New York, September 10, 2018 -- Moody's Investors Service, ("Moody's") upgraded
Contura Energy Inc.'s ("Contura") Corporate Family
Rating to B2 from B3, upgraded the Probability of Default Rating
to B2-PD from B3-PD, and assigned a B3 rating to the
company's proposed $600 million senior secured term loan
due 2025. Proceeds from the proposed term loan will be used to
help facilitate the proposed merger between Contura, ANR Inc.,
and Alpha Natural Resources Holdings, Inc. Following the
planned closing of the transaction in the fourth quarter of 2018,
Contura is expected to be listed as a publicly-traded company on
the NYSE. Moody's confirmed the Caa1 rating on the existing
secured debt, which is expected to be withdrawn at closing.
Moody's also assigned an SGL-2 Speculative Grade Liquidity
Rating. This action concludes the review for possible upgrade initiated
on 1 May 2018. The rating outlook is stable.
"Contura will become more diverse operationally and should generate
strong free cash flow while metallurgical coal prices remain high,"
said Ben Nelson, Moody's Vice President -- Senior Credit
Officer and lead analyst for Contura Energy.
Upgrades:
..Issuer: Contura Energy, Inc.
.... Corporate Family Rating, Upgraded
to B2 from B3
.... Probability of Default Rating,
Upgraded to B2-PD from B3-PD
Assignments:
..Issuer: Contura Energy, Inc.
....1st Lien Senior Secured Bank Credit Facility,
Assigned B3 (LGD4)
.... Speculative Grade Liquidity Rating,
Assigned SGL-2
Outlook Actions:
..Issuer: Contura Energy, Inc.
....Outlook, Changed To Stable From
Rating Under Review
Confirmations:
..Issuer: Contura Energy, Inc.
....1st Lien Senior Secured Bank Credit Facility,
Confirmed at Caa1 (LGD4)
The assigned ratings are subject to Moody's review of the terms and conditions
of the proposed transactions.
RATINGS RATIONALE
The B2 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, and the inherent geologic and
operational risks associated with mining. The rating benefits from
moderate operating diversity, meaningful coal reserves, access
to multiple transportation options, relatively strong credit metrics
on a trailing twelve months basis, including pro forma adjusted
financial leverage in the mid-1 times (Debt/EBITDA) for the twelve
months ended 30 June 2018, and good liquidity. Moody's
expects that pro forma adjusted credit metrics will remain quite strong
for the rating for at least the next few quarters.
The one-notch upgrade reflects the improved scale, operational
diversity, and expectation for meaningful free cash flow over the
next several quarters resulting from the proposed merger with Alpha.
Contura will operate eight mining complexes that produced about 25 million
tons of coal on a combined basis in 2017, split about evenly between
thermal coal and metallurgical coal. Slightly more than two-thirds
of the production is located in Central Appalachia ("CAPP"),
where substantial capacity has been shut down over the past decade and
pricing has increased significantly over the past two years to recently
more than $70/ton, and slightly less than one-third
of the production is located in Northern Appalachia ("NAPP"),
where pricing has been more stable around $40-50/ton.
The combined company no longer participates in other coal basins following
a series of divestitures. Contura will also roughly double its
production of thermal and metallurgical coal, becoming the largest
producer of metallurgical coal in the United States. Moody's
expects that prices for low-volatility metallurgical coal will
remain above our medium term price sensitivity range of $95-$145/metric
ton in the near-term, which will enable Contura to generate
EBITDA meaningfully above expected fixed charges, and support significant
free cash flow and increasing cash on the balance sheet while metallurgical
coal prices remain relatively high. Contura's metallurgical
coal is mostly high-vol A and high-vol B coals that price
at a discount to low-vol coals.
Moody's assessment of Contura's credit quality also takes
into consideration Contura's portfolio of legacy liabilities,
which will increase significantly following the merger with Alpha.
Legacy liabilities include some mining-specific items, such
asset retirement obligations, and coal-specific items,
such as black lung liabilities. While both companies have reduced
legacy liabilities since emerging from bankruptcy in 2016 by divesting
assets, these liabilities remain significant and current estimates
in the company's financial statements exceed balance sheet debt
on a pro forma basis for the proposed transactions.
The SGL-2 Speculative Grade Liquidity Rating ("SGL")
reflects good liquidity to support operations over the next 12-15
months. Pro forma for the transaction, the company will have
$317 million cash as of June 30, 2018 and some availability
under the proposed $225 million ABL facility after considering
letters of credit. The ABL facility has a minimum fixed charge
coverage ratio of 1.0x that is only tested when excess availability
falls below certain thresholds. The new first lien term loan does
not have any financial covenants. Moody's expects positive
free cash flows over the next twelve months.
The stable outlook assumes that Contura will remain on track to generate
at least $300 million of EBITDA on an annual basis and maintain
at least $200 million of available liquidity, based on the
company's current debt capitalization, capital spending plans,
and financial policies. Use of internally-generated free
cash flow to reduce debt could change the expectations underpinning the
stable rating outlook. Expectations for secular decline in the
US thermal coal industry and continued volatility in the metallurgical
coal industry limit prospects for a rating upgrade even if key credit
metrics strengthen. Moody's could upgrade the rating with
a significant reduction in absolute debt, accompanied by further
clarity regarding financial policies, or a material improvement
in scale and business diversity that helps stabilize expected cash flow
generation. Moody's could downgrade the rating with expectations
for adjusted financial leverage trending above 3.5x (Debt/EBITDA),
free cash flow below $25 million, or less than $100
million of available liquidity.
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.
Formed by a group of former first lien lenders of Alpha Natural Resources,
Contura was created to acquire and operate Alpha's core operations in
Northern Appalachia (including the Cumberland mine complex), all
Alpha's operations in the Powder River Basin and certain assets in Central
Appalachia (the Nicholas mine complex in Nicholas County, West Virginia,
and the McClure and Toms Creek mine complexes in Dickenson and Wise Counties,
Virginia). Contura also purchased Alpha's interest in the Dominion
Terminal Associates coal export terminal in eastern Virginia. The
company divested its PRB assets at the end of 2017. For the twelve
months ended June 30, 2018, Contura generated $1.7
billion in revenues.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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
Brian Oak
MD - Corporate Finance
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
