UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~


		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~June~~September 30, 2005

Commission File Number1-16463

PEABODY ENERGY CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		13-4004153

(State or other jurisdiction of		~~(I.R.S. Employer~~
incorporation or organization)		(I.R.S. Employer Identification No.)


~~701 Market Street, St. Louis, Missouri~~		~~63101-1826~~

~~(Address of principal executive offices)~~		~~(Zip~~701 Market Street, St. Louis, Missouri63101-1826 (Address of principal executive offices) (Zip Code)

(314) 342-3400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ ~~Yes~~ o No

~~Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).~~


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.	þ Yes	o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).	þ Yes	o No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).	o Yes	þ No

Number of shares outstanding of each of the Registrant’s classes of Common Stock, as of ~~July 31,~~October 28, 2005: Common Stock, par value $0.01 per share, ~~131,159,264~~131,489,626 shares outstanding.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

PEABODY ENERGY CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share data)


	Quarter Ended						Six Months Ended						Quarter Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2005			2004			2005			2004			2005			2004			2005			2004
REVENUES
Sales	$	1,089,817		$	898,582		$	2,152,338		$	1,643,033		$	1,191,282		$	895,156		$	3,343,620		$	2,538,189
Other revenues		18,969			18,189			33,928			46,031			32,228			23,833			66,156			69,864

Total revenues		1,108,786			916,771			2,186,266			1,689,064			1,223,510			918,989			3,409,776			2,608,053

COSTS AND EXPENSES
Operating costs and expenses		880,274			757,686			1,794,356			1,407,462			987,503			735,618			2,781,859			2,143,080
Depreciation, depletion and amortization		79,309			73,020			155,262			132,860			77,159			70,132			232,421			202,992
Asset retirement obligation expense		7,162			8,627			16,357			21,664			7,394			10,146			23,751			31,810
Selling and administrative expenses		40,671			32,144			78,431			59,936			57,009			33,623			135,440			93,559
Other operating income:
Net gain on disposal of assets		(16,452	)		(1,907	)		(47,574	)		(12,355	)
Net gain on disposal or exchange of assets														(47,577	)		(1,790	)		(95,151	)		(14,145	)
Income from equity affiliates		(11,487	)		(4,626	)		(20,678	)		(11,053	)		(8,863	)		(2,645	)		(29,541	)		(13,698	)


OPERATING PROFIT		129,309			51,827			210,112			90,550			150,885			73,905			360,997			164,455
Interest expense		25,205			24,595			50,761			45,923			25,327			24,926			76,088			70,849
Early debt extinguishment gains														—			(556	)		—			(556	)
Interest income		(1,810	)		(1,209	)		(3,183	)		(2,128	)		(3,218	)		(1,084	)		(6,401	)		(3,212	)


INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS		105,914			28,441			162,534			46,755			128,776			50,619			291,310			97,374
Income tax provision (benefit)		10,162			(15,194	)		14,586			(20,796	)		14,714			6,933			29,300			(13,863	)
Minority interests		498			390			804			653			722			247			1,526			900


INCOME FROM CONTINUING OPERATIONS		95,254			43,245			147,144			66,898			113,340			43,439			260,484			110,337
Loss from discontinued operations, net of income tax benefit of $1,177 and $1,892, respectively		—			(1,764	)		—			(2,837	)
Loss from discontinued operations, net of income tax benefit of $1 and $1,893, respectively														—			(2	)		—			(2,839	)


NET INCOME	$	95,254		$	41,481		$	147,144		$	64,061		$	113,340		$	43,437		$	260,484		$	107,498


BASIC EARNINGS PER SHARE
Income from continuing operations	$	0.73		$	0.34		$	1.13		$	0.56		$	0.86		$	0.34		$	1.99		$	0.90
Loss from discontinued operations		—			(0.02	)		—			(0.03	)		—			—			—			(0.02	)

Net income	$	0.73		$	0.32		$	1.13		$	0.53		$	0.86		$	0.34		$	1.99		$	0.88


WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC		130,815,073			127,927,900			130,582,209			119,752,076			131,216,197			128,557,174			130,795,861			122,708,532


DILUTED EARNINGS PER SHARE
Income from continuing operations	$	0.71		$	0.33		$	1.10		$	0.55		$	0.84		$	0.33		$	1.95		$	0.88
Loss from discontinued operations		—			(0.01	)		—			(0.03	)		—			—			—			(0.02	)

Net income	$	0.71		$	0.32		$	1.10		$	0.52		$	0.84		$	0.33		$	1.95		$	0.86


WEIGHTED AVERAGE SHARES OUTSTANDING — DILUTED		133,810,208			130,876,522			133,683,624			122,622,612			134,260,988			131,558,064			133,855,704			125,641,992


DIVIDENDS DECLARED PER SHARE	$	0.075		$	0.0625		$	0.15		$	0.125		$	0.095		$	0.0625		$	0.245		$	0.1875

PEABODY ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)


	(Unaudited)						(Unaudited)
	June 30, 2005			December 31, 2004			September 30, 2005			December 31, 2004
ASSETS
Current assets
Cash and cash equivalents	$	459,367		$	389,636		$	478,741		$	389,636
Accounts receivable, less allowance for doubtful accounts of $19,781 at June 30, 2005 and $1,361 at December 31, 2004		204,419			193,784
Accounts receivable, less allowance for doubtful accounts of $19,995 at September 30, 2005 and $1,361 at December 31, 2004								236,538			193,784
Inventories		363,561			323,609			368,850			323,609
Assets from coal trading activities		52,834			89,165			85,554			89,165
Deferred income taxes		15,050			15,461			15,050			15,461
Other current assets		57,991			42,947			84,430			42,947

Total current assets		1,153,222			1,054,602			1,269,163			1,054,602
Property, plant, equipment and mine development, net of accumulated depreciation, depletion and amortization of $1,474,006 at June 30, 2005 and $1,333,645 at December 31, 2004		4,883,277			4,781,431
Property, plant, equipment and mine development, net of accumulated depreciation, depletion and amortization of $1,543,759 at September 30, 2005 and $1,333,645 at December 31, 2004								5,014,029			4,781,431
Investments and other assets		368,162			342,559			371,603			342,559

Total assets	$	6,404,661		$	6,178,592		$	6,654,795		$	6,178,592

						��
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	21,861		$	18,979		$	23,031		$	18,979
Liabilities from coal trading activities		34,812			63,565			67,398			63,565
Accounts payable and accrued expenses		748,514			691,600			809,956			691,600

Total current liabilities		805,187			774,144			900,385			774,144

Long-term debt, less current maturities		1,393,049			1,405,986			1,384,263			1,405,986
Deferred income taxes		400,991			393,266			419,621			393,266
Asset retirement obligations		402,071			396,022			398,979			396,022
Workers’ compensation obligations		230,044			227,476			233,127			227,476
Accrued postretirement benefit costs		942,201			939,503			945,670			939,503
Other noncurrent liabilities		326,597			315,694			333,790			315,694

Total liabilities		4,500,140			4,452,091			4,615,835			4,452,091
Minority interests		1,713			1,909			1,685			1,909
Stockholders’ equity
Preferred Stock — $0.01 per share par value; 10,000,000 shares authorized, no shares issued or outstanding as of June 30, 2005 or December 31, 2004		—			—
Series Common Stock — $0.01 per share par value; 40,000,000 shares authorized, no shares issued or outstanding as of June 30, 2005 or December 31, 2004		—			—
Common Stock — $0.01 per share par value; 400,000,000 shares authorized, 131,201,979 shares issued and 130,940,799 shares outstanding as of June 30, 2005 and 150,000,000 shares authorized, 129,829,134 shares issued and 129,567,954 shares outstanding as of December 31, 2004		1,312			1,298
Preferred Stock — $0.01 per share par value; 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2005 or December 31, 2004								—			—
Series Common Stock — $0.01 per share par value; 40,000,000 shares authorized, no shares issued or outstanding as of September 30, 2005 or December 31, 2004								—			—
Series A Junior Participating Preferred Stock — 1,500,000 shares authorized, no shares issued or outstanding as of September 30, 2005 or December 31, 2004								—			—
Common Stock — $0.01 per share par value; 400,000,000 shares authorized, 131,676,733 shares issued and 131,415,553 shares outstanding as of September 30, 2005 and 150,000,000 shares authorized, 129,829,134 shares issued and 129,567,954 shares outstanding as of December 31, 2004								1,316			1,298
Additional paid-in capital		1,474,590			1,437,319			1,491,038			1,437,319
Retained earnings		478,533			350,968			579,411			350,968
Unearned restricted stock awards		(6,703	)		(459	)		(6,323	)		(459	)
Accumulated other comprehensive loss		(41,008	)		(60,618	)		(24,251	)		(60,618	)
Treasury shares, at cost: 261,180 shares as of June 30, 2005 and December 31, 2004		(3,916	)		(3,916	)
Treasury shares, at cost: 261,180 shares as of September 30, 2005 and December 31, 2004								(3,916	)		(3,916	)

Total stockholders’ equity		1,902,808			1,724,592			2,037,275			1,724,592

Total liabilities and stockholders’ equity	$	6,404,661		$	6,178,592		$	6,654,795		$	6,178,592

PEABODY ENERGY CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


	Six Months Ended						Nine Months Ended
	June 30,						September 30,
	2005			2004			2005			2004
Cash Flows from Operating Activities
Net income	$	147,144		$	64,061		$	260,484		$	107,498
Loss from discontinued operations		—			2,837			—			2,839

Income from continuing operations		147,144			66,898			260,484			110,337
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization		155,262			132,860			232,421			202,992
Deferred income taxes		11,699			(27,185	)		28,406			(24,273	)
Early debt extinguishment gains								—			(556	)
Amortization of debt discount and debt issuance costs		3,465			3,970			5,177			6,097
Net gain on disposal of assets		(47,574	)		(12,355	)
Net gain on disposal or exchange of assets								(95,151	)		(14,145	)
Income from equity affiliates		(20,678	)		(11,053	)		(29,541	)		(13,698	)
Dividends received from equity investments		5,095			1,860
Dividends received from equity affiliates								6,082			5,164
Changes in current assets and liabilities:
Accounts receivable, net of sale		(35,635	)		(45,760	)		(67,754	)		(5,476	)
Inventories		(40,334	)		(36,950	)		(46,204	)		(56,565	)
Net assets from coal trading activities		7,578			(2,185	)		7,444			(7,667	)
Other current assets		(2,811	)		2,634			(18,625	)		(7,655	)
Accounts payable and accrued expenses		57,787			67,708			119,229			46,076
Asset retirement obligations		(719	)		(2,423	)		(4,082	)		(5,238	)
Workers’ compensation obligations		3,860			4,957			6,943			6,335
Accrued postretirement benefit costs		2,698			(11,612	)		6,167			(27,666	)
Contributions to pension plans		(2,389	)		(52,484	)		(6,275	)		(61,380	)
Other, net		9,146			3,154			17,448			(177	)

Net cash provided by operating activities		253,594			82,034			422,169			152,505

Cash Flows from Investing Activities
Additions to property, plant, equipment and mine development		(187,650	)		(115,858	)		(346,703	)		(148,345	)
Purchase of mining assets		(56,500	)		—			(56,500	)		—
Additions to advance mining royalties		(6,247	)		(9,677	)		(9,061	)		(11,560	)
Acquisitions, net		—			(422,164	)		—			(426,265	)
Investment in joint venture								(2,000	)		—
Proceeds from disposal of assets		60,231			22,803			71,185			24,623

Net cash used in investing activities		(190,166	)		(524,896	)		(343,079	)		(561,547	)

Cash Flows from Financing Activities
Proceeds from long-term debt		—			250,000			11,459			250,000
Payments of long-term debt		(14,085	)		(16,697	)		(15,621	)		(28,749	)
Net proceeds from equity offering		—			383,125			—			383,125
Proceeds from stock options exercised		14,617			11,601			19,958			19,274
Proceeds from employee stock purchases		1,350			1,139			3,010			2,343
Increase of securitized interests in accounts receivable		25,000			50,000			25,000			100,000
Payment of debt issuance costs		—			(8,910	)		—			(8,922	)
Distributions to minority interests		(1,000	)		(694	)		(1,750	)		(818	)
Dividends paid		(19,579	)		(14,852	)		(32,041	)		(22,878	)

Net cash provided by financing activities		6,303			654,712			10,015			693,375

Net increase in cash and cash equivalents		69,731			211,850			89,105			284,333
Cash and cash equivalents at beginning of period		389,636			117,502			389,636			117,502

Cash and cash equivalents at end of period	$	459,367		$	329,352		$	478,741		$	401,835

PEABODY ENERGY CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~JUNE~~

SEPTEMBER 30, 2005

(1) Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its controlled affiliates. All intercompany transactions, profits and balances have been eliminated in consolidation.

Effective March 30, 2005, the Company implemented a two-for-one stock split on all shares of its common stock. All share and per share amounts in these condensed consolidated financial statements and related notes reflect the stock split.

The accompanying condensed consolidated financial statements as of ~~June~~September 30, 2005 and for the quarters and ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, and the notes thereto, are unaudited. However, in the opinion of management, these financial statements reflect all normal, recurring adjustments necessary for a fair presentation of the results of the periods presented. The balance sheet information as of December 31, 2004 has been derived from the Company’s audited consolidated balance sheet. The results of operations for the quarter and ~~six~~nine months ended ~~June~~September 30, 2005 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2005.

(2) New Pronouncements

AtAfter the March 17, 2005 Emerging Issues Task Force (“EITF”) meeting, the Task Force ~~reached a consensus in~~issued EITF Issue 04-6, “Accounting for Stripping Costs in the Mining Industry,” stating “that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred.” Advance stripping costs include those costs necessary to remove overburden above an unmined coal seam as part of the surface mining process, and are included as the “work-in-process” component of “Inventories” in the condensed consolidated balance sheets ($~~224.1~~230.2 million and $197.2 million as of ~~June~~September 30, 2005 and December 31, 2004, respectively -— see Note 6). This is consistent with the concepts embodied in Accounting Research Bulletin No. 43, “Restatement and Revision of Accounting Research Bulletins,” which provides that “the term inventory embraces goods awaiting sale . . . , goods in the course of production (work in process), and goods to be consumed directly or indirectly in production . . . .” At the June 15-16, 2005 EITF meeting, the Task Force clarified that the intended meaning of “inventory produced” is “inventory extracted.” Based on this clarification, stripping costs incurred during a period will be attributed only to the inventory costs of the coal that is extracted during that same period.

EITF Issue 04-6 is effective for the first reporting period in fiscal years beginning after December 15, 2005 (January 1, 2006 for the Company), with early adoption permitted. At the June EITF meeting, the Task Force modified the transition provisions of EITF Issue 04-6, indicating that companies that adopt ~~the consensus~~ in periods beginning after June 29, 2005 may utilize a cumulative effect adjustment approach where the cumulative effect adjustment is recorded directly to retained earnings in the year of adoption. If the Company had implemented the cumulative effect adjustment approach at September 30, 2005, the entry to reduce retained earnings, net of tax, would have been $141.9 million. Alternatively, a company may recognize this change in accounting by restatement of its prior-period financial statements through retrospective ~~application of this consensus.~~application. The Company is currently evaluating which method of adoption it will use. The Company expects to adopt ~~this consensus~~EITF Issue 04-6 on January 1, 2006.

The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations” in March of 2005. FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. This interpretation also clarifies the circumstances under which an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

years ending after December 15, 2005. The Company expects to adopt this interpretation on December 31, 2005. The adoption of this interpretation will not have a material impact on the Company’s financial condition, results of operations or cash flows.

The Securities and Exchange Commission has deferred the adoption date of Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment,” to the beginning of fiscal years that begin after June 15, 2005 (January 1, 2006 for calendar year companies). SFAS No. 123R requires the recognition of share-based payments, including employee stock options, in the income statement based on their fair values. The Company expects to adopt this standard on January 1, 2006. Based on stock option grants made in 2005 and currently anticipated for 2006, the Company estimates it will (assuming the modified prospective method is used) recognize stock option expense for the year ending December 31, 2006 of ~~$3.9~~$4.5 million, net of taxes. The Company began utilizing restricted stock as part of its equity-based compensation

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued~~

strategy in January 2005. Based on the restricted stock grants made in 2005 and years prior, and those currently anticipated for 2006, the Company estimates it will recognize expense related to restricted stock of $1.0 million, net of taxes, in 2005 and ~~$1.9~~$2.2 million, net of taxes, in 2006. The Company recognized expense for the ~~six~~nine months ended ~~June~~September 30, 2005 of ~~$0.5~~$0.7 million, net of taxes, for restricted stock grants made in 2005 and years prior.

(3) Significant Transactions and Events

Gains on Disposal or Exchange of Assets

In ~~June~~the third quarter of 2005, the Company exchanged certain idle steam coal reserves for steam and metallurgical coal reserves as part of a contractual dispute settlement. The exchange resulted in a $37.4 million gain as further discussed below and in Note 12. Also in the third quarter of 2005, the Company recognized a $6.2 million gain from an exchange transaction involving the acquisition of Illinois Basin coal reserves in exchange for coal reserves, cash, notes, and the Company’s 45% equity interest in a partnership. The exchanges were accounted for at fair value in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 29, “Accounting for Nonmonetary Transactions,” as modified by SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29” and EITF 01-2, “Interpretations of APB Opinion No. 29.”

In the second quarter of 2005, the Company recognized an aggregate $12.5 million gain from three property sales involving non-strategic coal assets and ~~properties. As~~properties which included a ~~result~~reduction of ~~the property transactions,~~ asset retirement obligations ~~were reduced by~~of $9.2 million.

