Fitch Affirms Peabody Energy Corporation's IDR at 'BB'; Outlook Negative
NEW YORK -- May 8, 2014
Fitch Ratings has affirmed Peabody Energy Corporation's (Peabody, NYSE: BTU)
Issuer Default Rating (IDR) at 'BB'. A complete list of rating actions follows
at the end of this release.
The Rating Outlook has been revised to Negative. Fitch believes the coal
markets are at or near the bottom of the cycle and should begin to show a slow
recovery. The Negative Outlook reflects the possibility that overcapacity
persists in the metallurgical coal market and the hard coking coal benchmark
price remains below $150/tonne (t) beyond the next 12-18 months. Fitch expects
leverage could be above 4.5x through 2015.
KEY RATINGS DRIVERS
Peabody's ratings reflect large, well-diversified operations and good control
of its low-cost production. The credit ratings also reflect high financial
leverage following the acquisition of Macarthur Coal Limited in an all-cash
transaction in the fourth quarter of 2011.
Peabody is the largest private sector coal company, globally, with 27 mining
operations producing low-sulfur thermal coal from the Powder River Basin (PRB)
and high heat thermal coal from the Illinois Basin (IB) as well as seaborne
thermal and metallurgical coal in Australia. Proven and probable reserves are
about 8.3 billion tons. Peabody is targeting 2014 U.S. volumes at 185 to 195
million tons with 90-95% of those volumes committed and priced for 2014. Based
on projected 2014 production levels, 50 - 60% of 2015 U.S. volume is priced.
Steam coal prices in the U.S. are rebounding given low coal and gas
inventories, higher natural gas prices and improved power demand. Globally,
both metallurgical (met) and steam coal are in excess supply and prices are
weak. Coal producers have been running for cash with a focus on reducing costs
which is expected to delay price recovery. In particular, Fitch believes the
hard coking coal bench mark price could average about $135/t and the Newcastle
steam coal benchmark could be below $85/t over the next 12 months. The
industry is consolidating which should benefit supply/demand dynamics longer
Peabody's earnings are leveraged to metallurgical coal prices. The Australian
segment comprises seaborne coking, pulverized coal injection (PCI) and steam
coal sales. For 2013, the Australian adjusted EBITDA was $317 million on 34.9
million tons sold at average realizations of $83.26/ton compared with $939
million on 33.0 million tons sold at average realizations of $106.05/ton for
2012. Fitch's calculation of consolidated operating EBITDA for 2013 was $962
million compared with $1.8 billion for 2012.
Total debt with equity credit of $6 billion compares to preliminary LTM March
31, 2014 operating EBITDA of $844 million at 7x. Fitch expects Peabody to
continue to focus on debt repayment while leverage is above 3x but thereafter
to invest in Australia and Asia to the extent of its free cash flow.
Cash on hand was $508 million as of March 31, 2014 and total liquidity was
$2.1 billion. The company has a $1.65 billion secured revolving credit
facility maturing on Sept. 24, 2018 or Aug. 15 2018 if the $1.5 billion 6%
Senior Notes due in November 2018 remain outstanding. Utilization is estimated
at $132 million for letters of credit. The company also has a $275 million
accounts receivable securitization program maturing in April 2016 which had
$117 million available at Dec. 31, 2013. Revolver covenants include an
interest coverage minimum of 1.50:1 through Dec. 31, 2015 with step-ups
thereafter and a maximum net secured leverage ratio of 3.50:1 through Dec. 31,
2015 with step-downs thereafter. Fitch anticipates that Peabody will operate
within its covenants.
Scheduled maturities of long-term debt are estimated at $32 million in 2014,
$19 million in 2015, $666 million in 2016, $12 million in 2017 and $1.5
billion in 2018.
Fitch believes operating EBITDA could drop to $780 million for 2014 on lower
average metallurgical coal prices. Under the same assumptions, negative free
cash flows could be as much as $200 million. Peabody guides to 2014 capital
expenditure of $250 million to $295 million before coal lease expenditures
($276.8 million in 2013). Interest expense runs about $400 million and
dividends are about $92 million, annually.
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--Cash operating losses in Australia;
--Expectations of negative free cash flow beyond 2014;
--Failure to reduce debt;
--Expectations of Total Debt/EBITDA greater than 3.5x in 2016.
Positive: Future developments that may lead to a positive rating action are
not anticipated over the next 12 months but may include:
--Leverage sustainably below 3.5x.
Fitch has affirmed Peabody's ratings as follows:
--IDR at 'BB';
--Senior secured revolving credit and terms loan at 'BB+';
--Senior unsecured notes at 'BB';
--Convertible junior subordinated debentures due 2066 at 'B+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Monica M. Bonar, +1 212-908-0579
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Christopher M. Collins, CFA, +1 312-368-3196
Sean T. Sexton, CFA, +1 312-368-3130
Brian Bertsch, +1 212-908-0549
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