TEXT-S&P may cut Xinergy Corp ratings

Fri Feb 24, 2012 4:17pm EST

Overview	
    -- Weak market demand for thermal coal following an unseasonably warm 	
winter may have eroded small Central Appalachian coal producer Xinergy Corp.'s 	
 liquidity position and could result in lower 2012 EBITDA than our
previous 	
expectations.	
     -- We are placing our ratings on Xinergy, including the 'B-' corporate 	
credit rating, on CreditWatch with negative implications.	
     -- In resolving the CreditWatch placement, we will monitor Xinergy's 	
contracted position, cash flow, and capital spending plans over the next 	
several months and assess the impact of its earnings and liquidity position on 	
the rating.	
	
Rating Action	
On Feb. 24, 2012, Standard and Poor's Ratings Services placed its ratings, 	
including the 'B-' corporate credit rating, on Knoxville, Tenn.-based Xinergy 	
Corp. on CreditWatch with negative implications.	
	
Rationale	
The CreditWatch listing reflects our concern that weak demand for thermal coal 	
due to an unseasonably warm winter in the company's regional end markets may 	
result in lower-than-expected 2012 earnings, leading to additional 	
deterioration of the company's fragile liquidity position. This may force 	
Xinergy to further delay its aggressive growth plans, which we view as 	
necessary to generate sufficient cash flow to fund further growth and service 	
its debt. We had previously expected Xinergy's 2012 adjusted EBITDA at roughly 	
$60 million, with adjusted leverage about 4x. However, at current estimated 	
levels of coal production, we now believe Xinergy may generate adjusted EBITDA 	
at or below 2011 levels (about $50 million) with credit measures at or above 	
5x and use more cash than we had expected to fund its operation and growth. As 	
of Sept. 30, 2011, Xinergy had total liquidity of about $95 million in cash. 	
The company has no revolving credit facility.	
	
The ratings on Xinergy reflect our assessment of the company's financial 	
profile as "highly leveraged" and business risk profile as "vulnerable" (as 	
our criteria define those terms). The rating incorporates the challenges faced 	
by the company, including building out its planned mines on time and budget, 	
its lack of operating and customer diversity, and its small size and scope. It 	
also considers the difficulties inherent in coal mining, including operating 	
problems, price volatility, transportation bottlenecks, weather-related 	
disruptions, and increasingly stringent environmental and safety regulations. 	
These risks are particularly elevated in Central Appalachia, where the company 	
operates.	
	
Ratings List	
Ratings Affirmed; CreditWatch/Outlook Action	
                                        To                 From	
Xinergy Corp.	
 Corporate Credit Rating                B-/Watch Neg/--    B-/Stable/--	
	
Ratings Affirmed; CreditWatch Action; Recovery Rating Unchanged	
                                        To                 From	
Xinergy Corp.	
 Senior Secured                         B-/Watch Neg       B- 	
  Recovery Rating                       4
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