In ~~March~~the first quarter of 2005, the Company sold its remaining 0.838 million ~~PVR~~Penn Virginia Resource Partners, L.P. (“PVR”) units for net proceeds of $41.9 million and recognized a $31.1 million gain on the sale. In the first quarter of 2004, the Company sold 0.575 million PVR units for net proceeds of $18.5 million and recognized a $9.9 million gain on the sale. The sales of the PVR units were accounted for under SFAS No. 66, “Sales of Real Estate.” In December 2002, the Company entered into a transaction with ~~Penn Virginia Resource Partners, L.P. (“PVR”)~~PVR whereby the Company sold 120 million tons of coal reserves in exchange for $72.5 million in cash and 2.76 million units ~~or 15%,~~ of the PVR master limited partnership. The Company’s subsidiaries leased back the coal and pay royalties as the coal is mined. No gain or loss was recorded at the inception of this transaction. ~~As of March 2005 (the~~At the time of the ~~final sale of units),~~original transaction, a deferred gain from the sales of the reserves and units of $19.0 million remained and ~~will be~~is being amortized over the minimum term of the leases. As of September 30, 2005, the deferred gain related to the PVR transactions was $17.4 million.

Contract Losses

~~The~~During the first six months of 2005, the Company recorded net contract losses of ~~approximately $34~~$10.7 million ~~in the quarter ended March 31, 2005, primarily~~ related to the breach of a coal supply contract by a producer. The estimated loss related to the supply contract breach reflected amounts accrued for estimated costs to obtain replacement coal in the current market ~~and no offsetting receivable from the producer who breached the contract was assumed. The loss recorded is not equivalent to, nor indicative~~(in excess of the ~~economic losses (i.e. legal damages) sought by~~estimated revenue expected to be earned on the ~~Company as a result of~~brokerage sales).

In the ~~breach.~~

~~During the second~~third quarter of 2005, the Company ~~reduced its estimated loss~~completed settlement of the dispute, and the related tolawsuit was dismissed (see further discussion in Note 12). Under the settlement, the Company received $10.0 million in cash, a new coal supply ~~contract breach by approximately $12.5 million, primarily as~~agreement that partially replaced the disputed coal supply agreement, and exchanged certain coal

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

properties. As a result of ~~negotiating a~~the final settlement ~~late~~and based on the fair values of the items exchanged in the ~~second quarter with~~overall settlement transaction, the ~~producer who breached the contract. The settlement mitigates the loss recognized~~Company further reduced its contract losses by $6.7 million and, as discussed above, recorded gains on assets exchanged of $37.4 million in the ~~first~~third quarter ~~and enables the Company to secure replacement coal at prices lower than originally anticipated. See Note 12 for more details on the breach~~ of ~~contract, subsequent lawsuit and the negotiated settlement.~~2005.

(4) Acquisition of Mining Assets

In March 2005, the Company purchased mining assets from Lexington Coal Company for $61.0 million, $59.0 million of which was paid on the closing date and up to $2.0 million is to be paid within 12 months of the close pending no outstanding claims related to the acquired mining assets. The purchased assets included $2.5 million of materials and supplies that were recorded in “Inventories” in the condensed consolidated balance sheet. The remaining purchased assets consisted of approximately 70 million tons of reserves, preparation plants, facilities and mining equipment that were recorded in “Property, plant, equipment and mine development” in the condensed consolidated balance sheet. The Company is using the acquired assets to open a new mine that is expected to produce ~~two~~2 to ~~three~~3 million tons per year, after it reaches full capacity, and to provide other synergies to existing properties. The new mine, which began production early in the third quarter, will supply coal under a new agreement with ~~Northern Indiana Public Service Company with~~ terms that can be extended through 2015 (and a minimum term through the end of 2008). The Company also recorded $21.6 million for ~~preliminary estimates of~~the estimated asset retirement obligations associated with the acquired assets.

(5) Business Combinations

On April 15, 2004, the Company purchased, through two separate agreements, all of the equity interests in three coal operations from RAG Coal International AG. The combined purchase price, including related costs and fees, of $442.2 million was funded from the Company’s equity and debt offerings in March 2004. Net proceeds from the equity and debt offerings were $383.1 million and $244.7 million, respectively. The purchases included two mines in Queensland, Australia that collectively produce 7 to 8 million tons per year of metallurgical coal and the Twentymile Mine in Colorado, which produces 78 to 89 million tons per year of steam coal with a planned production expansion up to 12 million tons per year by

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued~~

2008. The results of operations of the two mines in Queensland, Australia are included in the Company’s Australian Mining Operations segment and the results of operations of the Twentymile Mine are included in the Company’s Western U.S. Mining Operations segment. The acquisition was accounted for as a purchase.

The purchase accounting allocations related to the acquisition have been finalized and recorded in the accompanying condensed consolidated financial ~~statements as of, and for periods subsequent to, April 15, 2004.~~statements. The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition (dollars in thousands):


Accounts receivable	$	46,639		$	46,639
Materials and supplies		5,669			5,669
Coal inventory		11,543			11,543
Other current assets		6,234			6,234
Property, plant, equipment and mine development		463,567
Property, plant, equipment and mine development, net					463,567
Accounts payable and accrued expenses		(48,688	)		(48,688	)
Other noncurrent assets and liabilities, net		(63,699	)		(63,699	)

Total purchase price, net of cash received of $20,914	$	421,265		$	421,265

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

The following unaudited pro forma financial information presents the combined results of operations of the Company and the operations acquired from RAG Coal International AG, on a pro forma basis, as though the companies had been combined as of the beginning of the period presented. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and the operations acquired from RAG Coal International AG constituted a single entity during this period (dollars in thousands, except per share data):


	Quarter Ended		Six Months Ended		Nine Months Ended
	June 30, 2004		June 30, 2004 *		September 30, 2004 *
Revenues:
As reported	$	916,771	$	1,689,064	$	2,608,053
Pro forma		942,008		1,814,426		2,733,415

Income from continuing operations
Income from continuing operations:
As reported	$	43,245	$	66,898	$	110,337
Pro forma		44,757		64,257		107,696

Net income
Net income:
As reported	$	41,481	$	64,061	$	107,498
Pro forma		42,993		61,420		104,857

Basic earnings per share — net income:
As reported	$	0.32	$	0.53	$	0.88
Pro forma		0.34		0.48		0.82

Diluted earnings per share — net income:
As reported	$	0.32	$	0.52	$	0.86
Pro forma		0.33		0.47		0.80

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Cash Flows

The Company ~~previously~~ disclosed in its financial statements for the year ended December 31, 2004 that it expected to pay $85.7 million attributable to its postretirement benefit plans during 2005. ~~As of June~~For the nine months ended September 30, 2005, payments of ~~$42.4~~$63.6 million attributable to the Company’s postretirement benefit plans have been ~~made.~~made, and the Company does not anticipate any significant changes to its original estimate for 2005.

(11) Segment Information

The Company reports its operations primarily through the following reportable operating segments: “Western U.S. Mining,” “Eastern U.S. Mining,” “Australian Mining” and “Trading and Brokerage.” The principal business of the Western U.S. Mining, Eastern U.S. Mining and Australian Mining segments is the mining, preparation and sale of steam coal, sold primarily to electric utilities, and metallurgical coal, sold to steel and coke producers. Western U.S. Mining operations are characterized by predominantly surface mining extraction processes, lower sulfur content and Btu of coal, and longer shipping distances from the mine to the customer. Conversely, Eastern U.S. Mining operations are characterized by a majority of underground mining extraction processes, higher sulfur content and Btu of coal, and shorter shipping distances from the mine to the customer. Geologically, Western operations mine primarily subbituminous and Eastern operations mine bituminous coal deposits. Australian Mining operations are characterized by surface and underground extraction processes, mining primarily low sulfur, ~~high Btu~~metallurgical coal sold to an international customer base. The Trading and Brokerage segment’s principal business is the marketing, brokerage and trading of coal. “Corporate and Other” includes selling and administrative expenses, net gains on property disposals, costs associated with past mining obligations, joint venture earnings related to the Company’s 25.5% investment in a Venezuelan mine and revenues and expenses related to the Company’s other commercial activities such as coalbed methane, generation development and resource management.

The Company’s chief operating decision maker uses Adjusted EBITDA as the primary measure of segment profit and loss. Adjusted EBITDA is defined as income from continuing operations before deducting early debt extinguishment costs, net interest expense, income taxes, minority interests, asset retirement obligation expense and depreciation, depletion and amortization.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Operating segment results for the quarters and ~~six~~nine months ended ~~June~~September 30, 2005 and 2004 are as follows (dollars in thousands):


	Quarter Ended						Six Months Ended						Quarter Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Revenues:
Western U.S. Mining⁽¹⁾	$	376,796		$	344,003		$	781,231		$	648,031		$	403,214		$	373,629		$	1,184,445		$	1,021,660
Eastern U.S. Mining		437,763			365,074			862,655			712,231			452,825			344,938			1,315,480			1,057,169
Australian Mining		140,643			72,813			244,168			81,438			146,146			92,562			390,314			174,000
Trading and Brokerage		149,293			132,255			290,862			241,384			216,098			105,205			506,960			346,589
Corporate and Other		4,291			2,626			7,350			5,980			5,227			2,655			12,577			8,635

Total	$	1,108,786		$	916,771		$	2,186,266		$	1,689,064		$	1,223,510		$	918,989		$	3,409,776		$	2,608,053


Adjusted EBITDA⁽²⁾:
Adjusted EBITDA:
Western U.S. Mining⁽¹⁾	$	105,639		$	100,389		$	226,064		$	183,757		$	104,213		$	113,874		$	330,277		$	297,631
Eastern U.S. Mining		95,898			66,007			190,704			127,421			96,865			54,911			287,569			182,332
Australian Mining		47,479			11,948			61,565			12,878			39,780			20,777			101,345			33,655
Trading and Brokerage⁽³⁾⁽²⁾		15,439			6,443			(6,429	)		20,675			26,132			16,053			19,703			36,728
Corporate and Other⁽⁴⁾⁽³⁾		(48,675	)		(51,313	)		(90,173	)		(99,657	)		(31,552	)		(51,432	)		(121,725	)		(151,089	)

Total	$	215,780		$	133,474		$	381,731		$	245,074		$	235,438		$	154,183		$	617,169		$	399,257

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

its past operations. The Company has been named a potentially responsible party (“PRP”) based on CERCLA at five sites, and other claims have been asserted at 17 sites. The number of PRP sites in and of itself is not a relevant measure of liability, because the nature and extent of environmental concerns varies by site, as does the Company’s estimated share of responsibility.

The Company’s policy is to accrue environmental cleanup-related costs of a non-capital nature when those costs are believed to be probable and can be reasonably estimated. The quantification of environmental exposures requires an assessment of many factors, including the nature and extent of contamination, the timing, extent and method of the remedial action, changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. ~~For certain sites, the~~The Company also assesses the financial capability and proportional share of costs of other potentially responsible parties and, where allegations are based on tentative findings, the reasonableness of the Company’s apportionment. The Company has not anticipated any recoveries from insurance carriers or other potentially responsible third parties in the estimation of liabilities recorded on its condensed consolidated balance sheets. Undiscounted liabilities for environmental cleanup-related costs for all of the sites noted above totaled ~~$40.0~~$39.5 million at ~~June~~September 30, 2005 and $40.5 million at December 31, 2004, ~~$14.5~~$14.1 million and $15.1 million of which was a current liability, respectively. These amounts represent those costs that the Company believes are probable and reasonably estimable. In September 2005, Gold Fields and other PRP’s received a letter from the U.S. Department of Justice seeking to initiate settlement discussions relating to residential yard cleanup costs incurred by the Environmental Protection Agency (“EPA”) at Picher, Oklahoma. A predecessor of Gold Fields formerly operated two lead mills near Picher, Oklahoma prior to the 1950’s and mined, in accordance with lease agreements and permits, approximately 1.7% of the total amount of the ore mined in the county. The Department of Justice alleged that the PRPs’ mining operations caused the EPA to incur approximately $125 million in residential yard remediation costs and will cause the EPA to incur additional remediation costs relating to historic mining sites. Gold Fields believes it has meritorious defenses to these claims. Gold Fields is involved in other litigation in the Picher area as discussed under the “Oklahoma Lead Litigation” caption below.

Significant uncertainty exists as to whether claims will be pursued against Gold Fields in all cases, and where they are pursued, the amount of the eventual costs and liabilities, which could be greater or less than this provision. The Company anticipates that ~~all significant remaining~~the environmental remediation costs ~~discussed above~~it has currently accrued will be paid by the end of ~~2009.~~2010.

Although waste substances generated by coal mining and processing are generally not regarded as hazardous substances for the purposes of Superfund and similar legislation, some products used by coal companies in operations, such as chemicals, and the disposal of these products are governed by the statute. Thus, coal mines currently or previously owned or operated by the Company, and sites to which it has sent waste materials, may be subject to liability under Superfund and similar state laws.

Oklahoma Lead Litigation

Gold Fields and three other companies are defendants in two class action lawsuits filed in the U.S. District Court for the Northern District of Oklahoma (Betty Jean Cole, et al. v. Asarco Inc., et al. and Darlene Evans, et al. v. Asarco Inc., et al.). The plaintiffs have asserted nuisance and trespass claims predicated on allegations of intentional lead exposure by the defendants and are seeking compensatory damages for diminution of property value, punitive damages and the implementation of medical monitoring and relocation programs for the affected individuals. A predecessor of Gold Fields formerly operated two lead mills near Picher, Oklahoma prior to the 1950’s and mined, in accordance with lease agreements and permits, approximately 1.7% of the total amount of the ore mined in the county.

Gold Fields is also a defendant, along with other companies, in five individual lawsuits arising out of the same lead mill operations. In July 2004, two lawsuits were filed, one in the U.S. District Court for the Northern District of Oklahoma and one in Ottawa County, Oklahoma (subsequently removed to the U.S. District Court for the Northern District of Oklahoma), on behalf of 48 individuals against Gold Fields and three other companies (Billy Holder, et al. v. Asarco Inc., et al.). Plaintiffs in these actions are seeking compensatory and punitive damages for

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

alleged personal injuries from lead exposure. Previously scheduled trials for individual plaintiffs have been postponed.

In December 2003, the Quapaw Indian tribe and certain Quapaw owners of interests in land filed a class action lawsuit against Gold Fields and five other companies in the U.S. District Court for the Northern District of Oklahoma. The plaintiffs are seeking compensatory and punitive damages based on public and private nuisance, trespass, strict liability, natural resource damage claims under CERCLA, and claims under the Resource Conservation and Recovery Act. Gold Fields has denied liability to the plaintiffs, has filed counterclaims against the plaintiffs seeking indemnification and contribution and has filed a third-party complaint against the United States, owners of interests in chat and real property in the Picher area. In February 2005, the state of Oklahoma on behalf of itself and several other parties sent a notice to Gold Fields and other PRP’s alleging that they had concluded that there is a reasonable probability of making a successful claim against the PRP’s for damages to natural resources. Gold Fields believes it has meritorious defenses to these claims.

The outcome of litigation is subject to numerous uncertainties. Based on the Company’s evaluation of the issues and their potential impact, the amount of any potential loss cannot be estimated. However, the Company believes this matter is likely to be resolved without a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Navajo Nation

On June 18, 1999, the Navajo Nation served the Company’s subsidiaries, Peabody Holding Company, Inc., Peabody Coal Company and Peabody Western Coal Company (“Peabody Western”), with a complaint that had been filed in the U.S. District Court for the District of Columbia. The Navajo Nation has alleged 16 claims, including Civil Racketeer Influenced and Corrupt Organizations Act (“RICO”) violations and fraud and tortious interference with contractual relationships. The complaint alleges that the defendants jointly participated in unlawful activity to obtain favorable coal lease amendments. Plaintiff also alleges that defendants interfered with the fiduciary relationship between the United States and the Navajo Nation. The plaintiff is seeking various remedies including actual damages of at least $600 million, which could be trebled under the RICO counts, punitive damages of at least $1 billion, a determination that Peabody Western’s two coal leases for the Kayenta and Black Mesa mines have terminated due to Peabody Western’s breach of these leases and a reformation of the two coal leases to adjust the royalty rate to 20%. On March 15, 2001, the court allowed the Hopi Tribe to intervene in this lawsuit. The Hopi Tribe has asserted seven claims including fraud and is seeking various remedies including unspecified actual damages, punitive damages and reformation of its coal lease.

On March 4, 2003, the U.S. Supreme Court issued a ruling in a companion lawsuit involving the Navajo Nation and the United States. The court rejected the Navajo Nation’s allegation that the United States breached its trust responsibilities to the Tribe in approving the coal lease amendments and was liable for money damages.

On February 9, 2005, the U.S. District Court for the District of Columbia granted a consent motion to stay the litigation until further order of the court. Peabody Western, the Navajo Nation, the Hopi Tribe and the customers purchasing coal from the Black Mesa and Kayenta mines are in mediation with respect to this litigation and other business issues.

The outcome of litigation, or the current mediation, is subject to numerous uncertainties. Based on the Company’s evaluation of the issues and their potential impact, the amount of any potential loss cannot be estimated. However, the Company believes this matter is likely to be resolved without a material adverse effect on the Company’s ~~financial condition, results of operations or cash flows.~~

~~Salt River Project Agricultural Improvement and Power District — Mine Closing and Retiree Health Care~~

Salt River Project and the other owners of the Navajo Generating Station filed a lawsuit on September 27, 1996 in the Superior Court of Maricopa County in Arizona seeking a declaratory judgment that certain costs relating to final reclamation, environmental monitoring work and mine decommissioning and costs primarily relating to retiree health care benefits are not recoverable by the Company’s subsidiary, Peabody Western, under the terms of a coal supply agreement dated February 18, 1977. The contract expires in 2011.

