have enabled ICG 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 ICG’s coal supply agreements contain provisions requiring ICG 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, ICG expect to renew many of ICG’s expiring sales contracts at significantly higher prices.


Table of Contents


     ICG ships coal to its customers by rail, truck or barge. ICG typically pays the transportation costs for its 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, ICG’s 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 ICG’s proximity to the loadout facilities. ICG uses a variety of independent companies for its transportation needs and typically enter into multiple non-contract agreements with trucking companies throughout the year.

     In 2004, approximately 94% of ICG’s coal from ICG’s Central Appalachian operations was delivered to its customers by rail on either the Norfolk Southern or CSX rail lines, with the remaining 6% delivered by truck. For ICG’s Illinois Basin operations, 100% of ICG’s coal was delivered by truck to customers, generally within an 80 mile radius of ICG’s Illinois mine.

     ICG believes it enjoys good relationships with rail carriers and barge companies due, in part, to its modern coal-loading facilities and the experience of its transportation and distribution employees.


     ICG has historically spent more than $150 million per year to procure goods and services in support of its 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. ICG uses suppliers for a significant portion of ICG’s equipment rebuilds and repairs both on- and off-site, as well as construction and reclamation activities.

     Each of ICG’s regional mining operations has developed its own supplier base consistent with local needs. ICG has 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. ICG is not dependent on any one supplier in any region. ICG promotes competition between suppliers and seek to develop relationships with those suppliers whose focus is on lowering its costs. ICG seeks suppliers who identify and concentrate on implementing continuous improvement opportunities within their area of expertise.


     The coal industry is intensely competitive. ICG’s main competitors are Massey Energy Company and Alpha Natural Resources. As we develop additional reserves and expand our operations into Central and Northern West Virginia, we will face additional competition from Northern Appalachia coal producers, including Consol Energy and Foundation Coal Holdings. The most important factors on which ICG competes are coal price at the mine, coal quality and characteristics, transportation costs and the reliability of supply. Demand for coal and the prices that ICG will be able to obtain for its 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 ICG’s 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.


     As of March 31, 2005, ICG had 1,388 employees of which 20% were salaried and 80% were hourly. ICG believes its relationship with its employees is good. All of ICG’s workforce is union free.


     From time to time, ICG is involved in legal proceedings arising in the ordinary course of business. ICG believes it has 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 ICG’s financial condition, results of operations or


Table of Contents

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, ICG believes all or substantially all of the claims will be resolved in accordance with Horizon’s plan of reorganization.


     As of December 31, 2004, ICG’s leased equipment was, on average, 8.5 years old. ICG believes that a significant portion of its equipment needs to be upgraded in the near-term. Accordingly, ICG expects to retire much of its current equipment and invest approximately $176 million in new equipment and for mining development operations in the next two years. ICG believes ICG’s capital investment plan will provide it with a cost-effective fleet of equipment and enable it to improve ICG production efficiencies. As we take advantage of planned expansion opportunities from 2007 through 2009, we expect to spend approximately $204 million in capital expenditures, which may require external financing.

     While ICG currently operates its mines with a high percentage of leased equipment due primarily to Horizon’s preference for leasing, ICG will be purchasing equipment in the future. Current equipment is leased primarily from Caterpillar Finance, GE Capital and other leasing companies. ICG’s operating leases typically have a term of three to five years, with ICG having the right to purchase the equipment at the end of the lease at fair market value.


     Reclamation expenses are a significant part of any coal mining operation. Prior to commencing mining operations, a company is required to apply for numerous ICG 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 ICG 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.


Table of Contents


     The Board of Directors and executive officers of ICG and International Coal Group are identical. For a description of the Board of Directors and executive officers of International Coal Group, see “Management” beginning on page 111 of the public offering preliminary prospectus.


