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Rating Action:

Moody's assigns Caa1 to Xinergy's new notes; outlook stable

25 Apr 2011

Approximately $200 million of rated debt securities affected

New York, April 25, 2011 -- Moody's Investors Service assigned a Caa1 rating to Xinergy Corp.'s (Xinergy) proposed $200 million senior secured notes due 2019. Moody's also assigned a Caa1 corporate family rating (CFR), a Caa1 probability of default rating, and an SGL-2 speculative grade liquidity rating, reflecting good liquidity pro forma for the note offering. The rating outlook is stable. This is the first time that Moody's has rated the debt of Xinergy.

Rating Assignments:

..Issuer: Xinergy Corp.

....Corporate Family Rating, Assigned Caa1

....Probability of Default Rating, Assigned Caa1

....Speculative Grade Liquidity Rating, Assigned SGL-2

....Senior Secured Regular Bond/Debenture, Assigned Caa1 (LGD3, 48%)

.Outlook, Stable

RATING RATIONALE

The Caa1 CFR reflects Xinergy's very small scale and narrow operating diversification, short corporate history, exposure to fluctuating coal prices, especially given its lack of coal sales contracts beyond 2011, high degree of customer concentration, and the inherent geologic and operating risks associated with coal mining. Additionally, the risks that accompany the company's ambitious growth plans are key limitations for the rating. These growth plans are projected to more than triple Xinergy's coal production by 2012, but there are permitting, development and capital cost overrun risks associated with the expansion. With 1.3 million tons of coal produced and sold in 2010, revenues of $109 million and only 43 million tons of permitted reserves, Xinergy is by far the smallest coal company Moody's rates.

Proceeds from the company's proposed senior secured notes will be used to repay certain indebtedness and fund capital expenditures. As the expansion capex is staged over the next two years, a fair amount of the net proceeds from the note offering will sit in cash, giving the company good liquidity over the next several years (initially it will not have a revolving credit facility). This liquidity provides a cushion against some of the permitting and expansion risks noted above, as well as operating and price risk. Gross leverage, however, is quite high on a pro forma basis, and the company is not expected to generate cash flow until it successfully brings its two proposed mines on line, which will be in 2012 at the earliest.

Xinergy's strengths include its initial liquidity and its relatively low operating costs, which is in part a function of the fact that 85% of its production is from surface mines.

The stable outlook reflects the balanced supply-demand fundamentals for the U.S. coal industry and Moody's expectations for stable thermal coal prices, as well as the company's liquidity. The ratings could be revised upward if Xinergy successfully navigates the completion of its new mining projects, achieves scale and profitability appropriate for its debt and degree of operating risk, secures favorably priced sales contracts for a meaningful percentage of its thermal coal, and maintains adequate liquidity. The ratings could come under downward pressure if Xinergy's coal production is significantly lower than expected, its expansion plans are materially delayed, downsized or require significantly greater amounts of capital, coal prices decline, or operating costs significantly increase, any of which threaten liquidity or cash flow expectations.

The principal methodology used in rating Xinergy was the Global Mining Industry Methodology, published May 2009. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

Based in Knoxville, Tennessee, Xinergy is engaged in coal mining in eastern Kentucky and West Virginia and sells coal to electric utilities and industrial companies through the southeastern United States. In 2010, Xinergy generated revenues of $109 million.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Glenn B. Eckert
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Caa1 to Xinergy's new notes; outlook stable
No Related Data.
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