Peabody Western filed a motion to compel arbitration of these claims, which was granted in part by the trial court. Specifically, the trial court ruled that the mine decommissioning costs were subject to arbitration but that the retiree health care costs were not subject to arbitration. This ruling was subsequently upheld on appeal. As a result, Peabody Western,

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued~~

Salt River Project and the other owners of the Navajo Generating Station will arbitrate the mine decommissioning costs issue and will litigate the retiree health care costs issue. The Company has recorded a receivable for mine decommissioning costs of $70.8 million and $68.6 million included in “Investments and other assets” in the condensed consolidated balance sheets at June 30, 2005 and December 31, 2004, respectively.

The outcome of litigation is subject to numerous uncertainties. Based on the Company’s evaluation of the issues and their potential impact, the amount of any potential loss cannot be estimated. However, the Company believes this matter is likely to be resolved without a material adverse effect on its financial condition, results of operations or cash flows.

California Public Utilities Commission Proceedings Regarding the Future of the Mohave Generating Station

Peabody Western has a long-term coal supply agreement with the owners of the Mohave Generating Station that expires on December 31, 2005. Southern California Edison (the majority owner and operator of the plant) is involved in a California Public Utilities Commission proceeding related to the operation of the Mohave plant beyond 2005 or a temporary or permanent shutdown of the plant. Southern California Edison has stated to the Commission that the Mohave plant is not likely to return to service as a coal-fueled resource until 2010 at the earliest if the plant is shut down at December 31, 2005. There is a dispute with the Hopi Tribe regarding the use of groundwater in the transportation of the coal by pipeline from Peabody Western’s Black Mesa Mine to the Mohave

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

plant. As a part of the alternate dispute resolution referenced in the Navajo Nation litigation, Peabody Western has been participating in mediation with the owners of the Mohave Generating Station and the Navajo Generating Station, and the two tribes to resolve the complex issues surrounding the groundwater dispute and other disputes involving the two generating stations. Resolution of these issues is critical to the continuation of the operation of the Mohave Generating Station and the renewal of the coal supply agreement after December 31, 2005. There is no assurance that the issues critical to the continued operation of the Mohave plant will be resolved. The owners of the Mohave Generating Station entered into a consent decree with the Grand Canyon Trust, the Sierra Club, and the National Parks and Conservation Association that required the owners to install scrubbers by December 31, 2005 if the Mohave plant was to operate beyond that date. In a letter dated May 25, 2005, the Grand Canyon Trust, the Sierra Club, and the National Parks and Conservation Association rejected a request by the Navajo Nation and the Hopi Tribe to extend the December 31, 2005 deadline and therefore, the ~~Company believes it is likely that the operation of the~~ Mohave plant will ~~cease or be suspended~~suspend operation on December 31, 2005. ~~In the event the Mohave plant shuts down, the operations of~~The Company has issued Worker Adjustment and Retraining Notification (“WARN”) Act notices to its employees at the Black Mesa Mine ~~could be adversely impacted starting in the third quarter of 2005, and the mine would be shut down~~regarding layoffs at the end of 2005. The Mohave plant is the sole customer of the Black Mesa Mine, which sold ~~2.4~~3.5 million tons of coal in the first ~~six~~nine months of 2005 and 4.7 million tons during the year ended December 31, 2004. During the first ~~six~~nine months of 2005, the mine generated ~~$11.9~~$20.3 million of Adjusted EBITDA (reconciled to its most comparable measure under generally accepted accounting principles in Note 11), which represented ~~3.1%~~3.3% of the Company’s total of ~~$381.7~~$617.2 million. In 2004, the mine contributed $25.2 million of Adjusted EBITDA, or 4.5% of the Company’s total Adjusted EBITDA of $559.2 million.

~~Oklahoma Lead Litigation~~Salt River Project Agricultural Improvement and Power District — Mine Closing and Retiree Health Care

~~Gold Fields, which is a defendant in various litigation discussed below, is a dormant, non-coal producing entity that was previously managed~~Salt River Project and ~~owned by Hanson PLC, a predecessor owner~~the other owners of the ~~Company. In~~Navajo Generating Station filed a lawsuit on September 27, 1996 in the Superior Court of Maricopa County in Arizona seeking a declaratory judgment that certain costs relating to final reclamation, environmental monitoring work and mine decommissioning and costs primarily relating to retiree health care benefits are not recoverable by the Company’s subsidiary, Peabody Western, under the terms of a coal supply agreement dated February ~~1997 spin-off~~18, 1977. The contract expires in 2011.

Peabody Western filed a motion to compel arbitration of ~~its energy businesses, Hanson PLC transferred ownership of Gold Fields~~these claims, which was granted in part by the trial court. Specifically, the trial court ruled that the mine decommissioning costs were subject to arbitration but that the ~~Company, despite the fact that Gold Fields had no ongoing operations~~retiree health care costs were not subject to arbitration. This ruling was subsequently upheld on appeal. As a result, Peabody Western, Salt River Project and the other owners of the Navajo Generating Station will arbitrate the mine decommissioning costs issue and will litigate the retiree health care costs issue. The Company ~~had no prior involvement~~has recorded a receivable for mine decommissioning costs of $72.3 million and $68.6 million included in ~~its past operations.~~

~~Gold Fields~~“Investments and ~~three~~ other ~~companies are defendants in two class action lawsuits filed~~assets” in the ~~U.S. District Court for the Northern District of Oklahoma (Betty Jean Cole, et al. v. Asarco Inc., et al.~~condensed consolidated balance sheets at September 30, 2005 and Darlene Evans, et al. v. Asarco Inc., et al.). The plaintiffs have asserted nuisance and trespass claims predicated on allegations of intentional lead exposure by the defendants and are seeking compensatory damages for diminution of property value, punitive damages and the implementation of medical monitoring and relocation programs for the affected individuals. A predecessor of Gold Fields formerly operated two lead mills near Picher, Oklahoma prior to the 1950’s and mined, in accordance with lease agreements and permits, approximately 1.7% of the total amount of the ore mined in the county. Gold Fields has agreed to indemnify one of the other defendants, which is a former subsidiary of Gold Fields.

~~Gold Fields is also a defendant, along with other companies, in five individual lawsuits arising out of the same lead mill operations. In July~~December 31, 2004, two lawsuits were filed, one in the U.S. District Court for the Northern District of Oklahoma and one in Ottawa County, Oklahoma (subsequently removed to the U.S. District Court for the Northern District of Oklahoma), on behalf of 48 individuals against Gold Fields and three other companies (Billy Holder, et al. v. Asarco Inc., et al.). Plaintiffs in these actions are seeking compensatory and punitive damages for alleged personal injuries from lead exposure. The trials for five of the individual plaintiffs have been set for November 2005. A second trial for seven individuals has been set for January 2006.

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued~~

In December 2003, the Quapaw Indian tribe and certain Quapaw owners of interests in land filed a class action lawsuit against Gold Fields and five other companies in the U.S. District Court for the Northern District of Oklahoma. The plaintiffs are seeking compensatory and punitive damages based on public and private nuisance, trespass, strict liability, natural resource damage claims under CERCLA, and claims under the Resource Conservation and Recovery Act. Gold Fields has denied liability to the plaintiffs, has filed counterclaims against the plaintiffs seeking indemnification and contribution and has filed a third-party complaint against the United States, owners of interests in chat and real property in the Picher area. In February 2005, the state of Oklahoma on behalf of itself and several other parties sent a notice to Gold Fields and other potentially responsible parties (“PRPs”) alleging that they had concluded that there is a reasonable probability of making a successful claim against the PRPs for damages to natural resources.respectively.

The outcome of litigation is subject to numerous uncertainties. Based on the Company’s evaluation of the issues and their potential impact, the amount of any potential loss cannot be estimated. However, the Company believes this matter is likely to be resolved without a material adverse effect on ~~the Company’s~~its financial condition, results of operations or cash flows.

Other

In addition to the matters described above, the Company at times becomes a party to other claims, lawsuits, arbitration proceedings and administrative procedures in the ordinary course of business. Management believes that the ultimate resolution of pending or threatened proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

Accounts receivable in the condensed consolidated balance sheets as of ~~June~~September 30, 2005 and December 31, 2004, includes $19.4 and $18.1 million, respectively, of receivables billed between 2001 and 2005 related to legal fees incurred in the Company’s defense of the Navajo lawsuit discussed above. The billings have been disputed by two customers, who have withheld payment. The Company believes these billings were made properly under the coal supply agreement with each customer. The billings were consistent with past practice, when litigation costs related to legal or regulatory issues were billed under the contracts and paid by the customers. The Company is in litigation with these customers to resolve this issue. In the second quarter of 2005, the trial court in one of the cases dismissed the Company’s claim, and the Company ~~will appeal~~has appealed that decision. Although the Company believes it has meritorious grounds for appeal and has not yet litigated the other claim, the Company has recognized an

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued~~

(13) Supplemental Guarantor/Non-Guarantor Financial Information

In accordance with the indentures governing the 6.875% Senior Notes due 2013 and the 5.875% Senior Notes due 2016, certain wholly-owned U.S. subsidiaries of the Company have fully and unconditionally guaranteed the 6.875% Senior Notes and the 5.875% Senior Notes, on a joint and several basis. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to the holders of the 6.875% Senior Notes and the 5.875% Senior Notes. The following unaudited condensed historical financial statement information is provided for the Guarantor/Non-Guarantor Subsidiaries.

Peabody Energy Corporation

Unaudited Supplemental Condensed Consolidated Statements of Operations
(Dollars in thousands)

Quarter Ended June 30, 2005
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
Total revenues $ — $ 865,475 $ 264,750 $ (21,439 ) $ 1,108,786
Costs and expenses:
Operating costs and expenses (4,508 ) 692,203 214,018 (21,439 ) 880,274
Depreciation, depletion and amortization — 70,429 8,880 — 79,309
Asset retirement obligation expense — 6,441 721 — 7,162
Selling and administrative expenses 952 37,571 2,148 — 40,671
Other operating income:
Net gain on disposal of assets — (16,347 ) (105 ) — (16,452 )
Income from equity affiliates — (11,487 ) — — (11,487 )
Interest expense 38,328 7,523 5,032 (25,678 ) 25,205
Interest income (5,172 ) (16,030 ) (6,286 ) 25,678 (1,810 )

Income (loss) before income taxes and minority interests (29,600 ) 95,172 40,342 — 105,914
Income tax provision (benefit) (18,106 ) 19,858 8,410 — 10,162
Minority interests — 498 — — 498

Net income (loss) $ (11,494 ) $ 74,816 $ 31,932 $ — $ 95,254

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued~~

~~Peabody Energy Corporation~~

~~Unaudited Supplemental Condensed Consolidated Statements of Operations~~
~~(Dollars in thousands)~~

Quarter Ended June 30, 2004
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
Total revenues $ — $ 781,274 $ 153,204 $ (17,707 ) $ 916,771
Costs and expenses:
Operating costs and expenses (161 ) 636,925 138,629 (17,707 ) 757,686
Depreciation, depletion and amortization — 67,780 5,240 — 73,020
Asset retirement obligation expense — 8,158 469 — 8,627
Selling and administrative expenses 234 31,013 897 — 32,144
Other operating income:
Net gain on disposal of assets — (1,877 ) (30 ) — (1,907 )
Income from equity affiliates — (4,626 ) — — (4,626 )
Interest expense 38,435 33,835 648 (48,323 ) 24,595
Interest income (21,691 ) (23,441 ) (4,400 ) 48,323 (1,209 )

Income (loss) before income taxes and minority interests (16,817 ) 33,507 11,751 — 28,441
Income tax provision (benefit) (16,359 ) 915 250 — (15,194 )
Minority interests — 390 — — 390

Income (loss) from continuing operations (458 ) 32,202 11,501 — 43,245
Loss from discontinued operations, net of taxes — (1,764 ) — — (1,764 )

Net income (loss) $ (458 ) $ 30,438 $ 11,501 $ — $ 41,481

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued~~

~~Peabody Energy Corporation~~

~~Unaudited Supplemental Condensed Consolidated Statements of Operations~~
~~(Dollars in thousands)~~


	Six Months Ended June 30, 2005															Quarter Ended September 30, 2005
	Parent			Guarantor			Non-Guarantor									Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated			Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Total revenues	$	—		$	1,764,323		$	462,570		$	(40,627	)	$	2,186,266		$	—		$	959,278		$	287,688		$	(23,456	)	$	1,223,510
Costs and expenses:
Operating costs and expenses		(7,391	)		1,448,708			393,666			(40,627	)		1,794,356			(12,025	)		779,477			243,507			(23,456	)		987,503
Depreciation, depletion and amortization		—			139,386			15,876			—			155,262			—			68,853			8,306			—			77,159
Asset retirement obligation expense		—			15,202			1,155			—			16,357			—			8,049			(655	)		—			7,394
Selling and administrative expenses		1,548			74,424			2,459			—			78,431			1,288			53,753			1,968			—			57,009
Other operating income:
Net gain on disposal of assets		—			(47,478	)		(96	)		—			(47,574	)
Net gain on disposal or exchange of assets																	—			(47,516	)		(61	)		—			(47,577	)
Income from equity affiliates		—			(20,678	)		—			—			(20,678	)		—			(3,803	)		(5,060	)		—			(8,863	)
Interest expense		75,776			15,554			10,387			(50,956	)		50,761			39,163			13,607			5,463			(32,906	)		25,327
Interest income		(10,094	)		(31,565	)		(12,480	)		50,956			(3,183	)		(6,255	)		(22,942	)		(6,927	)		32,906			(3,218	)

Income (loss) before income taxes and minority interests		(59,839	)		170,770			51,603			—			162,534			(22,171	)		109,800			41,147			—			128,776
Income tax provision (benefit)		(29,219	)		36,237			7,568			—			14,586			(18,545	)		24,474			8,785			—			14,714
Minority interests		—			804			—			—			804			—			722			—			—			722

Net income (loss)	$	(30,620	)	$	133,729		$	44,035		$	—		$	147,144		$	(3,626	)	$	84,604		$	32,362		$	—		$	113,340

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Peabody Energy Corporation

Unaudited Supplemental Condensed Consolidated Statements of Operations
(Dollars in thousands)


	Six Months Ended June 30, 2004															Quarter Ended September 30, 2004
	Parent			Guarantor			Non-Guarantor									Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated			Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Total revenues	$	—		$	1,506,031		$	216,406		$	(33,373	)	$	1,689,064		$	—		$	784,385		$	150,642		$	(16,038	)	$	918,989
Costs and expenses:
Operating costs and expenses		(9	)		1,242,423			198,421			(33,373	)		1,407,462			(1,874	)		633,143			120,387			(16,038	)		735,618
Depreciation, depletion and amortization		—			126,525			6,335			—			132,860			—			63,221			6,911			—			70,132
Asset retirement obligation expense		—			21,153			511			—			21,664			—			9,615			531			—			10,146
Selling and administrative expenses		556			57,931			1,449			—			59,936			354			32,279			990			—			33,623
Other operating income:
Net gain on disposal of assets		—			(11,996	)		(359	)		—			(12,355	)
Net (gain) loss on disposal or exchange of assets																	—			(1,795	)		5			—			(1,790	)
Income from equity affiliates		—			(11,053	)		—			—			(11,053	)		—			(2,645	)		—			—			(2,645	)
Interest expense		70,166			60,027			1,331			(85,601	)		45,923			37,201			13,470			1,184			(26,929	)		24,926
Early debt extinguishment gains																	(556	)		—			—			—			(556	)
Interest income		(42,990	)		(35,781	)		(8,958	)		85,601			(2,128	)		(4,594	)		(17,965	)		(5,454	)		26,929			(1,084	)

Income (loss) before income taxes and minority interests		(27,723	)		56,802			17,676			—			46,755			(30,531	)		55,062			26,088			—			50,619
Income tax provision (benefit)		(22,181	)		(276	)		1,661			—			(20,796	)		(11,875	)		9,870			8,938			—			6,933
Minority interests		—			653			—			—			653			—			247			—			—			247

Income (loss) from continuing operations		(5,542	)		56,425			16,015			—			66,898			(18,656	)		44,945			17,150			—			43,439
Loss from discontinued operations, net of taxes		—			(2,837	)		—			—			(2,837	)		—			(2	)		—			—			(2	)

Net income (loss)	$	(5,542	)	$	53,588		$	16,015		$	—		$	64,061		$	(18,656	)	$	44,943		$	17,150		$	—		$	43,437

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Peabody Energy Corporation

Unaudited Supplemental Condensed Consolidated ~~Balance Sheets~~Statements of Operations
(Dollars in thousands)

June 30, 2005
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
ASSETS

Current assets
Cash and cash equivalents $ 444,338 $ 1,774 $ 13,255 $ — $ 459,367
Accounts receivable 3,188 112,664 88,567 — 204,419
Inventories — 317,864 45,697 — 363,561
Assets from coal trading activities — 52,834 — — 52,834
Deferred income taxes — 15,050 — — 15,050
Other current assets 31,672 21,030 5,289 — 57,991

Total current assets 479,198 521,216 152,808 — 1,153,222
Property, plant, equipment and mine development — 5,825,226 532,057 — 6,357,283
Less accumulated depreciation, depletion and amortization — (1,408,480 ) (65,526 ) — (1,474,006 )
Investments and other assets 4,621,435 408,662 3,974 (4,665,909 ) 368,162

