UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2004

Commission File Number 1-16463

PEABODY ENERGY CORPORATION

(314) 342-3400

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.       x Yes               o No

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

Number of shares outstanding of each of the Registrant’s classes of Common Stock, as of April 30, 2004: Common Stock, par value $0.01 per share, 63,947,245 shares outstanding.

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

PEABODY ENERGY CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

2

PEABODY ENERGY CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

3

PEABODY ENERGY CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

4

PEABODY ENERGY CORPORATION

(1)

Basis of Presentation

     The condensed consolidated financial statements include the accounts of Peabody Energy Corporation (the “Company”) and its controlled affiliates. Earnings of unconsolidated affiliates are included in “Other Revenues.” All significant intercompany transactions, profits and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation.

     The accompanying condensed consolidated financial statements as of March 31, 2004 and for the quarters ended March 31, 2004 and 2003, 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, 2003 has been derived from the Company’s audited consolidated balance sheet. The results of operations for the quarter ended March 31, 2004 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2004.

(2)

New Pronouncements

     Effective December 31, 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits (an amendment of Financial Accounting Standards Board (“FASB”) statements No. 87, 88 and 106).” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, “Employers’ Accounting for Pensions,” No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” This Statement retains the disclosure requirements contained in FASB Statement No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” which it replaces. It requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The interim disclosures required by SFAS No. 132 (revised 2003) are included in Note 9 to the Company’s unaudited condensed consolidated financial statements.

     Emerging Issues Task Force (“EITF”) Issue 04-02 addresses the issue of whether mineral rights are tangible or intangible assets. FASB Statement No. 141, “Business Combinations,” requires the acquirer in a business combination to allocate the cost of the acquisition to the acquired assets and liabilities. At the March 17-18, 2004 meeting, the EITF reached a consensus that mineral rights (defined as the legal right to explore, extract and retain at least a portion of the benefits from mineral deposits) are tangible assets. As a result of the EITF’s consensus, the FASB issued FASB Staff Position (“FSP”) Nos. FAS 141-a and FAS 142-a, “Interaction of FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, and EITF Issue No. 04-02, Whether Mineral Rights Are Tangible or Intangible Assets,” which amend SFAS No. 141 and 142 and results in the classification of mineral rights as tangible assets. Prior to this consensus, the Company provided a separate line item for leased coal interests and advance royalties within the consolidated (audited) balance sheet as of December 31, 2003. As of March 31, 2004, leased coal interests and advance royalties are now included within property, plant, equipment and mine development within the unaudited condensed consolidated balance sheet. Prior year amounts have been reclassified to conform with the current year presentation.

(3)

Debt and Equity Offerings

     In March 2004, we completed the debt and equity offerings described below. The offerings were made under the Company’s universal shelf registration statement on Form S-3 that had been declared effective by the U.S. Securities and Exchange Commission. The universal shelf registration statement remains effective with a remaining capacity of $602.9 million. The primary purpose of the debt and primary equity offerings was to fund the April 2004 purchases of coal operations from RAG International AG (as described in Note 4). Net proceeds from these offerings totaled $627.8 million, which funded the $432 million purchase price of the Australia and Colorado coal operations from RAG International AG (“RAG”), and the remaining $195.8 million will be used for general corporate purposes.

5

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

In addition, a secondary equity offering was completed in which the Company’s largest shareholder sold its remaining shares of common stock, as described below.

Debt Offering

     On March 23, 2004, the Company completed an offering of $250.0 million of 5.875% Senior Notes due 2016. The notes are senior unsecured obligations of the Company and rank equally with all of the Company’s other senior unsecured indebtedness. Interest payments are scheduled to occur on April 15 and October 15 of each year, and commenced on April 15, 2004. The notes, which are unsecured, are guaranteed by the Company’s “restricted subsidiaries” as defined in the note indenture. The note indenture contains covenants which, among other things, limit the Company’s ability to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, make other restricted payments and investments, create liens, sell assets and merge or consolidate with other entities. The notes are redeemable prior to April 15, 2009 at a redemption price equal to 100% of the principal amount plus a make-whole premium (as defined in the indenture) and on or after April 15, 2009 at fixed redemption prices as set forth in the indenture. Net proceeds from the offering, after deducting underwriting discounts and expenses, were $244.7 million.

Amendment to Senior Secured Credit Facility

     On March 9, 2004, the Company entered into an amendment to the Company’s senior secured credit facility. This amendment reduces the interest rate payable on the existing term loan under the senior credit facility from LIBOR plus 2.5% to LIBOR plus 1.75% (the applicable rate was 2.86% at March 31, 2004), and expands maximum borrowings under the revolving credit facility from $600.0 million to $900.0 million.

As of March 31, 2004 and December 31, 2003, our total indebtedness consisted of the following (dollars in thousands):

Equity Offering

     On March 23, 2004, the Company completed a concurrent offering of 8,825,000 shares of the Company’s common stock, priced at $45.00 per share. Net proceeds from the offering, after deducting underwriting discounts and commissions and other expenses, were $383.1 million.

Secondary Offering

     On March 23, 2004, concurrent with the primary equity offering described above, Lehman Brothers Merchant Banking Partners II L.P. and affiliates (“Merchant Banking Fund”), the Company’s largest shareholder as of that date, sold 10,267,169 shares of the Company’s common stock. The Company did not receive any proceeds from the sale of shares by Merchant Banking Fund. This offering completed Merchant Banking Fund’s planned exit strategy and eliminated the remaining portion of their beneficial ownership of the Company.

