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Rating Action:

Moody's downgrades Contura Energy's CFR to B3; outlook negative

27 Feb 2020

New York, February 27, 2020 -- Moody's Investors Service, ("Moody's") downgraded Contura Energy, Inc.'s ("Contura") Corporate Family Rating ("CFR") to B3 from B2, senior secured term loan to Caa1 from B3, and Speculative Grade Liquidity ("SGL") Rating to SGL-3 from SGL-2. The rating outlook has been revised to negative from stable.

"Contura Energy is expected to experience significant margin compression due to lower metallurgical coal prices and burn cash in 2020," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Contura Energy, Inc.

Downgrades:

..Issuer: Contura Energy, Inc.

.... Probability of Default Rating, Downgraded to B3-PD from B2-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

.... Corporate Family Rating, Downgraded to B3 from B2

....Senior Secured Bank Credit Facility, Downgraded to Caa1 (LGD4) from B3 (LGD4)

Outlook Actions:

..Issuer: Contura Energy, Inc.

....Outlook, Changed To Negative From Stable

RATING RATIONALE

Moody's expects a very challenging year for the coal industry in 2020. Domestic demand for thermal coal is challenged by a mild winter season, historically low natural gas prices, and ongoing reduction of the fleet of coal-fired power plants. A substantive reduction in export prices has redirected coal back into the weakened domestic market, further reducing prices in early 2020 following a weak 2019. Likewise, metallurgical coal fell sharply in the second half of 2019 and, while the met coal market has evidenced some stability in early 2020, there is no near-term catalyst for substantive and sustained price improvement. Business conditions for the global steel industry remain weak, particularly in Europe where Contura exports a majority of its metallurgical coal. Management has been taking action to reduce cash costs from about $82/short ton in 4Q19 to the $76-81/short ton in 2020. However, based on export metallurgical coal pricing anticipated near the midpoint of our range of $110-170 per metric ton (CFR Jingtang) and incorporating adjustments for the quality and location of the company's coal, Moody's expects that Contura Energy will generate $125-175 million of management-defined EBITDA in 2020, down meaningfully from $335 million in 2018 and $264 million for the nine months ended 30 September 2019, and will consume cash in the current environment of low prices for the company's grades of metallurgical coal at ports on the East Coast. Moody's also expects that the company's thermal coal platform will generate modest losses. Credit metrics will weaken considerably for the rating, including adjusted financial leverage above 3.5x (Debt/EBITDA).

Moody's also believes that investor concerns about the coal industry's ESG profile are intensifying and coal producers will be increasingly challenged by intensifying access to capital issues in the early 2020s. An increasing portion of the global investment community is reducing or eliminating exposure to the coal industry with greater emphasis on moving away from thermal coal. The aggregate impact on the credit quality of the coal industry is that debt capital will become more expensive over this horizon, particularly in the public bond markets, and other business requirements, such as surety bonds, which together will lead to much more focus on individual coal producers' ability to fund their operations and articulate clearly their approach to addressing environmental, social, and governance considerations -- including reducing net debt in the near-to-medium term. Contura reported about $600 million of debt and $227 million of surety bonds to support reclamation-related items at 30 September 2019.

The B3 CFR is principally constrained by the inherent volatility in the metallurgical coal industry and ongoing secular decline in the thermal coal industry that make it challenging to operate with a leveraged balance sheet over the rating horizon. The rating also reflects ongoing regulatory pressures on the coal mining industry despite improved political support since late 2016, inherent geologic and operational risks associated with mining, and environmental and social risks specific to the coal industry. The rating benefits from moderate operating diversity, meaningful coal reserves, access to multiple transportation options, and adequate liquidity. Contura's rating also considers meaningful legacy liabilities, including some mining-specific items, such asset retirement obligations related to the impact of coal mining on the environment, and coal-specific items, such as black lung liabilities related to negative health impacts on mining employees.

The negative outlook reflects the expectation for cash consumption in 2020. Moody's could downgrade the rating with expectations for available liquidity to fall below $225 million or cash to fall below $100 million. Further deterioration in metallurgical coal prices or expected realized prices could also have negative rating implications. Moody's could upgrade the rating with expectations for adjusted financial leverage to remain below 3.5x (Debt/EBITDA), free cash flow in excess of $25 million, and good liquidity to support operations.

The SGL-3 balances more than $300 million of available liquidity with expectations for cash consumption in 2020 and meaningful sensitivity to changes in metallurgical coal prices. Moody's expects that the company will generate negative free cash flow in 2019 -- based on expectations for about $50 million of cash interest and capital spending in the guided range of $175-$195 million that includes some spending on multiple development projects. Contura Energy disclosed in an earnings preannouncement that the company has $213 million of cash and $115 million of availability under a $225 million asset-based revolving credit facility at 31 December 2019. The asset-based revolving credit facility is used for letters of credit ($49 million at 30 September 2019) and some collateral limitations due to the asset-based nature of the facility. The revolver has a springing fixed charge coverage ratio test, which Moody's does not expect will be triggered in 2020, and the term loan does not have financial maintenance covenants.

Environmental, social, and governance factors are important factors influencing Contura's credit quality. The company is exposed to ESG issues typical for a company in the coal mining industry, including increasing global demand for renewable energy that is detrimental to demand for thermal coal, especially in the United States and Western Europe. From an environmental perspective the coal mining sector is also viewed as: (i) very high risk for air pollution and carbon regulations; (ii) high risk for soil and water pollution, land use restrictions, and natural and man-made hazards; and (iii) moderate risk for water shortages. Social issues include factors such as community relations, operational track record, and health and safety issues associated with coal mining, such as black lung disease. Contura Energy is exposed to both thermal coal and metallurgical coal, though the company's thermal coal business does not generate meaningful earnings and cash flows. Moody's believes that thermal coal carries greater ESG-related risks than metallurgical coal. Governance-related risks are higher than average for publicly-traded mining companies, incorporating an aggressive approach to shareholder returns, including more than $30 million of share repurchases in the third quarter of 2019, and recent change in the company's chief executive officer in 2019.

Following a merger with ANR, Inc. and Alpha Natural Resources Holdings, Inc. in November 2018, Contura now operates 23 underground mines, 9 surface mines and 12 preparation plants in the Northern Appalachia and Central Appalachia regions. Contura produced about 25 million tons of coal in 2018 in Central Appalachia and Northern Appalachia regions, split about evenly between thermal coal and metallurgical coal. The company also has 65% stake in the Dominion Terminal Associates coal export terminal in eastern Virginia. Contura generated $2.4 billion of revenue for the twelve months ended 30 September 2019.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Benjamin Nelson
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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