Total assets $ 5,100,633 $ 5,346,624 $ 623,313 $ (4,665,909 ) $ 6,404,661

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Current maturities of long-term debt $ 8,750 $ 12,229 $ 882 $ — $ 21,861
Payables and notes payable to affiliates, net 1,727,839 (2,097,461 ) 369,622 — —
Liabilities from coal trading activities — 34,812 — — 34,812
Accounts payable and accrued expenses 22,575 633,261 92,678 — 748,514

Total current liabilities 1,759,164 (1,417,159 ) 463,182 — 805,187
Long-term debt, less current maturities 1,334,654 56,547 1,848 — 1,393,049
Deferred income taxes 18,323 370,264 12,404 — 400,991
Other noncurrent liabilities 17,192 1,876,668 7,053 — 1,900,913

Total liabilities 3,129,333 886,320 484,487 — 4,500,140
Minority interests — 1,713 — — 1,713
Stockholders’ equity 1,971,300 4,458,591 138,826 (4,665,909 ) 1,902,808

Total liabilities and stockholders’ equity $ 5,100,633 $ 5,346,624 $ 623,313 $ (4,665,909 ) $ 6,404,661


	Nine Months Ended September 30, 2005
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Total revenues	$	—		$	2,723,601		$	750,258		$	(64,083	)	$	3,409,776
Costs and expenses:
Operating costs and expenses		(19,416	)		2,228,185			637,173			(64,083	)		2,781,859
Depreciation, depletion and amortization		—			208,239			24,182			—			232,421
Asset retirement obligation expense		—			23,251			500			—			23,751
Selling and administrative expenses		2,836			128,109			4,495			—			135,440
Other operating income:
Net gain on disposal or exchange of assets		—			(94,994	)		(157	)		—			(95,151	)
Income from equity affiliates		—			(13,445	)		(16,096	)		—			(29,541	)
Interest expense		114,939			41,337			16,824			(97,012	)		76,088
Interest income		(16,349	)		(67,657	)		(19,407	)		97,012			(6,401	)

Income (loss) before income taxes and minority interests		(82,010	)		270,576			102,744			—			291,310
Income tax provision (benefit)		(47,764	)		57,013			20,051			—			29,300
Minority interests		—			1,526			—			—			1,526

Net income (loss)	$	(34,246	)	$	212,037		$	82,693		$	—		$	260,484

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Peabody Energy Corporation

Unaudited Supplemental Condensed Consolidated ~~Balance Sheets~~Statements of Operations
(Dollars in thousands)

December 31, 2004
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
ASSETS

Current assets
Cash and cash equivalents $ 373,066 $ 3,562 $ 13,008 $ — $ 389,636
Accounts receivable 1,611 86,748 105,425 — 193,784
Inventories — 290,863 32,746 — 323,609
Assets from coal trading activities — 89,165 — — 89,165
Deferred income taxes — 15,050 411 — 15,461
Other current assets 19,737 15,971 7,239 — 42,947

Total current assets 394,414 501,359 158,829 — 1,054,602
Property, plant, equipment and mine development — 5,686,143 428,933 — 6,115,076
Less accumulated depreciation, depletion and amortization — (1,289,947 ) (43,698 ) — (1,333,645 )
Investments and other assets 4,808,202 34,410 3,577 (4,503,630 ) 342,559

Total assets $ 5,202,616 $ 4,931,965 $ 547,641 $ (4,503,630 ) $ 6,178,592

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Current maturities of long-term debt $ 5,000 $ 12,971 $ 1,008 $ — $ 18,979
Payables and notes payable to affiliates, net 2,022,037 (2,332,635 ) 310,598 — —
Liabilities from coal trading activities — 63,565 — — 63,565
Accounts payable and accrued expenses 20,120 599,253 72,227 — 691,600

Total current liabilities 2,047,157 (1,656,846 ) 383,833 — 774,144
Long-term debt, less current maturities 1,338,465 65,228 2,293 — 1,405,986
Deferred income taxes 5,250 386,351 1,665 — 393,266
Other noncurrent liabilities 18,658 1,852,684 7,353 — 1,878,695

Total liabilities 3,409,530 647,417 395,144 — 4,452,091
Minority interests — 1,909 — — 1,909
Stockholders’ equity 1,793,086 4,282,639 152,497 (4,503,630 ) 1,724,592

Total liabilities and stockholders’ equity $ 5,202,616 $ 4,931,965 $ 547,641 $ (4,503,630 ) $ 6,178,592


	Nine Months Ended September 30, 2004
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Total revenues	$	—		$	2,290,416		$	367,048		$	(49,411	)	$	2,608,053
Costs and expenses:
Operating costs and expenses		(1,883	)		1,875,566			318,808			(49,411	)		2,143,080
Depreciation, depletion and amortization		—			189,746			13,246			—			202,992
Asset retirement obligation expense		—			30,768			1,042			—			31,810
Selling and administrative expenses		910			90,210			2,439			—			93,559
Other operating income:
Net gain on disposal or exchange of assets		—			(13,791	)		(354	)		—			(14,145	)
Income from equity affiliates		—			(13,698	)		—			—			(13,698	)
Interest expense		107,367			73,497			2,515			(112,530	)		70,849
Early debt extinguishment gains		(556	)		—			—			—			(556	)
Interest income		(47,584	)		(53,746	)		(14,412	)		112,530			(3,212	)

Income (loss) before income taxes and minority interests		(58,254	)		111,864			43,764			—			97,374
Income tax provision (benefit)		(34,056	)		9,594			10,599			—			(13,863	)
Minority interests		—			900			—			—			900

Income (loss) from continuing operations		(24,198	)		101,370			33,165			—			110,337
Loss from discontinued operations, net of taxes		—			(2,839	)		—			—			(2,839	)

Net income (loss)	$	(24,198	)	$	98,531		$	33,165		$	—		$	107,498

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Peabody Energy Corporation

Unaudited Supplemental Condensed Consolidated ~~Statements of Cash Flows~~Balance Sheets
(Dollars in thousands)

Six Months Ended June 30, 2005
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Consolidated
Cash Flows from Operating Activities

Net cash provided by (used in) operating activities $ (84,340 ) $ 279,925 $ 58,009 $ 253,594

Cash Flows from Investing Activities

Additions to property, plant, equipment and mine development — (86,218 ) (101,432 ) (187,650 )
Purchase of mining assets — (56,500 ) — (56,500 )
Additions to advance mining royalties — (6,242 ) (5 ) (6,247 )
Proceeds from disposal of assets — 60,098 133 60,231

Net cash used in investing activities — (88,862 ) (101,304 ) (190,166 )

Cash Flows from Financing Activities

Payments of long-term debt (2,500 ) (11,014 ) (571 ) (14,085 )
Proceeds from stock options exercised 14,617 — — 14,617
Proceeds from employee stock purchases 1,350 — — 1,350
Increase of securitized interests in accounts receivable — — 25,000 25,000
Distributions to minority interests — (1,000 ) — (1,000 )
Dividends paid (19,579 ) — — (19,579 )
Transactions with affiliates, net 161,724 (180,837 ) 19,113 —

Net cash provided by (used in) financing activities 155,612 (192,851 ) 43,542 6,303

Net increase (decrease) in cash and cash equivalents 71,272 (1,788 ) 247 69,731
Cash and cash equivalents at beginning of period 373,066 3,562 13,008 389,636

Cash and cash equivalents at end of period $ 444,338 $ 1,774 $ 13,255 $ 459,367


	September 30, 2005
	Parent		Guarantor			Non-Guarantor
	Company		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	470,663	$	2,182		$	5,896		$	—		$	478,741
Accounts receivable		5,225		127,647			103,666			—			236,538
Inventories		—		312,492			56,358			—			368,850
Assets from coal trading activities		—		85,554			—			—			85,554
Deferred income taxes		—		15,050			—			—			15,050
Other current assets		42,446		29,476			12,508			—			84,430

Total current assets		518,334		572,401			178,428			—			1,269,163
Property, plant, equipment and mine development		—		5,954,792			602,996			—			6,557,788
Less accumulated depreciation, depletion and amortization		—		(1,470,169	)		(73,590	)		—			(1,543,759	)
Investments and other assets		4,752,269		366,773			50,155			(4,797,594	)		371,603

Total assets	$	5,270,603	$	5,423,797		$	757,989		$	(4,797,594	)	$	6,654,795


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	10,000	$	12,149		$	882		$	—		$	23,031
Payables and notes payable to affiliates, net		1,779,560		(2,236,025	)		456,465			—			—
Liabilities from coal trading activities		—		67,398			—			—			67,398
Accounts payable and accrued expenses		15,362		700,786			93,808			—			809,956

Total current liabilities		1,804,922		(1,455,692	)		551,155			—			900,385
Long-term debt, less current maturities		1,313,896		68,715			1,652			—			1,384,263
Deferred income taxes		29,494		366,033			24,094			—			419,621
Other noncurrent liabilities		16,524		1,887,877			7,165			—			1,911,566

Total liabilities		3,164,836		866,933			584,066			—			4,615,835
Minority interests		—		1,685			—			—			1,685
Stockholders’ equity		2,105,767		4,555,179			173,923			(4,797,594	)		2,037,275

Total liabilities and stockholders’ equity	$	5,270,603	$	5,423,797		$	757,989		$	(4,797,594	)	$	6,654,795

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Peabody Energy Corporation
Supplemental Condensed Consolidated Balance Sheets
(Dollars in thousands)


	December 31, 2004
	Parent		Guarantor			Non-Guarantor
	Company		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	373,066	$	3,496		$	13,074		$	—		$	389,636
Accounts receivable		1,611		86,748			105,425			—			193,784
Inventories		—		290,863			32,746			—			323,609
Assets from coal trading activities		—		89,165			—			—			89,165
Deferred income taxes		—		15,050			411			—			15,461
Other current assets		19,737		15,971			7,239			—			42,947

Total current assets		394,414		501,293			158,895			—			1,054,602
Property, plant, equipment and mine development		—		5,686,143			428,933			—			6,115,076
Less accumulated depreciation, depletion and amortization		—		(1,289,947	)		(43,698	)		—			(1,333,645	)
Investments and other assets		4,808,202		4,151			33,836			(4,503,630	)		342,559

Total assets	$	5,202,616	$	4,901,640		$	577,966		$	(4,503,630	)	$	6,178,592


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	5,000	$	12,971		$	1,008		$	—		$	18,979
Payables and notes payable to affiliates, net		2,022,037		(2,357,000	)		334,963			—			—
Liabilities from coal trading activities		—		63,565			—			—			63,565
Accounts payable and accrued expenses		20,120		599,253			72,227			—			691,600

Total current liabilities		2,047,157		(1,681,211	)		408,198			—			774,144
Long-term debt, less current maturities		1,338,465		65,228			2,293			—			1,405,986
Deferred income taxes		5,250		386,351			1,665			—			393,266
Other noncurrent liabilities		18,658		1,852,684			7,353			—			1,878,695

Total liabilities		3,409,530		623,052			419,509			—			4,452,091
Minority interests		—		1,909			—			—			1,909
Stockholders’ equity		1,793,086		4,276,679			158,457			(4,503,630	)		1,724,592

Total liabilities and stockholders’ equity	$	5,202,616	$	4,901,640		$	577,966		$	(4,503,630	)	$	6,178,592

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)


	Six Months Ended June 30, 2004												Nine Months Ended September 30, 2005
	Parent			Guarantor			Non-Guarantor						Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Consolidated			Company			Subsidiaries			Subsidiaries			Consolidated
Cash Flows from Operating Activities
Net cash provided by (used in) operating activities	$	(26,666	)	$	103,344		$	5,356		$	82,034		$	(114,649	)	$	469,136		$	67,682		$	422,169


Cash Flows from Investing Activities
Additions to property, plant, equipment and mine development		—			(55,577	)		(60,281	)		(115,858	)		—			(173,109	)		(173,594	)		(346,703	)
Purchase of mining assets														—			(56,500	)		—			(56,500	)
Additions to advance mining royalties		—			(9,427	)		(250	)		(9,677	)		—			(9,061	)		—			(9,061	)
Acquisitions, net		—			(189,656	)		(232,508	)		(422,164	)
Investment in joint venture														—			(2,000	)		—			(2,000	)
Proceeds from disposal of assets		—			22,261			542			22,803			—			69,353			1,832			71,185

Net cash used in investing activities		—			(232,399	)		(292,497	)		(524,896	)		—			(171,317	)		(171,762	)		(343,079	)


Cash Flows from Financing Activities
Proceeds from long-term debt		250,000			—			—			250,000			—			11,459			—			11,459
Payments of long-term debt		(2,250	)		(13,458	)		(989	)		(16,697	)		(3,750	)		(11,104	)		(767	)		(15,621	)
Net proceeds from equity offering		383,125			—			—			383,125
Proceeds from stock options exercised		11,601			—			—			11,601			19,958			—			—			19,958
Proceeds from employee stock purchases		1,139			—			—			1,139			3,010			—			—			3,010
Increase of securitized interests in accounts receivable		—			—			50,000			50,000			—			—			25,000			25,000
Payment of debt issuance costs		(8,910	)		—			—			(8,910	)
Distributions to minority interests		—			(694	)		—			(694	)		—			(1,750	)		—			(1,750	)
Dividends paid		(14,852	)		—			—			(14,852	)		(32,041	)		—			—			(32,041	)
Transactions with affiliates, net		(388,084	)		143,996			244,088			—			225,069			(297,738	)		72,669			—

Net cash provided by financing activities		231,769			129,844			293,099			654,712
Net cash provided by (used in) financing activities														212,246			(299,133	)		96,902			10,015


Net increase in cash and cash equivalents		205,103			789			5,958			211,850
Net increase (decrease) in cash and cash equivalents														97,597			(1,314	)		(7,178	)		89,105
Cash and cash equivalents at beginning of period		114,575			1,392			1,535			117,502			373,066			3,496			13,074			389,636

Cash and cash equivalents at end of period	$	319,678		$	2,181		$	7,493		$	329,352		$	470,663		$	2,182		$	5,896		$	478,741

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)


	Nine Months Ended September 30, 2004
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Consolidated
Cash Flows from Operating Activities
Net cash provided by (used in) operating activities	$	(43,734	)	$	134,977		$	61,262		$	152,505


Cash Flows from Investing Activities
Additions to property, plant, equipment and mine development		—			(81,666	)		(66,679	)		(148,345	)
Additions to advance mining royalties		—			(11,310	)		(250	)		(11,560	)
Acquisitions, net		—			(190,940	)		(235,325	)		(426,265	)
Proceeds from disposal of assets		—			24,069			554			24,623

Net cash used in investing activities		—			(259,847	)		(301,700	)		(561,547	)


Cash Flows from Financing Activities
Proceeds from long-term debt		250,000			—			—			250,000
Payments of long-term debt		(13,850	)		(13,236	)		(1,663	)		(28,749	)
Net proceeds from equity offering		383,125			—			—			383,125
Proceeds from stock options exercised		19,274			—			—			19,274
Proceeds from employee stock purchases		2,343			—			—			2,343
Increase of securitized interests in accounts receivable		—			—			100,000			100,000
Payment of debt issuance costs		(8,922	)		—			—			(8,922	)
Distributions to minority interests		—			(818	)		—			(818	)
Dividends paid		(22,878	)		—			—			(22,878	)
Transactions with affiliates, net		(298,710	)		139,993			158,717			—

Net cash provided by financing activities		310,382			125,939			257,054			693,375


Net increase in cash and cash equivalents		266,648			1,069			16,616			284,333
Cash and cash equivalents at beginning of period		114,575			1,392			1,535			117,502

Cash and cash equivalents at end of period	$	381,223		$	2,461		$	18,151		$	401,835

(14) Guarantees

In the normal course of business, the Company is a party to the following guarantees:

The Company owns a 30.0% interest in a partnership that leases a coal export terminal from the Peninsula Ports Authority of Virginia under a 30-year lease that permits the partnership to purchase the terminal at the end of the lease term for a nominal amount. The partners have severally (but not jointly) agreed to make payments under various agreements which in the aggregate provide the partnership with sufficient funds to pay rents and to cover the principal and interest payments on the floating-rate industrial revenue bonds issued by the Peninsula Ports Authority, and which are supported by letters of credit from a commercial bank. The Company’s maximum reimbursement obligation of $42.8 million is supported by a letter of credit.

The Company owns a 49.0% interest in a joint venture that operates an underground mine and preparation plant facility in West Virginia. The partners have severally agreed to guarantee the debt of the joint venture, which consists of a ~~$17.2~~$16.4 million loan facility as of ~~June~~September 30, 2005. The total amount of the joint venture’s debt guaranteed by the Company was ~~$8.4~~$8.0 million as of ~~June~~September 30, 2005.

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued~~

guarantee are approximately ~~$10~~$7 million, based on recent spot coal prices. As a matter of recourse in the event of a default, the Company has access to cash held in escrow and the ability to trigger an assignment of ~~the AMG~~AMG’s assets to the Company. Based on these recourse options and the remote probability of non-performance by AMG due to their proven operating history, the Company has valued the liability associated with the guarantee at zero.

As part of arrangements through which the Company obtains exclusive sales representation agreements with small coal mining companies (the “Counterparties”), the Company issued financial guarantees on behalf of the Counterparties. These guarantees facilitate the Counterparties’ efforts to obtain bonding or financing. The ~~total~~Company also guaranteed bonding for a partnership in which it formerly held an interest as part of an exchange in which the Company obtained strategic Illinois Basin coal reserves (see Note 3). The aggregate amount guaranteed by the Company was ~~$1.6~~$4.4 million, and the fair value of the guarantees recognized as a liability was ~~less than $0.1~~$0.4 million as of ~~June~~September 30, 2005. The Company’s obligations under the guarantees extend to ~~the end of 2007.~~September 2015.