(4)

Subsequent Event

     On April 15, 2004, we purchased, through two separate agreements, three coal operations from RAG Coal International AG. The combined purchase price of $432 million was funded from the Company’s equity and debt offerings as discussed in Note 3. The purchases include two mines in Queensland, Australia that collectively are expected to produce 7 to 8 million tons per year of metallurgical coal, and the Twentymile Mine in Colorado, which is expected to produce 8 million tons per year of steam coal. The Company continues to have a memorandum of understanding with RAG Coal International AG for the purchase of a 25.5% interest in Carbones del Guasare, S.A., a joint venture that includes Anglo American plc and a Venezuelan governmental partner. Carbones del Guasare operates the Paso Diablo surface mine in northwestern Venezuela, which produces 7 to 7.5 million tons per year of coal for electricity generators and steel producers.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

(5)

Coal Inventory

     Inventories consisted of the following at (dollars in thousands):

(6)

Assets and Liabilities from Coal Trading Activities

     The fair value of coal trading derivatives (and related hedged coal contracts) as of March 31, 2004 is set forth below (dollars in thousands):

     Ninety-eight percent of the contracts in the Company’s trading portfolio as of March 31, 2004 were valued utilizing prices from over-the-counter market sources, adjusted for coal quality, and two percent of the Company’s contracts were valued based on similar market transactions.

     As of March 31, 2004, the timing of the estimated future realization of the value of the Company’s trading portfolio was as follows:

     The Company’s coal trading operations traded 9.9 million tons and 16.6 million tons for the quarters ended March 31, 2004 and 2003, respectively.

(7)

Earnings Per Share and Stockholders’ Equity

       Weighted Average Shares Outstanding

     A reconciliation of weighted average shares outstanding follows:

     For the quarter ended March 31, 2003, options were excluded from the diluted earnings per share calculation because they were anti-dilutive.

7

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Stock Compensation

     These interim financial statements include the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” The Company applies Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for its equity incentive plans. The Company recorded $0.1 million of compensation expense for equity-based compensation during each of the quarters ended March 31, 2004 and 2003. The following table reflects pro forma net income and basic and diluted earnings per share had compensation cost been determined for the Company’s non-qualified and incentive stock options based on the fair value at the grant dates consistent with the methodology set forth under SFAS No. 123, “Accounting for Stock-Based Compensation"(dollars in thousands, except per share data):

Treasury Stock

     During the quarter ended March 31, 2004, the Company received 4,793 shares of common stock as consideration for employees’ exercise of stock options. The value of the common stock tendered by employees to exercise stock options was based upon the closing price on the dates of the respective transactions. The common stock tenders were in accordance with the provisions of the 1998 Stock Purchase and Option Plan, which was previously approved by the Company’s Board of Directors.

(8)

Comprehensive Income

The following table sets forth the after-tax components of comprehensive income (loss) for the quarters ended March 31, 2004 and 2003 (dollars in thousands):

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

(9)		Pension and Postretirement Benefit Costs
		Components of Net Periodic Pension Costs

     Net periodic pension costs included the following components (dollars in thousands):

Contributions

     The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute $13.1 million to its funded pension plans and make $1.0 million in expected benefit payments attributable to its unfunded pension plans during 2004. As of March 31, 2004, $0.5 million of contributions have been made to the funded pension plans and $0.3 million of expected benefit payments attributable to the unfunded pension plans have been made. The Company presently anticipates it will contribute $60.2 million in total to its funded pension plans during 2004. The revised contribution consists of an April 2004 contribution of $50.0 million to the Peabody Plan, which covers substantially all salaried U.S. employees and eligible hourly employees at certain Peabody Holding Company subsidiaries, and a planned $10.2 million contribution, which is a $2.2 million reduction from December 31, 2003 expectations due to pension funding law changes enacted in early April 2004, to the Western Plan, which covers eligible employees who are represented by the United Mine Workers of America under the Western Surface Agreement of 2000.

Components of Net Periodic Postretirement Benefits Costs

     Net periodic postretirement benefits costs included the following components (dollars in thousands):

Cash Flows

     The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to pay $72.5 million attributable to its postretirement benefit plans during 2004. As of March 31, 2004, payments of $20.2 million attributable to its postretirement benefit plans have been made.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

(10)

Segment Information

     The Company reports its operations primarily through the following reportable operating segments: “Eastern U.S. Mining,” “Western U.S. Mining,” “Australian Mining” and “Trading and Brokerage.” The principal business of the Eastern U.S. Mining, Western U.S. Mining and Australian Mining segments is mining, preparation and sale of steam coal, sold primarily to electric utilities, and metallurgical coal, sold to steel and coke producers. Eastern U.S. Mining operations are characterized by predominantly underground mining extraction processes, higher sulfur content and Btu of coal, and shorter shipping distances from the mine to the customer. Conversely, 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. Geologically, Eastern operations mine bituminous and Western operations mine subbituminous coal deposits. 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 and revenues and expenses related to our other commercial activities such as coalbed methane, generation development and resource management.

     Operating segment results for the quarters ended March 31, 2004 and 2003 are as follows (dollars in thousands):