     The reorganization is being completed to facilitate the acquisitions of Anker and CoalQuest, on a tax-deferred basis. The reorganization will be tax-free for ICG shareholders. The following discussion contains material information pertaining to the reorganization. This discussion is subject, and qualified in its entirety by reference, to the Anker business combination agreement filed as an exhibit to the registration statement relating to the public offering, which contains the material provisions relating to the reorganization. International Coal Group encourages you to read and review the Anker business combination agreement as well as the discussion in this prospectus. The business combination agreement relating to the CoalQuest acquisition is unrelated to the reorganization.


     The next section of this document, “The Business Combination Agreement,” has additional and more detailed information regarding the legal documents that govern the reorganization, including information about the conditions to completion of the reorganization and the provisions for terminating or amending the Anker business combination agreement.


     ICG was formed by WLR and other investors in May 2004 to acquire and operate competitive coal mining facilities. Through the acquisition of certain key assets from the bankruptcy estate of Horizon, ICG was able to acquire high quality reserves located in Appalachia and the Illinois Basin that are union free, have limited reclamation liabilities and are substantially free of other legacy liabilities. Consistent with the WLR investor group’s strategy to consolidate profitable coal assets, ICG began discussions in December 2004 with Anker and CoalQuest regarding possible strategic transactions.

     Throughout these discussions, representatives of Anker and CoalQuest made it clear to ICG that the Anker and CoalQuest acquisitions must be accomplished on a tax-deferred basis so that the shareholders of Anker and the members of CoalQuest would not, as a general rule, recognize immediate taxable gain on the exchange of their Anker or CoalQuest equity for ICG equity. In order to accomplish this objective, the parties’ advisors determined that the Anker and CoalQuest acquisitions should be structured as elements of a “Section 351” transaction in which the equity of Anker, CoalQuest and ICG was contributed (by merger or otherwise) to a new holding company in exchange for holding company stock. International Coal Group was created to serve as the holding company in the Section 351 transaction.

     Since ICG, Inc. shares were held by more than 100 shareholders, ICG, Inc. determined that the only practical way to accomplish the “contribution” of ICG’s equity to International Coal Group was by merging ICG, Inc. into a subsidiary, which had been formed as a subsidiary of ICG, Inc. As a result of this merger, which we refer to as the reorganization, each ICG common share will be exchanged for one International Coal Group common share on a tax-free basis. The mechanics of the reorganization were included in the Anker business combination agreement, which was approved by the Board of Directors of ICG and executed by all parties on March 31, 2005.


     At a meeting on March 31, 2005, the ICG board of directors, based on a recommendation of a special directorate committee of the board, unanimously approved the Anker business combination agreement and the CoalQuest business combination agreement and the transactions contemplated by each agreement, including the reorganization.

     The reorganization is subject to the approval of the holders of a majority of all issued and outstanding ICG common shares. The holders of a majority of the outstanding ICG common shares as of the record date of March


Table of Contents

31, 2005 have delivered irrevocable proxies authorizing ICG to vote their shares in favor of the adoption of the Anker business combination agreement and the transactions contemplated by it, including the reorganization. Directors, officers and/or their affiliates granted proxies with respect to 28.6% of the outstanding shares. The Anker business combination will be approved by written consent of the shareholders pursuant to the proxies granted by the majority of shareholders. ICG will not hold a meeting of shareholders. No other action on the part of any shareholder of ICG is required for the reorganization to be completed and, therefore, we are not soliciting your vote.

     The HSR Act and the rules and regulations thereunder provide that certain merger transactions, including the Anker and CoalQuest acquisitions, may not be consummated until required information and materials have been furnished to the Department of Justice and the Federal Trade Commission, and certain waiting periods have expired or been terminated. ICG filed with the FTC and the DOJ notification and report forms under the HSR Act on April 16, and April 15 and April 29, 2005. On April 19, 2005, ICG was notified that it received early termination of the applicable waiting period under the HSR Act.


     You do not need to send your ICG stock certificates to us. Your current ICG common stock certificates will represent shares of International Coal Group following the reorganization.