The Company is the lessee under numerous equipment and property leases. It is common in such commercial lease transactions for the Company, as the lessee, to agree to indemnify the lessor for the value of the property or equipment leased, should the property be damaged or lost during the course of the Company’s operations. The Company expects that losses with respect to leased property would be covered by insurance (subject to deductibles). The Company and certain of its subsidiaries have guaranteed other subsidiaries’ performance under their various lease obligations. Aside from indemnification of the lessor for the value of the property leased, the Company’s maximum potential obligations under its leases are equal to the respective future minimum lease payments and assume that no amounts could be recovered from third parties.

The Company has provided financial guarantees under certain long-term debt agreements entered into by its subsidiaries, and substantially all of the Company’s subsidiaries provide financial guarantees under long-term debt agreements entered into by the Company. The maximum amounts payable under the Company’s debt agreements are equal to the respective principal and interest payments. Supplemental guarantor/non-guarantor financial information is provided in Note 13.

(15) ~~Subsequent Events~~Risk Management and Financial Instruments

~~On July 21, 2005,~~The Company enters into both derivative and non-derivative contracts to manage its exposure to the ~~Company announced that its Board~~price volatility of ~~Directors increased the quarterly dividend by 27 percent~~diesel fuel. Fuel costs make up between three and ~~authorized a share repurchase program. The share repurchase program allows for the repurchase of up to 5~~four percent of the Company’s ~~common shares; however, any repurchase under~~total operating costs and expenses. As of September 30, 2005, the ~~program requires a separate approval~~Company had designated derivative contracts as cash flow hedges with notional amounts totaling 69.0 million gallons (44.9 million gallons of heating oil and 24.1 million gallons of crude oil), with maturities extending from the ~~Company’s Board~~fourth quarter of ~~Directors~~2005 through the end of 2007. The condensed consolidated balance sheets as of September 30, 2005 and December 31, 2004 reflect unrealized gains on the derivatives designated as cash flow hedges of $54.2 million and $5.8 million, respectively, which is recorded net of tax provisions of $21.7 million and $2.3 million, respectively, in “Accumulated other comprehensive loss.”

The Company accounts for its fuel hedge derivative instruments as cash flow hedges, as defined in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Under SFAS No. 133, all derivatives designated as hedges that meet certain requirements are granted hedge accounting treatment. Generally, utilizing the hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective, as defined, are recorded in “Accumulated other comprehensive income (loss)” until the underlying diesel fuel is consumed. However, the Company is exposed to the risk that periodic changes will not be effective, as defined, or that the derivatives will no longer qualify for hedge accounting.

To the extent that the periodic changes in the fair value of the derivatives are not effective, or if the hedge ceases to qualify for hedge accounting, those periodic non-cash changes are recorded as ineffectiveness to “Operating costs and expenses” in the income statement in the period of the change. During the quarter ended

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

September 30, 2005, the Company recognized approximately $0.1 million of lower operating costs and expenses related to the ineffectiveness of its ~~Executive Committee. The repurchases may be made from time to time~~hedges.

Ineffectiveness is inherent in hedging diesel fuel with derivative positions based on ~~an evaluation~~other crude oil related commodities. Due to the volatility in markets for crude oil, and crude oil related products, and the current refining spreads that have widened the price spread between crude oil and other petroleum distillates (such as diesel fuel), the Company is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting (which could be determined on a derivative by derivative basis or in the aggregate), which may result in increased volatility in the Company’s outlook and general business conditions, as well as alternative investment and debt repayment options. The increase in the regular quarterly dividend on common stock, to $0.095 per share, is payable on August 25, 2005 to shareholders of record on August 4, 2005.results.

2427

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Notice Regarding Forward-Looking Statements

This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. These statements relate to future events or our future financial performance, including, without limitation, the section captioned “Outlook.” We use words such as “anticipate,” “believe,” “expect,” “may,” “project,” “will” or other similar words to identify forward-looking statements.

Without limiting the foregoing, all statements relating to our future outlook, anticipated capital expenditures, future cash flows and borrowings, and sources of funding are forward-looking statements. These forward-looking statements are based on numerous assumptions that we believe are reasonable, but are open to a wide range of uncertainties and business risks and actual results may differ materially from those discussed in these statements. Among the factors that could cause actual results to differ materially are:

	•		growth of domestic and international coal and power markets;

	•		coal’s market share of electricity generation;

	•		prices of fuels which compete with or impact coal usage, such as oil or natural gas;

	•		future worldwide economic conditions;

	•		economic strength and political stability of countries in which we have operations or serve customers;

	•		weather;

	•		transportation performance and costs, including demurrage;

	•		ability to renew sales contracts;

	•		successful implementation of business strategies;

	•		regulatory and court decisions;

	•		future legislation;

	•		variation in revenues related to synthetic fuel production;

	•		changes in postretirement benefit and pension obligations;

	•		negotiation of labor contracts, employee relations and workforce availability;

	•		availability and costs of credit, surety bonds and letters of credit;

	•		the effects of changes in currency exchange rates;

	•		price volatility and demand, particularly in higher-margin products;

	•		risks associated with customers;

	•		availability and costs of key supplies and commodities such as diesel fuel, steel, explosives and tires;

	•		reductions of purchases by major customers;

	•		geology and equipment risks inherent to mining;

	•		terrorist attacks or threats;

	•		performance of contractors, third party coal suppliers or major suppliers of mining equipment or supplies;

	•		replacement of reserves;

	•		implementation of new accounting standards and Medicare regulations;

	•		inflationary trends, including those impacting materials used in our business;

	•		the effects of interest rate changes;

	•		the effects of acquisitions or divestitures;

	•		changes to contribution requirements to multi-employer benefit funds; and

	•		other factors, including those discussed in Part II, Item 1, “Legal Proceedings.”

When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and in our other Securities and Exchange Commission (“SEC”) filings, including the more detailed discussion of these factors, as well as other factors that could affect our results, contained in the “Risks Relating to Our Company” section of Item 7 of our 2004 Annual Report on Form ~~10-K filed with the Securities and Exchange Commission and all related documents incorporated by reference.~~10-K. We do not undertake any obligation to update these ~~statements.~~statements, except as required by federal securities laws.

2528

Overview

We are the largest private sector coal company in the world, with majority interests in 3233 active coal operations located throughout all major U.S. coal producing regions and internationally in Australia. We also own a 25.5% interest in Carbones del Guasare, which owns and operates the Paso Diablo Mine in ~~Venezuela.~~Venezuela, and a 49% interest in an Appalachia joint venture. In the ~~second~~third quarter and first ~~half~~nine months of 2005, we sold ~~57.7~~61.6 million and ~~116.9~~178.4 million tons of coal, ~~respectively.~~respectively, which are records for the Company. In 2004, we sold 227.2 million tons of coal that accounted for 20% of all U.S. coal sales, and were more than 85% greater than the sales of our closest competitor. According to reports published by the Energy Information Administration, 1.1 billion tons of coal were consumed in the United States in 2004. The Energy Information Administration also published estimates indicating that domestic consumption of coal by electricity generators would grow at a rate of 1.6% per year through 2025. Coal-fueled generation is used in most cases to meet baseload electricity requirements, and coal use generally grows at the pace of electricity growth. In 2004, coal’s share of U.S. electricity generation was approximately 52%.

Our primary customers are U.S. utilities, which accounted for 90% of our sales in 2004. We typically sell coal to utility customers under long-term contracts (those with terms longer than one year). During 2004, approximately 90% of our sales were under long-term contracts. Our results of operations in the near term can be negatively impacted by poor weather conditions, unforeseen geologic conditions or equipment problems at mining locations, the performance of contractors or third party coal suppliers, ~~and~~ by the availability of transportation for coal ~~shipments.~~shipments and the availability and costs of key supplies and commodities such as steel, tires, diesel fuel and explosives. On a long-term basis, our results of operations could be impacted by the availability and prices of competing electricity-generation fuels, our ability to secure or acquire high-quality coal reserves, our ability to find replacement buyers for coal under contracts with comparable terms to existing contracts, or the passage of new or expanded regulations that could limit our ability to mine, increase our mining costs, or limit our customers’ ability to utilize coal as fuel for electricity generation. In the past, we have achieved production levels that are relatively consistent with our projections.

We conduct business through four principal operating segments: Western U.S. Mining, Eastern U.S. Mining, Australian Mining, and Trading and Brokerage. Our Western U.S. Mining operations consist of our Powder River Basin, Southwest and Colorado operations, and its principal business is the mining, preparation and sale of steam coal, sold primarily to electric utilities. Our Eastern U.S. Mining operations consist of our Appalachia and Midwest operations, and its principal business is the mining, preparation and sale of steam coal, sold primarily to electric utilities, as well as the mining of metallurgical coal, sold to steel and coke producers.

Geologically, our Western operations mine bituminous and subbituminous coal deposits, and our Eastern operations mine bituminous coal deposits. Our Western U.S. Mining operations are characterized by predominantly surface mining extraction processes, lower sulfur content and Btu of coal, and higher customer transportation costs (due to longer shipping distances). Our Eastern U.S. Mining operations are characterized by a majority of underground mining extraction processes, higher sulfur content and Btu of coal, and lower customer transportation costs (due to shorter shipping distances).

Our Australian Mining operations consist of four mines. The Burton and North Goonyella mines were acquired in April 2004. We opened the Eaglefield Mine in 2004, which is a surface operation adjacent to, and fulfilling contract tonnages in conjunction with, the North Goonyella underground mine. In addition, we have owned and operated our Wilkie Creek Mine since 2002, which is our only steam coal operation in Australia. We expect to begin production from our Baralaba mine during the fourth quarter of 2005. Baralaba will be a surface operation producing metallurgical coal. Our Australian Mining operations are characterized by surface and underground extraction processes, mining primarily low sulfur, metallurgical coal sold to an international customer base.

Metallurgical coal represented approximately 5% of our total sales volume and approximately 3% of U.S. sales volume in the ~~six~~nine months ended ~~June~~September 30, 2005. ~~Each of our~~Our mining operations isare described in Item 1 of our 2004 Annual Report on Form 10-K.

2629

In addition to our mining operations, which comprised ~~86%~~82% of revenues in the ~~second~~third quarter of 2005, we also generated ~~13%~~18% of our revenues from brokering and trading coal. We generate additional income and cash flows by extracting value from our vast natural resource position by selling non-core, idle or reclaimed land holdings and non-strategic mineral interests.

We ~~are developing three~~continue to pursue the development of coal-fueled generating projects in areas of the U.S. where electricity demand is strong and where there is access to land, water, transmission lines and low-cost coal. ~~These~~The projects involve mine-mouth generating plants using our surface lands and coal reserves. Our ultimate role in these projects could take numerous forms, including, but not limited to equity partner, contract miner or coal lessor. The projects we are currently pursuing are as follows: the 1,500 megawatt Prairie State Energy Campus in Washington County, Illinois; the 1,500 megawatt Thoroughbred Energy Campus in Muhlenberg County, Kentucky; and the 300 megawatt Mustang Energy Project near Grants, ~~N.M.~~New Mexico. The plants, assuming all necessary permits and financing are obtained and following selection of partners and sale of a majority of the output of each plant, ~~would~~could be operational following a four-year construction phase. The first of these plants ~~will~~would not be operational earlier than mid-2010.

~~The Prairie State Energy Campus project has continued to advance in 2005.~~ In February 2005, a group of Midwest rural electric cooperatives and municipal joint action agencies entered into definitive agreements to acquire 47% of the Prairie State Energy Campus project. After an initial appeal was successfully resolved related to the air permit that was issued in January 2005, the Illinois Environmental Protection Agency reissued the air permit on April 28, 2005. The same parties who filed the earlier permit challenge filed a new appeal on June 8, 2005. The Company believes the permit was appropriately issued and expects to prevail in the appeal process.

In the first quarter of 2005, the Board of Directors, after completing an orderly succession planning process, elected Gregory H. Boyce, President and Chief Operating Officer, to the position of President and Chief Executive Officer, effective January 1, 2006. Chairman and Chief Executive Officer, Irl F. Engelhardt will continue his CEO duties through 2005, and will remain employed as Chairman of the Board on January 1, 2006. Effective March 1, 2005, Mr. Boyce was also elected to the Board of Directors and Chairman of the Executive Committee of the Board.

Effective March 30, 2005, we implemented a two-for-one stock split on all shares of our common stock. ~~Other than as noted in Part II, Item 4, “Submission of Matters to a Vote of Security Holders,” all~~All share and per share amounts in this Quarterly Report on Form 10-Q reflect the stock split. During July 2005, we increased our quarterly dividend 27% to $0.095 per share and our Board of Directors authorized a share repurchase program of up to ~~5 percent~~5% of the outstanding shares of our common stock. ~~However, any repurchase under the program requires a separate approval from the Company’s Board of Directors or its Executive Committee.~~ The repurchases may be made from time to time based on an evaluation of ~~the Company’s~~our outlook and general business conditions, as well as alternative investment and debt repayment options.

In July 2005, the Board of Directors elected John F. Turner as an independent director who will serve on the Board’s Nominating and Corporate Governance Committee. Turner is former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs (OES) within the State Department and is the past President and Chief Executive Officer of the Conservation Fund, a national nonprofit organization dedicated to public-private partnerships to protect land and water resources. He has also served as the Director of the U.S. Fish and Wildlife Service, with responsibility for increasing wetland protection and establishing 55 National Wildlife Refuges, the most of any administration in the nation’s history.

Adjusted EBITDA is not calculated identically by all companies, our calculation may not be comparable to similarly titled measures of other companies. Adjusted EBITDA is reconciled to its most comparable measure, under generally accepted accounting principles, in Note 11 to our unaudited condensed consolidated financial statements included in this report.

Recent Acquisitions Impacting Comparability of Results of Operations

Results in our Western U.S. Mining Operations segment include amounts for our April 15, 2004 acquisition of the Twentymile Mine in Colorado. Results in our Australian Mining Operations segment include amounts for our April 15, 2004 acquisition of the Burton and North Goonyella Mines as well as the opening of the Eaglefield Mine adjacent to the North Goonyella Mine in the fourth quarter of 2004. Our Corporate and Other segment includes results from our December 2004 acquisition of a 25.5% interest in Carbones del Guasare, which owns and operates the Paso Diablo Mine in Venezuela.

Quarter Ended ~~June~~September 30, 2005 Compared to Quarter Ended ~~June~~September 30, 2004

Summary

~~In the second quarter of 2005, our~~Our revenues increased ~~$192.0~~$304.5 million, or 33.1%, to ~~$1,108.8 million, a 20.9% increase over the prior year, primarily driven by improved pricing in most regions. Our segment Adjusted EBITDA totaled $264.5~~$1,223.5 million in the ~~second~~third quarter of 2005 compared to ~~$184.8~~the prior year. Segment Adjusted EBITDA was $267.0 million in the third quarter of 2005 compared to $205.6 million in the prior year, a ~~43.1%~~29.8% increase. ~~Net~~Third quarter net income ~~improved 129.6% to $95.3~~of $113.3 million, or ~~$0.71~~$0.84 per share, ~~in the second quarter~~was 160.9% higher than prior year net income of ~~2005, compared to $41.5~~$43.4 million, or ~~$0.32~~$0.33 per ~~share, in the prior year.~~share. The improvements were primarily driven by higher sales prices in nearly every region and for all of our products, particularly metallurgical coal, and by demand-driven volume increases, particularly for our Midwest products and for our ultra-low sulfur Powder River Basin products. In addition, higher gains on property transactions contributed to higher year over year results.

Tons Sold

The following table presents tons sold by operating segment for the quarters ended ~~June~~September 30, 2005 and 2004:


	(Unaudited)										(Unaudited)
	Quarter Ended June 30,				Increase (Decrease)						Quarter Ended September 30,				Increase (Decrease)
	2005		2004		Tons			%			2005		2004		Tons			%
	(Tons in millions)										(Tons in millions)
Western U.S. Mining Operations		36.7		35.0		1.7			4.9	%		39.1		37.9		1.2			3.2	%
Eastern U.S. Mining Operations		13.2		12.7		0.5			3.9	%		13.4		12.3		1.1			8.9	%
Australian Mining Operations		2.1		1.7		0.4			23.5	%		1.9		2.0		(0.1	)		(5.0	)%
Trading and Brokerage Operations		5.7		7.6		(1.9	)		(25.0	)%		7.2		6.5		0.7			10.8	%

Total		57.7		57.0		0.7			1.2	%		61.6		58.7		2.9			4.9	%

~~Overall, our~~Our revenues increased ~~$192.0~~$304.5 million, or ~~20.9%~~33.1%, ~~over~~overall compared to the ~~prior year second quarter.~~third quarter of 2004. Sales increased ~~$191.2~~$296.1 million, ~~in the second quarter of 2005,~~ reflecting increases in every segment: Western U.S. Mining ($~~33.5~~30.1 million), Eastern U.S. Mining ($~~68.0~~105.3 million), Australian Mining ($~~68.1~~54.1 million), and Trading & Brokerage ($~~21.6~~106.6 million). Western U.S. Mining sales increased primarily due to higher sales prices in the Powder River and Colorado regions and higher volumes at our ~~Twentymile Mine due to improved productivity from its longwall and 15 additional days of operation in the current year and at our~~ Powder River operations due to continued higher demand for Powder River Basin coal. Sales price increases overcame the short-term volume impact of a longwall move during the quarter at one of our Colorado operations. Average sales prices for the Western U.S. Mining operations were ~~4.2%~~4.6% higher ~~despite a $13.4 million charge to provide an allowance for disputed receivables as discussed in Note 12 to our unaudited condensed consolidated financial statements.~~during the quarter versus prior year. Sales volumes for the Powder River operations were higher in 2005 compared to the prior year despite the negative impact of ~~two train derailments and subsequent~~transportation from on-going rail ~~maintenance, which lowered shipments through much of the quarter.~~maintenance. The restricted transportation capacity impacted all coal producers in the ~~area,~~Powder River Basin, and rail capacity is not expected to return to ~~pre-derailment~~higher levels until late in 2005 as discussed in “Outlook” below. In our Eastern U.S. Mining operations, ~~increases in~~the recent trend of higher average selling prices continued, rising ~~15.6%~~20.4% in the ~~second~~third quarter of 2005 compared to prior ~~year and resulting in a $68.0 million increase in sales due primarily to strong~~year. Strong demand for steam and metallurgical coal ~~demand. In addition, volume~~from the region is driving the higher prices and supporting higher volumes in ~~our Midwest operations improved over~~both Appalachia and the ~~prior year.~~Midwest. The increase in our Australian Mining operations’ sales ~~increase~~ primarily reflected higher sales prices for metallurgical ~~coal and an increase~~coal. Volumes for the quarter in ~~volumes~~Australia were comparable to prior year as production from a new mine offset lower production at ~~the mines, primarily~~one of our metallurgical operations due to ~~an additional 15 days of ownership of the Burton and North Goonyella Mines~~poor roof conditions as further discussed in ~~the second quarter of 2005.~~“Segment Adjusted EBITDA” below. Average sales prices in our Australian operations improved ~~62.5%.~~68.2%, reflecting the strong demand for metallurgical coal. Improved Trading and Brokerage sales primarily reflected improved pricing for broker transactions. The $8.4 million increase in other revenues was driven primarily by improved trading revenues in our trading operations.

