Fitch Affirms Peabody Energy Corporation's IDR at 'BB'; Outlook Negative

  Fitch Affirms Peabody Energy Corporation's IDR at 'BB'; Outlook Negative  Business Wire  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 term.  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.  Capital Structure  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.  Strong Liquidity  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.  Expectations  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.  RATING SENSITIVITIES  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 ''.  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 Subsidiary Linkage  Additional Disclosure  Solicitation Status  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.  Contact:  Fitch Ratings Primary Analyst Monica M. Bonar, +1 212-908-0579 Senior Director Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Secondary Analyst Christopher M. Collins, CFA, +1 312-368-3196 Director or Committee Chairperson Sean T. Sexton, CFA, +1 312-368-3130 Managing Director or Media Relations: Brian Bertsch, +1 212-908-0549  
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