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

--Issuer Default Rating (IDR) at 'BB+';

--Senior unsecured notes at 'BB+';

--Senior unsecured revolving credit and term loan at 'BB+';

--Convertible junior subordinated debentures due 2066 at 'BB-'.

The Rating Outlook is Stable.

Peabody's credit ratings reflect large, well diversified operations, good control of low-cost production, strong liquidity and moderate leverage.

Liquidity at quarter's end was strong, with cash on hand of $526.7 million and availability under the company's revolver of $1.5 billion. Total debt with equity credit/EBITDA for the latest 12 months (LTM) ended March 31, 2009, was 1.5 times (x). Peabody has substantial legacy liabilities and adjusted leverage was 2.3x for the year ended Dec. 31, 2008.

Capital expenditures in 2009 are expected to be up to $450 million, excluding federal coal reserve lease payments, which are estimated at $130 million for 2009. Interest is expected to be about $215 million for the year.

Fitch expects operating cash flows will cover capital expenditures, scheduled maturities of debt ($17 million in 2009 and $14 million in 2010), and dividends of about $64 million per year, amply over the next 12-18 months. Peabody should remain well within its financial covenants of a maximum consolidated leverage ratio of 3.25x and a minimum interest coverage ratio of 2.50x.

Although earnings are expected to decline in 2009, Peabody should generate free cash flow as a result of more modest expenditures. Fitch would consider a positive rating action if leverage looks to be sustainably reduced.

Fitch expects any significant acquisitions to be financed in a balanced manner with some cash on hand and/or equity. Fitch expects total debt with equity credit/EBITDA to remain below 2.5x over the next 18 months absent material production or shipment disruptions. Fitch would consider a negative rating action if there were a substantial recapitalization or a significant debt financed acquisition.

Peabody is the largest U.S. coal producer, fueling 10% of domestic electricity generation and the fifth largest coal producer in Australia. In 2008, Peabody sold 255.5 million tons of coal and had year-end reserves of 9.2 billion tons.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

SOURCE: Fitch Ratings

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