Segment Adjusted EBITDA

Our total segment Adjusted EBITDA was ~~$264.5~~$267.0 million for the ~~second~~third quarter of 2005, compared with ~~$184.8~~$205.6 million in the prior year, detailed as follows:


					Increase to									Increase (Decrease) to
	(Unaudited)				Segmented Adjusted					(Unaudited)				Segmented Adjusted
	Quarter Ended June 30,				EBITDA					Quarter Ended September 30,				EBITDA
	2005		2004		$		%			2005		2004		$			%
	(Dollars in thousands)									(Dollars in thousands)
Western U.S. Mining Operations	$	105,639	$	100,389	$	5,250		5.2	%	$	104,213	$	113,874	$	(9,661	)		(8.5	)%
Eastern U.S. Mining Operations		95,898		66,007		29,891		45.3	%		96,865		54,911		41,954			76.4	%
Australian Mining Operations		47,479		11,948		35,531		297.4	%		39,780		20,777		19,003			91.5	%
Trading and Brokerage Operations		15,439		6,443		8,996		139.6	%		26,132		16,053		10,079			62.8	%

Total Segment Adjusted EBITDA	$	264,455	$	184,787	$	79,668		43.1	%	$	266,990	$	205,615	$	61,375			29.8	%

Eastern U.S. Mining operations’ Adjusted EBITDA increased ~~$29.9~~$42.0 million ~~in the second~~compared to third quarter of ~~2005 compared to~~ prior year, primarily driven by higher sales prices for metallurgical and steam coal in our Appalachia operations. Adjusted EBITDA in our Appalachia operations increased principally as a result of quarter over quarter sales price increases of ~~25%~~36% (over ~~60%~~75% for metallurgical coal) ~~in 2005, partially offset by~~. Overall, volumes were higher than prior year, although one metallurgical mine experienced lower production ~~at two~~during the quarter that will extend into the first quarter of ~~our mines, mainly related to problems from excessive water and geologic issues, and higher contract~~2006 as the operation engages in development of a new longwall mining ~~costs. The results~~area. Results in our Midwest operations were higher than prior year ~~as the benefits of~~benefiting from higher volumes and prices ~~were partially~~which offset by higher fuel and dragline repair costs. Also, gains from our fuel hedging program offset a significant portion of the increase in fuel prices during the quarter.

Australian Mining operations’ Adjusted EBITDA increased ~~$35.5~~$19.0 million in the ~~second~~third quarter of 2005 compared to the prior year. Improved results were mainly driven by sales price increases of over ~~60%~~68% quarter over quarter. Current year results benefited from ~~the~~ strong sales prices, but were negatively impacted by ~~continued port congestion, related~~poor roof conditions that interrupted production on the longwall and a subsequent roof fall that curtailed operations during the month of September at our underground metallurgical coal operation. Continued high demurrage costs and ~~lower production due to geological problems at the longwall operation.~~timing of vessel loadings also negatively impacted results.

Trading and Brokerage operations’ Adjusted EBITDA increased ~~$9.0~~$10.1 million inversus the ~~second~~third quarter of ~~2005 compared~~2004, due to improved brokerage margins, higher prices and trading volumes and the ~~prior year, primarily related to a $12.5 million reduction~~positive effect of ~~the previously established reserve for~~settlement of a contractual dispute with one of our coal suppliers, as discussed in Note 3 to our unaudited condensed consolidated financial statements.

Income Before Income Taxes And Minority Interests


	(Unaudited)						Increase (Decrease) to						(Unaudited)						Increase (Decrease) to
	Quarter Ended June 30,						Income						Quarter Ended September 30,						Income
	2005			2004			$			%			2005			2004			$			%
	(Dollars in thousands)												(Dollars in thousands)
Total Segment Adjusted EBITDA	$	264,455		$	184,787		$	79,668			43.1	%	$	266,990		$	205,615		$	61,375			29.8	%

Corporate and Other Adjusted EBITDA		(48,675	)		(51,313	)		2,638			5.1	%		(31,552	)		(51,432	)		19,880			38.7	%
Depreciation, depletion and amortization		(79,309	)		(73,020	)		(6,289	)		(8.6	)%		(77,159	)		(70,132	)		(7,027	)		(10.0	)%
Asset retirement obligation expense		(7,162	)		(8,627	)		1,465			17.0	%		(7,394	)		(10,146	)		2,752			27.1	%
Interest expense		(25,205	)		(24,595	)		(610	)		(2.5	)%		(25,327	)		(24,926	)		(401	)		(1.6	)%
Early debt extinguishment gains														—			556			(556	)		n/a
Interest income		1,810			1,209			601			49.7	%		3,218			1,084			2,134			196.9	%

Income before income taxes and minority interests	$	105,914		$	28,441		$	77,473			272.4	%	$	128,776		$	50,619		$	78,157			154.4	%

Corporate and Other Adjusted EBITDA results include selling and administrative expenses, equity income from our Venezuelan joint venture, net gains on asset disposals or exchanges, costs associated with past mining obligations and revenues and expenses related to our other commercial activities such as coalbed methane, generation development and resource management. The $19.9 million improvement of Corporate and Other results ~~by $2.6~~included:

higher gain on disposal or exchange of assets of $45.8 million, ~~included:~~primarily related to:

	•		~~higher~~a $37.4 million gain on ~~disposal~~settlement of ~~assets of $14.5 million primarily related to aggregate gains of $12.5 million on three sales involving non-strategic~~a contract dispute with a third-party coal ~~assets and properties;~~supplier; and

	•		~~income in 2005 of $6.1~~a $6.2 million gain from ~~the December 2004 acquisition of a 25.5%~~an asset exchange where we acquired strategic Illinois Basin coal reserves for non-strategic reserves, our interest in ~~Carbones del Guasare, which owns~~a joint venture and ~~operates the Paso Diablo Mine in Venezuela.~~monetary consideration (see Note 3); and

~~Six~~Nine Months Ended ~~June~~September 30, 2005 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2004

Summary

InOur revenues increased $801.7 million to $3,409.8 million for the first ~~six~~nine months of 2005, ~~our revenues increased $497.2 million to $2,186.3 million,~~ a ~~29.4%~~30.7% increase over the prior ~~year, with a 7.4%~~year. The increase in ~~sales volume and~~revenue was primarily due to improved pricing in all ~~regions. Our segment~~regions, increased sales volumes from strong demand at domestic and international mining operations and the benefit of mining operations acquired during 2004. Segment Adjusted EBITDA ~~totaled $471.9~~was $738.9 million infor the first ~~six~~nine months of 2005 compared to ~~$344.7~~$550.3 million in the prior year, a ~~36.9%~~34.3% increase. Net income ~~improved 129.7% to $147.1~~of $260.5 million, or ~~$1.10~~$1.95 per share, was 142.3% higher in the first ~~six~~nine months of 2005, compared to ~~$64.1~~$107.5 million, or ~~$0.52~~$0.86 per share, in the prior year. The improvements were primarily ~~driven by improved~~due to greater demand-driven volume, improved sales prices ~~particularly for our metallurgical and Powder River Basin products,~~ and the impact of mining operations acquired in 2004. In addition, higher gains on property transactions contributed to higher year over year results.

attributable to the 2004 acquisition of the Twentymile Mine and to increases in both sales price and ~~sales volumes~~volume in the Powder River Basin. Excluding the impact of a $16.2 million allowance that was established relative to disputed receivables (discussed in Note 12 to our unaudited condensed consolidated financial statements), Western US Mining sales increased $153.3 million, or 23.8%. Production in the Powder River Basin ~~continued~~increased 6.7 million tons, or 7.8%, compared to ~~increase~~the prior year in response to overall higher demand, ~~increasing 4.9 million tons compared to the prior year,~~ overcoming ~~two~~ train derailments, weather and track maintenance disruptions on the main shipping line out of the ~~basin, which reduced our shipments from the region by an estimated 3.5 million tons in the second quarter of 2005.~~basin. Eastern U.S. Mining operations’ sales increased ~~$143.8 million, or 20.6%,~~24.0% compared with prior year ~~primarily~~ due to improved pricing in Appalachia that resulted from strong steam and metallurgical coal demand, and higher volume and prices in the Midwest. The increase in Australian Mining operations’ sales ~~were primarily~~was due to significantly higher prices for metallurgical coal in 2005 and the contribution from higher volumes due to the acquisition of two mines and the ~~subsequent opening~~startup of ~~an adjoining~~our Eaglefield surface mine in ~~2004 and increases in the selling price for metallurgical coal. Improved~~2004. Trading and Brokerage sales ~~primarily reflected increases in coal prices for brokerage sales.~~

were up $172.3 million on higher pricing. Other revenues ~~decreased $12.1 million in the first six months of 2005 compared to~~were comparable with the prior year, primarily as the result of a $12.7 million decrease in coal trading revenues in 2005. In 2004, higher trading revenues were driven by significant pricing increases related to our Eastern trading portfolio. Appalachia steam coal prices remain strong in 2005, but are more stable and have not provided the same opportunities for trading revenues as in 2004.year.

Segment Adjusted EBITDA

Our total segment Adjusted EBITDA was ~~$471.9~~$738.9 million for the first ~~six~~nine months of 2005, compared with ~~$344.7~~$550.3 million in the prior year, detailed as follows:


						Increase (Decrease) to										Increase (Decrease) to
	(Unaudited)					Segmented Adjusted						(Unaudited)				Segmented Adjusted
	Six Months Ended June 30,					EBITDA						Nine Months Ended September 30,				EBITDA
	2005			2004		$			%			2005		2004		$			%
				(Dollars in thousands)								(Dollars in thousands)
Western U.S. Mining Operations	$	226,064		$	183,757	$	42,307			23.0	%	$	330,277	$	297,631	$	32,646			11.0	%
Eastern U.S. Mining Operations		190,704			127,421		63,283			49.7	%		287,569		182,332		105,237			57.7	%
Australian Mining Operations		61,565			12,878		48,687			378.1	%		101,345		33,655		67,690			201.1	%
Trading and Brokerage Operations		(6,429	)		20,675		(27,104	)		n/a			19,703		36,728		(17,025	)		(46.4	)%

Total Segment Adjusted EBITDA	$	471,904		$	344,731	$	127,173			36.9	%	$	738,894	$	550,346	$	188,548			34.3	%

Western U.S. Mining operations’ Adjusted EBITDA increased ~~$42.3~~$32.6 million, or ~~23.0%~~11.0%, in the first ~~six~~nine months of 2005 compared to prior year. The increase reflected improvements in our Powder River Basin operations and the addition of the Twentymile Mine to our Colorado operations in April 2004 and increased productivity from its ~~operations as well as improvements in the Powder River Basin.~~operations. The improvement at our Powder River operations was ~~primarily~~ due to ~~an 8.7%~~higher prices, leading to a 21.1% increase in per ton margin, and a 7.8% volume increase in response to increased ~~demand, and improved margin per ton, primarily due to higher sales prices.~~demand. In 2005, ~~second~~third quarter volumes ~~were reduced from~~reached record ~~volume~~levels after sequentially decreasing in the ~~first~~second quarter due to constraints on the region’s rail system. Improved revenues overcame increased unit costs that resulted from higher fuel costs, lower than anticipated volume due to rail difficulties and an increase in revenue-based royalties and ~~sales taxes,~~production taxes. Improvements in the Powder River Basin and ~~the impact of adding higher value Twentymile production~~Colorado overcame a decrease in Adjusted EBITDA for our ~~cost mix.~~Southwest operations due to a $16.2 million allowance that was established relative to disputed receivables (discussed in Note 12 to our unaudited condensed consolidated financial statements).

~~to our unaudited condensed consolidated financial statements) with one of our coal suppliers and~~ less favorable trading results in 2005 compared to ~~2004, discussed above.~~2004. The first nine months of 2005 includes a net charge of $7.5 million, primarily related to the breach of a coal supply contract by a producer (see Note 3 to our unaudited condensed consolidated financial statements).

Income Before Income Taxes And Minority Interests


	(Unaudited)						Increase (Decrease) to						(Unaudited)						Increase (Decrease) to
	Six Months Ended June 30,						Income						Nine Months Ended September 30,						Income
	2005			2004			$			%			2005			2004			$			%
	(Dollars in thousands)												(Dollars in thousands)
Total Segment Adjusted EBITDA	$	471,904		$	344,731		$	127,173			36.9	%	$	738,894		$	550,346		$	188,548			34.3	%

Corporate and Other Adjusted EBITDA		(90,173	)		(99,657	)		9,484			9.5	%		(121,725	)		(151,089	)		29,364			19.4	%
Depreciation, depletion and amortization		(155,262	)		(132,860	)		(22,402	)		(16.9	)%		(232,421	)		(202,992	)		(29,429	)		(14.5	)%
Asset retirement obligation expense		(16,357	)		(21,664	)		5,307			24.5	%		(23,751	)		(31,810	)		8,059			25.3	%
Interest expense		(50,761	)		(45,923	)		(4,838	)		(10.5	)%		(76,088	)		(70,849	)		(5,239	)		(7.4	)%
Early debt extinguishment gains														—			556			(556	)		n/a
Interest income		3,183			2,128			1,055			49.6	%		6,401			3,212			3,189			99.3	%

Income before income taxes and minority interests	$	162,534		$	46,755		$	115,779			247.6	%	$	291,310		$	97,374		$	193,936			199.2	%

	•		higher gains on disposal or exchange of assets of ~~$35.2~~$81.0 million primarily related to settlement of a contract dispute with a third-party coal supplier (see Note 3), Penn Virginia (“PVR”) unit sales, ~~($21.2 million) and to~~ three resource sales involving non-strategic coal assets and properties ($12.5 million), and an asset exchange in ~~2005.~~which we acquired Illinois Basin coal reserves in exchange for a) coal reserves, b) our interest in a joint venture and c) monetary consideration. In 2005, we ~~recognized~~also realized a $31.1 million gain ~~(see Note 3 to our unaudited condensed consolidated financial statements)~~ from the sale of all of our remaining 0.838 million PVR units compared to a gain of $9.9 million on the sale of 0.575 million PVR units in 2004;

	•		income in 2005 of ~~$11.0~~$16.1 million from our ~~recently acquired~~ 25.5% interest in Carbones del Guasare (acquired in December 2004), which owns and operates the Paso Diablo Mine in Venezuela; and

	•		lower net expenses related to generation development of ~~$2.6~~$4.8 million, primarily due to reimbursements from the Prairie State Energy Campus partnership group. The reimbursements include $1.8 million for expenses previously incurred on behalf of the project and the amortization of a $4.9 million non-refundable payment over the project development service period (which ends in mid-2006).

Depreciation, depletion and amortization increased ~~$22.4~~$29.4 million in 2005 with approximately ~~46%~~54% of the increase due to acquisitions made in 2004 and the remainder of the increase due primarily to improved volume at existing mines in 2005. Asset retirement obligation expense decreased ~~$5.3~~$8.1 million due to expenses in 2004 related to the acceleration of planned reclamation of certain closed mine sites. Interest expense increased ~~$4.8~~$5.2 million primarily related to the issuance of $250 million of 5.875% Senior Notes ~~due 2016~~ in late March of ~~2004.~~2004 and increases in the cost of floating rate debt due to higher interest rates.

