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

For the quarterly period ended June 30, 2004

Commission File Number 1-16463

PEABODY ENERGY CORPORATION

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 July 31, 2004: Common Stock, par value $0.01 per share, 64,213,163, shares outstanding.

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

PEABODY ENERGY CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

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PEABODY ENERGY CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

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PEABODY ENERGY CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

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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 unaudited condensed consolidated financial statements as of June 30, 2004 and for the quarters and six months ended June 30, 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 statement of operations for the six months ended June 30, 2003 contains the cumulative effect of accounting changes, net of taxes, related to the adoption of new standards regarding asset retirement obligations, the classification of gains and losses on debt extinguishment, and guarantor’s accounting for guarantees, including indirect guarantees of indebtedness of others. 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 and six months ended June 30, 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.” The revised Statement retains the disclosure requirements contained in the original FASB Statement No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” which it replaces. The statement, as revised, requires additional disclosures to those in the original FASB Statement No. 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.

     In May 2004, in response to the federal Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Act), the FASB finalized guidance on how employers should account for the Medicare Act (FSP FAS 106-2). The FASB guidance did not impact the Company’s accounting for the Medicare Act as initially applied under FSP FAS 106-1, the effects of which were described in the notes to the Company’s 2003 audited financial statements.

     Emerging Issues Task Force (“EITF”) Issue 04-02, effective April 30, 2004, states that mineral rights are 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 June 30, 2004, leased coal interests and advance royalties are presented in the same manner as they had been before December 2003, and are 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, the Company 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 Coal International AG (described in Note 4). Net proceeds from these offerings totaled $627.8 million, which funded the $438 million purchase price of the Australia and Colorado coal operations from RAG Coal International AG, and the remaining $189.8 million will be used for the planned acquisition of a 25.5% interest in the Paso

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Diablo Mine in Venezuela and general corporate purposes. In addition, a secondary equity offering was completed in which the Company’s largest stockholder 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 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 3.25% at June 30, 2004), and expands maximum borrowings under the revolving credit facility from $600.0 million to $900.0 million.

As of June 30, 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 stockholder 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) Business Combinations

     On April 15, 2004, the Company purchased, through two separate agreements, three coal operations from RAG Coal International AG. The combined purchase price, including related costs and fees, of $438 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 two Australian mines increased the Company’s metallurgical coal capacity to 13 to 15 million tons per year and the Company believes they are well positioned to access the growing, high-margin metallurgical coal product markets in the Pacific Rim. The Twentymile Mine has been perennially one of the largest and most productive underground mines in the United States. The results of operations of the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

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 segment from the April 15, 2004 purchase date.

     The preliminary purchase accounting allocations related to the acquisition have been recorded in the accompanying condensed consolidated financial statements as of, and for periods subsequent to, April 15, 2004. The final valuation of the net assets acquired is expected to be finalized once third-party appraisals are completed. The Company expects the completion of these appraisals prior to year end. Given the size and complexity of the acquisition, the fair valuation of certain assets is still preliminary. Additionally, adjustment to the estimated liabilities assumed in connection with the acquisition may still be required.

     The following table summarizes the preliminary estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition (dollars in thousands):

     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 each 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 those periods (dollars in thousands):

*

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 an unrelated collapse of a third party loading facility, the pro forma Australian operation experienced a net loss in the quarter immediately prior to acquisition.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

     On June 10, 2004, the Company signed a definitive agreement 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, for $37.5 million in cash. The purchase price is subject to certain conditions that, if fulfilled, would lead to an expected closing within the next several months. 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.

(5) Coal Inventory

     Inventories consisted of the following (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 June 30, 2004 is set forth below (dollars in thousands):

     Ninety-seven percent of the contracts in the Company’s trading portfolio as of June 30, 2004 were valued utilizing prices from over-the-counter market sources, adjusted for coal quality, and three percent of the Company’s contracts were valued based on similar market transactions.

     As of June 30, 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 8.3 million tons and 6.8 million tons for the quarters ended June 30, 2004 and 2003, respectively, and 18.3 million tons and 23.4 million tons for the six months ended June 30, 2004 and 2003, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

(7) Earnings Per Share and Stockholders’ Equity

Weighted Average Shares Outstanding

     A reconciliation of weighted average shares outstanding follows:

     For the quarter and six months ended June 30, 2003, options were excluded from the diluted earnings per share calculation because they were anti-dilutive due to the Company’s net loss.

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 granted stock options during each of the quarters ended June 30, 2004 and 2003, and $0.1 million and $0.2 million of compensation expense for equity-based compensation during the six months ended June 30, 2004 and 2003, respectively. The following table reflects pro forma net income (loss) and basic and diluted earnings (loss) 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):