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Rating Action:

Moody's raises Murray Energy's CFR to B3; rates proposed senior notes

17 Nov 2010

Approximately $690 million debt securities affected

New York, November 17, 2010 -- Moody's Investors Service upgraded Murray Energy Corporation's ("Murray") Corporate Family Rating ("CFR") and Probability of Default Rating to B3 from Caa1, and the rating on the existing $540 million senior secured notes due 2015 to B2 from Caa1. Moody's also assigned a Caa2 rating to the proposed $150 million senior unsecured notes due 2017. The rating outlook is stable. The company intends to use the net proceeds from this offering, together with cash on hand, to fund capital expenditures.

RATINGS RATIONALE

The rating upgrades reflect Moody's expectations that intermediate term expansion projects at Murray's existing mines - including a new longwall in Northern Appalachia and upgrades to existing longwall equipment -- could improve its assets, materially reduce unit costs, and improve longer-term ability to generate EBITDA and cash flow. Moody's also believes that improved coal fundamentals have afforded Murray the ability to better its overall contracted position at relatively favorable prices. Additionally, Moody's expects the company's Northern Appalachian mines to benefit from longer-term secular production declines in Central Appalachia caused by depletion, permitting issues, higher costs, and increased sulfur scrubbing capacity at coal-powered power plants.

The B3 CFR also reflects high debt leverage, reliance on a few key coal mines, operating and geologic risk, and the absence of committed revolving credit. The ratings are supported by long-standing relationships with highly rated utilities, long-term sales contracts, low-cost longwall mining methods, freight advantages associated with water-based transportation and proximity to customers, and a largely union-free workforce.

In addition, Moody's expects that Murray would maintain good short term liquidity in part because the net proceeds of roughly $145 million from the proposed notes issuance will bolster the company's $165 million unrestricted cash balance (reported at September 30, 2010). Free cash flow generation has been very modestly positive through the first half of 2010 but Moody's believes it would be negative over the near-term as Murray funds its sizeable growth capital spending. Moody's notes that a material portion of Murray's meaningful cash generation in 2009 resulted from favorable customer price adjustments that ended on December 31, 2009.

Moody's also upgraded to B2 from Caa1 the existing $540 million second priority senior secured notes to reflect the advantaged position in the capital structure in accordance with our loss-given default methodology. We expect existing secured noteholders to benefit from the improved asset base and increased coal production funded with the proceeds from contractually junior proposed unsecured notes.

The stable rating outlook reflects Murray's highly contracted sales position for the remainder of 2010 and 2011 and good liquidity to support operations over the near-term. The outlook also anticipates that Murray will meet production and tonnage sold targets, and make planned progress towards completing its expansion and upgrade projects.

Moody's could consider a positive action if there is permanent reduction of debt. In addition, the rating or outlook could be favorably impacted should the company demonstrate sustainable improvement in production levels and price per ton realizations while maintaining a favorable cost position.

However, Moody's could downgrade the rating if (i) liquidity deteriorates meaningfully, (ii) we do not expect funds from operations to cover maintenance capital expenditures for a sustainable period, (iii) Murray pursues further leveraging transactions, (iv) there are adverse developments in the thermal coal market without adequately priced contracts for the majority of near-term coal production, or (v) the company faces significant operational issues.

The following summarizes Moody's rating actions:

Murray Energy Corporation

Ratings assigned:

..$150 million proposed senior unsecured notes due 2017 -- Caa2 (LGD5, 87%)

Ratings upgraded:

..Corporate family rating -- to B3 from Caa1

..Probability of default rating -- to B3 from Caa1

..10.25% $540 million second lien senior secured notes due 2015 -- to B2 (LGD3, 35%) from Caa1

Outlook remains stable.

The principal methodologies used in this rating were Global Mining Industry published in May 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Murray Energy Corporation is a privately owned coal mining company which produced approximately 23 million tons in 2009. The company controls approximately 900 million tons of assigned and unassigned reserves in the Northern Appalachia, Illinois, and Uinta basins. Revenues for LTM period ended September 30, 2010 were $1 billion.

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

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

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

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New York
Arvinder Saluja
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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Moody's raises Murray Energy's CFR to B3; rates proposed senior notes
No Related Data.
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