Net Income


	(Unaudited)						Increase (Decrease) to						(Unaudited)						Increase (Decrease) to
	Six Months Ended June 30,						Income						Nine Months Ended September 30,						Income
	2005			2004			$			%			2005			2004			$			%
				(Dollars in thousands)									(Dollars in thousands)
Income before income taxes and minority interests	$	162,534		$	46,755		$	115,779			247.6	%	$	291,310		$	97,374		$	193,936			199.2	%

Income tax (provision) benefit		(14,586	)		20,796			(35,382	)		n/a			(29,300	)		13,863			(43,163	)		n/a
Minority interests		(804	)		(653	)		(151	)		(23.1	)%		(1,526	)		(900	)		(626	)		(69.6	)%

Income from continuing operations		147,144			66,898			80,246			120.0	%		260,484			110,337			150,147			136.1	%
Loss from discontinued operations, net of taxes		—			(2,837	)		2,837			n/a			—			(2,839	)		2,839			n/a

Net income	$	147,144		$	64,061		$	83,083			129.7	%	$	260,484		$	107,498		$	152,986			142.3	%

Our underground metallurgical coal mine in Australia is experiencing difficult geologic conditions that are expected to continue disrupting production in the near term. In the first quarter of 2006, we plan to install longwall replacement equipment with better roof control and ~~has not eased over~~cutting capabilities. In the ~~last year. Discussions regarding capacity expansion are on-going.~~interim, we plan to meet our shipping commitments from this mine by supplementing its output with production from our newly-opened, adjacent surface operation. In May 2005, we were notified of a reduced port allocation that is aimed at improving the loading of vessels and reducing ~~demurrage.~~demurrage at the main port for our Australian coal operations. Although port congestion has been reduced, high demurrage costs and unpredictable timing of vessel loading could continue to impact future results.

Outlook Overview

Our outlook for the coal markets remains positive. We believe strong coal markets will continue worldwide, as long as growth continues in the U.S., Asia and other industrialized economies that are increasing coal demand for electricity generation and steelmaking. The U.S. economy grew ~~almost 4%~~at an annual rate of 3.3% in the ~~first~~second quarter of 2005 as reported by the U.S. Commerce Department, and China’s economy grew 9.5% as published by the National Bureau of Statistics of China. Strong demand for coal and coal-based electricity generation in the U.S. is being driven by the ~~strengthening~~growing economy, low customer stockpiles, ~~production difficulties for some producers,~~ favorable weather, capacity constraints of nuclear generation and high prices of natural gas and oil. The high price of natural gas is leading some coal-fueled generating plants to operate at

~~increasing~~ increased levels. U.S. coal inventories at quarter end remained at levels well below the five-year average. Primarily due to a 26% increase in cooling degree days, U.S. electricity generation increased by 8.2% in the third quarter of 2005 compared to the same period in the prior year and increased 3.4% for the first nine months year-over-year according to the Edison Electric Institute.

Demand for Powder River Basin coal is increasing, particularly for our ultra-low sulfur products. The Powder River Basin represents more than half of our production, and the published reference price for high-Btu, ultra-low sulfur Powder River Basin coal has increased. We control approximately 3.4 billion tons of proven and probable reserves in the Southern Powder River Basin and sold 115.8 million tons of coal from this region during the year ended December 31, 2004, and ~~60.8~~92.9 million tons through the first ~~half~~nine months of 2005. Metallurgical coal is selling at a significant premium to steam ~~coal.~~coal and metallurgical markets remain strong with global steel production growing 6% to 7% in 2005. We expect to capitalize on the strong global market for metallurgical coal primarily through a portion of our Appalachia operations and our Australian operations, which produce mainly metallurgical coal.

We continue to target 2005 production of 210 million to 220 million tons and total sales volume of 240 million to 250 million tons, including 12 to 14 million tons of metallurgical coal. As of ~~June~~September 30, 2005, we are essentially sold out of our planned 2005 production.

Management expects strong market conditions and operating performance to overcome external cost pressures, geologic conditions and adverse port and rail performance. We are experiencing increases in operating costs related to fuel, explosives, steel, tires and healthcare, and have taken measures to mitigate the increases in these costs. Portions of the recent increase in materials costs have been due to weather-related supply disruptions in the Gulf of Mexico. In addition, historically low long-term interest rates also have a negative impact on expenses related to our actuarially determined, employee-related liabilities. We may also encounter poor geologic conditions, lower third party contract miner or brokerage source performance or unforeseen equipment problems that limit our ability to produce at forecasted levels. To the extent upward pressure on costs exceeds our ability to realize sales increases, or if we experience unanticipated operating or transportation difficulties, our operating margins would be negatively impacted. See “Cautionary Notice Regarding Forward-Looking Statements” for additional considerations regarding our outlook.

Liquidity and Capital Resources

Our primary sources of cash include sales of our coal production to customers, cash generated from our trading and brokerage activities, sales of non-core assets and financing transactions, including the sale of our accounts receivable through our securitization program. Our primary uses of cash include our cash costs of coal production, capital expenditures, interest costs and costs related to past mining obligations as well as planned acquisitions. Our ability to pay dividends, service our debt (interest and principal) and acquire new productive assets or businesses is dependent upon our ability to continue to generate cash from the primary sources noted above in excess of the primary uses. Future dividends, among other things, are subject to limitations imposed by our 6.875% Senior Notes, 5.875% Senior Notes and Senior Secured Credit Facility covenants. We typically fund all of our capital expenditure

requirements with cash generated from operations, and during 2004 and the first ~~six~~nine months of 2005, have had no borrowings outstanding under our $900.0 million revolving line of credit, which we use primarily for standby letters of credit. As of ~~June~~September 30, 2005, we had letters of credit outstanding under the facility of ~~$412.8~~$409.9 million, leaving ~~$487.2~~$490.1 million available for borrowing. This provides us with available borrowing capacity under the line of credit to fund strategic acquisitions or meet other financing needs. We were in compliance with all of the covenants of the Senior Secured Credit Facility, the 6.875% Senior Notes and the 5.875% Senior Notes as of ~~June~~September 30, 2005. On May 9, 2005, we filed a shelf registration statement on Form S-3 with the SEC, which was declared effective in June 2005. The universal shelf registration statement permits us to offer and sell from time to time up to an aggregate maximum of $3 billion of securities, including common stock, preferred stock, debt securities, warrants and units. As of September 30, 2005, no securities have been issued under the universal shelf registration statement, which remains effective.

Net cash provided by operating activities was ~~$253.6~~$422.2 million in the first ~~six~~nine months of 2005, an increase of ~~$171.6~~$269.7 million, or 176.8%, from the first ~~six~~nine months of 2004. The increase was primarily driven by stronger operational performance in 2005, ~~and the funding of our pension plans for $52.5 million in 2004 compared to $2.4 million in 2005. Net~~as net income increased ~~$83.1~~$153.0 million from the prior ~~year, and in 2004, we electively funded one~~year. Also contributing to the increase was lower funding of ~~our~~ pension plans, as we voluntarily pre-funded $50.0 ~~million.~~million in the prior year. The remainder of the increase iswas primarily due to higher working capital ~~and other changes.~~cash flows of $25.4 million.

Net cash used in investing activities was ~~$190.2~~$343.1 million during the first ~~six~~nine months of 2005 compared to ~~$524.9~~$561.5 million used in 2004. Capital expenditures were ~~$187.7~~$346.7 million in the first ~~six~~nine months of 2005, an increase of ~~$71.8~~$198.4 million over prior year. Included in the 2005 capital expenditures was a $63.5 million payment for the 327 million ton West Roundup federal coal reserve lease in the Powder River Basin, which was awarded to us in February 2005. ~~Also~~The 2005 capital expenditures also included expenditures for Twentymile mine longwall equipment, expenditures for longwall components and other projects at our Australian mines, the acquisition of new coal reserves, and the opening of new mines and upgrading of existing mines in the Midwest. Investing activities in 2005 wealso reflected $56.5 million in capital expenditures for mining assets acquired ~~mining assets,~~from Lexington Coal Company, including 70 million tons of Illinois and Indiana coal reserves, surface properties and ~~equipment, from Lexington Coal Company for $61.0 million. The purchase price was paid with $59.0 million on the closing date and an additional $2.0~~

million to be paid within 12 months of the close pending no outstanding claims related to the acquired mining assets. Capital expenditures include $56.5 million paid for reserves and equipment, and inventories include $2.5 million paid for materials and supplies.equipment. Proceeds from the disposal of assets increased ~~$37.4~~$46.6 million primarily due to higher proceeds in 2005 from the sale of PVR units and non-strategic property, reserves and equipment. In 2004, we acquired the Twentymile mine in Colorado and two mines in Australia for ~~$417.2~~$421.3 million and we made a $5.0 million ~~acquisition~~ earn-out payment related to our April 2003 acquisition of the remaining minority interest in Black Beauty Coal Company.

Net cash provided by financing activities was ~~$6.3~~$10.0 million during the first ~~six~~nine months of 2005 compared to ~~$654.7~~$693.4 million in the prior year, with the decrease primarily related to the 2004 issuance of 17.6 million shares of common stock at $22.50 per share, netting proceeds of $383.1 million; issuance of $250 million of 5.875% Senior Notes due in 2016; and the payment of debt issuance costs of $8.9 million in connection with the acquisition of the three mines discussed above. During the first ~~six~~nine months of 2005 and 2004, we made scheduled payments on our long-term debt of ~~$14.1~~$15.6 and ~~$16.7~~$28.7 million, respectively. ~~We received cash of $14.6 and $11.6 million in the first six months of 2005 and 2004, respectively, from the exercise of stock options.~~ Securitized interest in accounts receivable increased by $25.0 million in the first ~~six~~nine months of 2005 compared to an increase of ~~$50.0~~$100.0 million in 2004. We paid dividends of ~~$19.6~~$32.0 million and ~~$14.9~~$22.9 million in the first ~~six~~nine months of 2005 and 2004, respectively. In September 2005, we issued $11.5 million in notes payable as part of an asset exchange in which we acquired additional Illinois Basin coal reserves.

Contractual Obligations

The following table updates, as of ~~June~~September 30, 2005, our contractual coal reserve lease and royalty obligations presented in our 2004 Annual Report on Form 10-K. These obligations have changed due to the Federal Coal Lease bid that we won in February 2005. The first payment of $63.5 million on this lease was made during the first quarter of 2005, and future payments of the same amount will be due annually through 2009.


	Payments Due by Year
	Within		2-3		4-5		After
(Dollars in thousands)	1 Year		Years		Years		5 Years

Coal reserve lease and royalty obligations	$	142,575	$	401,642	$	334,736	$	52,996

At ~~June~~September 30, 2005, we had ~~$204.8~~$332.0 million of purchase obligations related to capital expenditures, of which $312.7 million is for 2005 and 2006. Commitments for coal reserve-related expenditures, including Federal Coal Leases, are included in the table above. Total projected capital expenditures for calendar year 2005 are approximately $450 million to $500 million. Approximately 50% of projected 2005 capital expenditures relate to the Federal Coal Leases and longwall equipment at the Twentymile Mine and longwall replacement components in Australia, and the remainder is expected to be used to purchase or develop reserves, replace or add equipment, fund cost reduction initiatives and upgrade equipment and facilities at recently acquired operations. We ~~anticipate~~have and expect to continue funding these capital expenditures primarily through operating cash flow.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees, indemnifications, financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds and our accounts receivable securitization. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.

In March 2000, we established an accounts receivable securitization program. Under the program, undivided interests in a pool of eligible trade receivables that have been contributed to our wholly-owned, bankruptcy-remote subsidiary are sold, without recourse, to a multi-seller, asset-backed commercial paper

conduit (“Conduit”). Purchases by the Conduit are financed with the sale of highly rated commercial paper. We used proceeds from the sale of the accounts receivable to repay long-term debt, effectively reducing our overall borrowing costs. The securitization program is scheduled to expire in September 2009, and the maximum amount of undivided interests in accounts receivable that may be sold to the Conduit is $225.0 million. The securitization transactions have been recorded as sales, with those accounts receivable sold to the Conduit removed from the consolidated balance sheet. In the third quarter of 2005, we renegotiated certain terms of the program, including lowering the program pricing, removing a minimum balance requirement and adding the ability to issue letters of credit under the program. We expect the new program terms to result in annual savings of approximately $2 million. The amount of undivided interests in accounts receivable sold to the Conduit was $225.0 million and $200.0 million as of ~~June~~September 30, 2005 and December 31, 2004, respectively.

There were no other material changes to our off-balance sheet arrangements during the ~~six~~nine months ended ~~June~~September 30, 2005. Material off-balance sheet arrangements are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2004. See Note 14 to our unaudited condensed consolidated financial statements included in this report for a discussion of our guarantees.

Other

Labor Agreements

The miners at our Burton mine in Australia have agreed to a new labor agreement that expires on June 9, 2008. The Western Surface Agreement of 2000, which applies to hourly workers at two mines in Arizona and one of our Colorado mines, was extended during the third quarter of 2005 for an additional two years and expires on September 1, 2007.

Risks Related to Contract Miners and Brokerage Sources

In conducting our trading, brokerage and mining operations, we utilize third party sources of coal production, including contract miners and brokerage sources, to fulfill deliveries under our coal supply agreements. Recently, certain of our brokerage sources and contract miners have experienced adverse geologic mining and/or financial difficulties that have made their delivery of coal to us at the contractual price difficult or uncertain. Our profitability or exposure to loss on transactions or relationships such as these is dependent upon the reliability (including financial viability) and price of the third-party supply, our obligation to supply coal to customers in the event that adverse geologic mining conditions restrict deliveries from our suppliers, our willingness to participate in temporary cost increases experienced by our third-party coal suppliers, our ability to pass on temporary cost increases to our customers, the ability to substitute, when economical, third-party coal sources with internal production or coal purchased in the market, and other factors.

During the first quarter of 2005, a producer ceased shipping to us on a coal supply agreement. We have filed a lawsuit for breach of contract to enforce our contractual rights and to recover damages caused by this material breach of the coal supply agreement. We have agreed to settlement terms with the producer, and the lawsuit has been stayed pending completion of the transactions in the agreed upon settlement. See Notes 3 and 12 to our unaudited condensed consolidated financial statements.

Mohave Generating Station

See Note 12 to our unaudited condensed consolidated financial statements included in this report relating to the ~~likely cessation or~~ suspension of the operations of our Black Mesa Mine and the Mohave Generating Station on December 31, 2005.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The potential for changes in the market value of our coal trading, interest rate and currency portfolios is referred to as “market risk.” Market risk related to our coal trading portfolio is evaluated using a value at risk analysis (described below). Value at risk analysis is not used to evaluate our non-trading, interest rate and currency portfolios. A description of each market risk category is set forth below. We attempt to manage market risks through diversification, controlling position sizes, and executing hedging strategies. Due to lack of quoted market prices and the long term, illiquid nature of the positions, we have not quantified market risk related to our non-trading, long-term coal supply agreement portfolio.

Coal Trading Activities and Related Commodity Price Risk

We engage in over-the-counter and direct trading of coal. These activities give rise to commodity price risk, which represents the potential loss that can be caused by an adverse change in the market value of a particular commitment. We actively measure, monitor and adjust traded position levels to remain within risk limits prescribed by management. For example, we have policies in place that limit the amount of total exposure, in value at risk terms, that we may assume at any point in time.

We account for coal trading using the fair value method, which requires us to reflect financial instruments with third parties, such as forwards, options, and swaps, at market value in our consolidated financial statements. Our trading portfolio included forwards and swaps at ~~June~~September 30, 2005 and December 31, 2004.

We perform a value at risk analysis on our coal trading portfolio, which includes over-the-counter and brokerage trading of coal. The use of value at risk allows us to quantify in dollars, on a daily basis, the price risk inherent in our trading portfolio. Value at risk represents the potential loss in value of our mark-to-market portfolio due to adverse market movements over a defined time horizon (liquidation period) within a specified confidence level. Our value at risk model is based on the industry standard variance/co-variance approach. This captures our exposure related to both option and forward positions. Our value at risk model assumes a 15-day holding period and a 95% one-tailed

confidence interval. This means that there is a one in 20 statistical chance that the portfolio would lose more than the value at risk estimates during the liquidation period.

The use of value at risk allows management to aggregate pricing risks across products in the portfolio, compare risk on a consistent basis and identify the drivers of risk. Due to the subjectivity in the choice of the liquidation period, reliance on historical data to calibrate the models and the inherent limitations in the value at risk methodology, we perform regular stress and scenario analysis to estimate the impacts of market changes on the value of the portfolio. The results of these analyses are used to supplement the value at risk methodology and identify additional market-related risks.

We use historical data to estimate our value at risk and to better reflect current asset and liability volatilities. Given our reliance on historical data, value at risk is effective in estimating risk exposures in markets in which there are not sudden fundamental changes or shifts in market conditions. An inherent limitation of value at risk is that past changes in market risk factors may not produce accurate predictions of future market risk. Value at risk should be evaluated in light of this limitation.

Our concentration of credit risk is substantially with energy producers and marketers, electric utilities, steel producers, and financial institutions. Our policy is to independently evaluate each customer’s creditworthiness prior to entering into transactions and to constantly monitor the credit extended. In the event that we engage in a transaction with a counterparty that does not meet our credit standards, we generally seek to protect our position by requiring the counterparty to provide appropriate credit enhancement. When appropriate (as determined by our credit management function), we have taken steps to reduce our credit exposure to customers or counterparties whose credit has deteriorated and who may pose a higher risk of failure to perform under their contractual obligations. These steps include obtaining letters of credit or cash collateral, requiring prepayments for shipments or the creation of customer trust accounts held for our benefit to serve as collateral in the event of a failure to pay. To reduce our credit exposure related to trading and brokerage activities, we seek to enter into netting agreements with counterparties that permit us to offset receivables and payables with such counterparties. Counterparty risk with respect to interest rate swap, foreign currency forwards and options transactions, and fuel hedging derivatives is not considered to be significant based upon the creditworthiness of the participating financial institutions.

2005 non-capital, Australian dollar-denominated cash expenditures is approximately ~~$240~~$120 million. A change in the Australian dollar/U.S. dollar exchange rate of US$0.01 (ignoring the effects of hedging) would result in an increase or decrease in our operating costs of $4.8 million per year.

Interest Rate Risk

Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we manage fixed rate debt as a percent of net debt through the use of various hedging instruments. As of ~~June~~September 30, 2005, after taking into consideration the effects of interest rate swaps, we had ~~$865.9~~$859.8 million of fixed-rate borrowings and ~~$549.0~~$547.5 million of variable-rate borrowings outstanding. A one-percentage point increase in interest rates would result in an annualized increase to interest expense of $5.5 million on our variable-rate borrowings. With respect to our fixed-rate borrowings, a one-percentage point increase in interest rates would result in a ~~$56.6~~$53.8 million decrease in the estimated fair value of these borrowings.

Other Non-trading Activities

We manage our commodity price risk for our non-trading, long-term coal contract portfolio through the use of long-term coal supply agreements, rather than through the use of derivative instruments. We sold 90% of our sales volume under long-term coal supply agreements during 2004 and 2003. As of ~~June~~September 30, 2005, we are essentially sold out of our planned 2005 production. Also as of ~~June~~September 30, 2005, we had 3520 to 4530 million tons, 95 to 105 million tons and ~~110~~165 to ~~120~~175 million tons of expected production available for sale or repricing at market prices for 2006, 2007 and ~~2007,~~2008, respectively. We have an annual metallurgical coal production capacity of 12 to 14 million tons, all of which is priced for 2005 and approximately 50% of which is priced for 2006.

Some of the products used in our mining activities, such as diesel fuel and explosives, are subject to commodity price risk. To manage some of this risk, we use a combination of forward contracts with our suppliers and financial derivative contracts, primarily swap contracts with financial institutions. In addition, we utilize derivative contracts to hedge some of our commodity price exposure. As of ~~June~~September 30, 2005, we had derivative contracts outstanding that are designated as cash flow hedges of anticipated purchases of fuel. Notional amounts outstanding under these contracts, scheduled to expire through 2007, were ~~55.7~~44.9 million gallons of heating oil and ~~27.3~~24.1 million gallons of crude oil. Overall, we have fixed prices for approximately 90% of our anticipated diesel fuel requirements in 2005.

We expect to consume ~~approximately~~ 95 to 100 million gallons of fuel per year. On a per gallon basis, based on this usage, a change in fuel prices of one cent per gallon (ignoring the effects of hedging) would result in an increase or decrease in our operating costs of approximately $1 million per year. Alternatively, a one dollar per barrel change in the price of crude oil would increase or decrease our annual fuel costs (ignoring the effects of hedging) by approximately $2.3 million.

Item 4. Controls and Procedures.

Our disclosure controls and procedures are designed to, among other things, provide reasonable assurance that material information, both financial and non-financial, and other information required under the securities laws to be disclosed is identified and communicated to senior management on a timely basis. Under the direction of the Chief Executive Officer and Executive Vice President and Chief Financial Officer, management has evaluated our disclosure controls and procedures as of ~~June~~September 30, 2005 and has concluded that the disclosure controls and procedures were effective.

During the second quarter of 2005, we completed the integration of our Australian operations acquired in 2004 into our system of internal control over financial reporting. We implemented new general ledger and reporting systems in our Australian operations and will complete our assessment of the effectiveness of related controls over financial reporting by the end of 2005. Other than changes made in our Australian operations,Additionally, during the most recent fiscal quarter, there have been no ~~other~~ changes to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Item 4. Submission of Matters to a Vote of Security Holders.~~

Peabody Energy Corporation’s annual meeting of stockholders was held on May 6, 2005. The shares of common stock eligible to vote were based on a record date of March 15, 2005 and do not reflect the March 30, 2005 two-for-one stock split. Four Class I directors were elected to serve for three-year terms expiring in 2008. A tabulation of votes for each director is set forth below:

For Withheld
B.R. Brown 59,711,173 1,986,575
Henry Givens, Jr. 58,745,000 2,952,748
James R. Schlesinger 45,976,481 15,721,267
Sandra Van Trease 59,716,590 1,981,158

Stockholders also voted to ratify Ernst & Young LLP as our independent registered public accounting firm for 2005 and voted to approve an increase in the number of authorized common stock shares from 150,000,000 shares to 400,000,000 shares and number of total authorized capital stock shares from 200,000,000 shares to 450,000,000 shares. Three stockholder proposals were voted on at the annual meeting, including a proposal regarding director independence submitted by Amalgamated Bank LongView MidCap 400 Index Fund, a proposal to declassify the Board for the purpose of director elections submitted by the AFL-CIO Reserve Fund, and a proposal to require a majority of affirmative votes for the election of director nominees submitted by the Sheet Metal Workers’ National Pension Fund. The result of the vote on each of these matters is set forth below:

Broker
For Against Abstentions Non-votes
Ratification of independent registered public accounting firm 61,153,591 383,733 160,424 —
Approval of increase in number of authorized common stock shares 57,046,627 4,636,333 14,743 —
Proposal regarding director independence 22,560,474 30,184,555 84,274 8,868,445
Proposal regarding declassification of Board 37,246,968 15,482,029 100,305 8,868,445
Proposal regarding majority vote for election of director nominees 19,465,711 33,061,714 301,877 8,868,445

Each of the shareholder proposals submitted at the annual meeting was advisory in nature. The Nominating & Corporate Governance Committee, which consists entirely of independent directors, is evaluating the impact of the vote on these proposals and will recommend a course of action for consideration by the full Board.

Item 6. Exhibits.

See Exhibit Index at page 4447 of this report.

4245

EXHIBIT INDEX

The exhibits below are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.


Exhibit
No.		Description of Exhibit

3.1		Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-1 Registration Statement No. 333-55412).

3.2		Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 16, 2005).

3.3*3.3		Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of Peabody Energy ~~Corporation.~~Corporation (incorporated by reference to Exhibit 3.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed on August 8, 2005).

10.14.1		~~Federal Coal Lease WYW151134 effective May 1, 2005: West Roundup.~~6 7/8% Senior Notes Indenture Due 2013 Seventh Supplemental Indenture, dated as of September 30, 2005, among the Registrant, the Guaranteeing Subsidiaries (as defined therein), and US Bank National Association, as trustee.

~~10.2~~4.2*		5 7/8% Senior Notes Due 2016 Fifth Supplemental Indenture, dated as of September 30, 2005, among the Registrant, the Guaranteeing Subsidiaries (as defined therein), and U.S. Bank National Association, as trustee.

10.1		Indemnification Agreement dated ~~April 8,~~July 21, 2005 by and between Peabody Energy Corporation and ~~Gregory H. Boyce~~John F. Turner (incorporated by reference to Exhibit 10.1 toof the Company’s Current Report on Form 8-K filed on ~~April 14,~~August 5, 2005).

10.2*		Amended and Restated Receivables Purchase Agreement, dated as of September 30, 2005, by and among Seller, Registrant, the Sub-Servicers named therein, Market Street Funding Corporation, as Issuer, PNC Bank, National Association, as Administrator and as LC Bank, and financial institutions from time to time parties thereto, as LC Participants.

31.1*		Certification of periodic financial report by Peabody Energy Corporation’s Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of periodic financial report by Peabody Energy Corporation’s Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Peabody Energy Corporation’s Chief Executive Officer.

32.2*		Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Peabody Energy Corporation’s Executive Vice President and Chief Financial Officer.


*		Filed herewith.

4447


			Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Condensed Consolidated Statements of Operations for the Quarters and ~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004			2

Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2005 (unaudited) and December 31, 2004			3

Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004			4

Notes to Unaudited Condensed Consolidated Financial Statements			5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2528

Item 3. Quantitative and Qualitative Disclosures About Market Risk			3942

Item 4. Controls and Procedures			4144

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			41

~~Item 4. Submission of Matters to a Vote of Security Holders~~			4245

Item 6. Exhibits			4245
~~Certificate of Amendment of 3rd Amended/Restated Certificate of Incorporation~~Seventh Supplemental Indenture
~~Coal Lease~~Fifth Supplemental Indenture
Amended and Restated Receivables Purchase Agreement
Certification of CEO Pursuant to Rule ~~13a-14(a)~~13A-14(A)
Certification of EVP/CFO Pursuant to Rule ~~13a-14(a)~~13A-14(A)
Certification of CEO Pursuant to 18 U.S.C. Section 1350
Certification of EVP/CFO Pursuant to 18 U.S.C. 18 Section 1350


	June 30,		December 31,		September 30,		December 31,
	2005		2004		2005		2004
Materials and supplies	$	62,883	$	57,467	$	64,718	$	57,467
Raw coal		15,510		17,590		15,174		17,590
Advance stripping		224,069		197,225		230,154		197,225
Saleable coal		61,099		51,327		58,804		51,327

Total	$	363,561	$	323,609	$	368,850	$	323,609


													Quarter Ended						Nine Months Ended
	Quarter Ended						Six Months Ended						September 30,						September 30,
	June 30,						June 30,						2005			2004			2005			2004
	2005			2004			2005			2004
Service cost for benefits earned	$	2,963		$	3,055		$	5,926		$	5,928		$	2,964		$	3,147		$	8,890		$	9,122
Interest cost on projected benefit obligation		11,373			10,738			22,746			21,337			11,373			11,027			34,119			32,594
Expected return on plan assets		(13,203	)		(12,958	)		(26,406	)		(24,323	)		(13,203	)		(12,573	)		(39,609	)		(37,238	)
Amortization of prior service cost		(4	)		64			(8	)		128			(4	)		64			(12	)		191
Amortization of net loss		5,948			5,401			12,294			11,030			6,147			5,477			18,441			16,573

Net periodic pension costs		7,077			6,300			14,552			14,100			7,277			7,142			21,829			21,242
Curtailment charges		—			—			9,527			—			—			—			9,527			—

Total pension costs	$	7,077		$	6,300		$	24,079		$	14,100		$	7,277		$	7,142		$	31,356		$	21,242


													Quarter Ended						Nine Months Ended
	Quarter Ended						Six Months Ended						September 30,						September 30,
	June 30,						June 30,						2005			2004			2005			2004
	2005			2004			2005			2004
Service cost for benefits earned	$	1,325		$	1,180		$	2,649		$	2,400		$	1,355		$	908		$	4,004		$	3,308
Interest cost on accumulated postretirement benefit obligation		18,175			15,797			36,351			31,591			18,154			16,089			54,505			47,680
Amortization of prior service cost		(1,325	)		(3,308	)		(2,649	)		(6,615	)		(1,355	)		(3,308	)		(4,004	)		(9,923	)
Amortization of actuarial losses		6,575			1,063			13,150			1,837			6,579			918			19,729			2,755

Net periodic postretirement benefit costs	$	24,750		$	14,732		$	49,501		$	29,213		$	24,733		$	14,607		$	74,234		$	43,820



*		During the first quarter of 2004, prior to the Company’s acquisition, the Australian underground mine acquired by the Company in April 2004 experienced a roof collapse on a portion of the active mine face, resulting in the temporary suspension of mining activities. Due to the inability to ship during a portion of this downtime, costs to return the mine to operations and shipping limits imposed as the result of unrelated restrictions of capacity at a third party loading facility, the Australian operation experienced a pro forma net loss in the quarter immediately prior to acquisition.


Year of	Percentage			Percentage
Expiration	of Portfolio			of Portfolio
2005		91	%		48	%
2006		6	%		42	%
2007		1	%		10	%
2008		2	%

		100	%		100	%



⁽¹⁾		For the nine months ended September 30, 2005, Western U.S. Mining results include a charge related to the reserves established for disputed legal fees billed to customers as discussed in Note 12.

⁽²⁾		Adjusted EBITDA is defined as income from continuing operations before deducting early debt extinguishment costs, net interest expense, income taxes, minority interests, asset retirement obligation expense and depreciation, depletion and amortization.

⁽³⁾		Trading and Brokerage results include a benefit for the quarter and a charge for the ~~six~~nine months ended ~~June~~September 30, 2005 related to contract losses and a settlement agreement as discussed in Note 3.

⁽⁴⁾⁽³⁾		Corporate and Other results include the gains on the ~~sales~~disposal or exchange of ~~PVR units~~assets discussed in Note 3.

	•		Remove or mitigate the effects on the environment at various sites from the disposal or release of certain substances;

	•		Perform remediation work at such sites; and

	•		Pay damages for loss of use and non-use values.


	Quarter Ended June 30, 2005
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Total revenues	$	—		$	865,475		$	264,750		$	(21,439	)	$	1,108,786
Costs and expenses:
Operating costs and expenses		(4,508	)		692,203			214,018			(21,439	)		880,274
Depreciation, depletion and amortization		—			70,429			8,880			—			79,309
Asset retirement obligation expense		—			6,441			721			—			7,162
Selling and administrative expenses		952			37,571			2,148			—			40,671
Other operating income:
Net gain on disposal of assets		—			(16,347	)		(105	)		—			(16,452	)
Income from equity affiliates		—			(11,487	)		—			—			(11,487	)
Interest expense		38,328			7,523			5,032			(25,678	)		25,205
Interest income		(5,172	)		(16,030	)		(6,286	)		25,678			(1,810	)

Income (loss) before income taxes and minority interests		(29,600	)		95,172			40,342			—			105,914
Income tax provision (benefit)		(18,106	)		19,858			8,410			—			10,162
Minority interests		—			498			—			—			498

Net income (loss)	$	(11,494	)	$	74,816		$	31,932		$	—		$	95,254


	Quarter Ended June 30, 2004
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Total revenues	$	—		$	781,274		$	153,204		$	(17,707	)	$	916,771
Costs and expenses:
Operating costs and expenses		(161	)		636,925			138,629			(17,707	)		757,686
Depreciation, depletion and amortization		—			67,780			5,240			—			73,020
Asset retirement obligation expense		—			8,158			469			—			8,627
Selling and administrative expenses		234			31,013			897			—			32,144
Other operating income:
Net gain on disposal of assets		—			(1,877	)		(30	)		—			(1,907	)
Income from equity affiliates		—			(4,626	)		—			—			(4,626	)
Interest expense		38,435			33,835			648			(48,323	)		24,595
Interest income		(21,691	)		(23,441	)		(4,400	)		48,323			(1,209	)

Income (loss) before income taxes and minority interests		(16,817	)		33,507			11,751			—			28,441
Income tax provision (benefit)		(16,359	)		915			250			—			(15,194	)
Minority interests		—			390			—			—			390

Income (loss) from continuing operations		(458	)		32,202			11,501			—			43,245
Loss from discontinued operations, net of taxes		—			(1,764	)		—			—			(1,764	)

Net income (loss)	$	(458	)	$	30,438		$	11,501		$	—		$	41,481


	(Unaudited)				Increase					(Unaudited)				Increase
	Quarter Ended June 30,				to Revenues					Quarter Ended September 30,				to Revenues
	2005		2004		$		%			2005		2004		$		%
			(Dollars in thousands)							(Dollars in thousands)
Sales	$	1,089,817	$	898,582	$	191,235		21.3	%	$	1,191,282	$	895,156	$	296,126		33.1	%
Other revenues		18,969		18,189		780		4.3	%		32,228		23,833		8,395		35.2	%

Total revenues	$	1,108,786	$	916,771	$	192,015		20.9	%	$	1,223,510	$	918,989	$	304,521		33.1	%

	•		ana $6.9 million increase in past mining obligations expense, ~~of $10.2 million,~~ primarily related to higher retiree health care costs. The increase in retiree health care costs was primarily associated with actuarial assumptions such as higher trend rates, lower interest discount assumptions and ~~the~~higher amortization of actuarial losses in 2005; and

	•		~~an $8.5~~a $23.4 million increase in selling and administrative expenses primarily related to ~~higher annual~~an increase in performance-based incentives ($19.6 million), principally long-term plans that are driven by total shareholder returns. Our share price increased 62% during the quarter and ~~long-term performance-based incentives,~~184% in the last twelve months, significantly outperforming market benchmarks and the peer group. The remaining increase is from higher outside services costs related to ~~business development and~~ support services, acquisitions and ~~higher administrative costs in our Australian operations.~~regulatory compliance.

	•		an increase in past mining obligations expense of ~~$21.9~~$28.8 million, primarily related to higher retiree health care costs. The increase in retiree health care costs was ~~due to~~actuarially driven by higher trend rates, lower interest discount assumptions and ~~the~~higher amortization of actuarial losses in 2005; and

	•		~~an $18.5~~a $41.9 million increase in selling and administrative expenses primarily related to higher ~~annual and long-term~~ performance-based incentives ($30.0 million), principally long-term plans that are driven by total shareholder returns. Our share price increased 109% during the first nine months of 2005, significantly outperforming benchmarks and the peer group. The remaining increase is from higher personnel and outside services costs, which are being driven by ~~business development initiatives~~support services, acquisitions and ~~the support and management of the Twentymile Mine and Australia operations acquired during 2004.~~regulatory compliance.


	For		Withheld
B.R. Brown		59,711,173		1,986,575
Henry Givens, Jr.		58,745,000		2,952,748
James R. Schlesinger		45,976,481		15,721,267
Sandra Van Trease		59,716,590		1,981,158


							Broker
	For		Against		Abstentions		Non-votes
Ratification of independent registered public accounting firm		61,153,591		383,733		160,424		—
Approval of increase in number of authorized common stock shares		57,046,627		4,636,333		14,743		—
Proposal regarding director independence		22,560,474		30,184,555		84,274		8,868,445
Proposal regarding declassification of Board		37,246,968		15,482,029		100,305		8,868,445
Proposal regarding majority vote for election of director nominees		19,465,711		33,061,714		301,877		8,868,445


		PEABODY ENERGY CORPORATION

Date: ~~August~~November 8, 2005	By:	/s/ RICHARD A. NAVARRE

	Richard A. Navarre
	Executive Vice President and Chief Financial Officer
	(On behalf of the registrant and as Principal Financial Officer)