UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number 1-16463

Peabody Energy Corporation

(Exact name of registrant as specified in its charter)

(314) 342-3400

Registrant’s telephone number, including area code

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

None

      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.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes þ

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

      Aggregate market value of the voting stock held by non-affiliates of the Registrant, calculated using the closing price on June 30, 2004: Common Stock, par value $0.01 per share, $2,777.9 million.

      Number of shares outstanding of each of the Registrant’s classes of Common Stock, as of February 28, 2005: Common Stock, par value $0.01 per share, 65,327,329 shares outstanding, or 130,654,658 shares outstanding after giving retroactive effect to the registrant’s two-for-one stock split, effective March 30, 2005 for shareholders of record on March 16, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Peabody Energy Corporation (the “Company”) Annual Report for the year ended December 31, 2004 are incorporated by reference into Part II hereof. Portions of the Company’s Proxy Statement to be filed with the SEC in connection with the Company’s Annual Meeting of Stockholders to be held on May 6, 2005 (the “Company’s 2005 Proxy Statement”) are incorporated by reference into Part III hereof. Other documents incorporated by reference in this report are listed in the Exhibit Index of this Form 10-K.

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, such statements in 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:

      When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and the documents incorporated by reference. We will not update these statements unless the securities laws require us to do so.

TABLE OF CONTENTS

PART I

Overview

      We are the largest private-sector coal company in the world. During the year ended December 31, 2004, we sold 227.2 million tons of coal. During this period, we sold coal to over 300 electricity generating and industrial plants in 16 countries. Our coal products fuel more than 10% of all U.S. electricity generation and 3% of worldwide electricity generation. At December 31, 2004, we had 9.3 billion tons of proven and probable coal reserves. The 9.3 billion tons of proven and probable coal reserves did not include approximately 300 million tons (based on Bureau of Land Management estimates) of Powder River Basin reserves we recently gained control of through a successful Federal Coal Lease bid.

      We own, through our subsidiaries, majority interests in 32 coal operations located throughout all major U.S. coal producing regions and in Australia. Additionally, we own interests in four mines through joint venture arrangements. We shipped 73% of our U.S. mining operations’ coal sales from the western United States during the year ended December 31, 2004 and the remaining 27% from the eastern United States. Most of our production in the western United States is low-sulfur coal from the Powder River Basin. Our overall western U.S. coal production has increased from 37.0 million tons in fiscal year 1990 to 142.6 million tons during 2004, representing a compounded annual growth rate of 10%. In the West, we own and operate mines in Arizona, Colorado, New Mexico and Wyoming. In the East, we own and operate mines in Illinois, Indiana, Kentucky and West Virginia. We own 4 mines in Queensland, Australia, one of which was acquired in 2002, two were acquired during April 2004 and a fourth that was opened after the 2004 acquisition. Most of our Australian production is low-sulfur, metallurgical coal. We generated 79% of our production for the year ended December 31, 2004 from non-union mines.

      For the year ended December 31, 2004, 90% of our sales were to U.S. electricity generators, 7% were to customers outside the United States and 3% were to the U.S. industrial sector. Approximately 90% of our coal sales during the year ended December 31, 2004 were under long-term (one year or greater) contracts. Our sales backlog, including backlog subject to price reopener and/or extension provisions, was over one billion tons as of December 31, 2004. The average volume weighted remaining term of our long-term contracts was approximately 3.4 years, with remaining terms ranging from one to 17 years. As of December 31, 2004, we had 5 to 10 million tons, 65 to 75 million tons and 130 to 140 million tons for 2005, 2006 and 2007, respectively, of expected production (including steam and metallurgical coal production) available for sale or repricing at market prices. We have an annual metallurgical coal production capacity of 12 to 14 million tons. Approximately 90% of our expected 2005 metallurgical coal production is priced, and our 2006 metallurgical production is mostly unpriced. The portion of 2006 that is priced primarily relates to tonnage committed at our Australian operations for delivery in the period from April 1, 2005 to March 31, 2006, the traditional contract year for many customers purchasing seaborne metallurgical coal. The metallurgical production we priced for 2005 and 2006 is priced, on average, at levels significantly above historical metallurgical coal prices.

      In addition to our mining operations, we market, broker and trade coal. Our total tons traded were 33.4 million for the year ended December 31, 2004. Our other energy related businesses include the development of mine-mouth coal-fueled generating plants, the management of our vast coal reserve and real estate holdings, coalbed methane production and transportation services.

History

      Peabody, Daniels and Co. was founded in 1883 as a retail coal supplier, entering the mining business in 1888 as Peabody & Co. with the opening of our first coal mine in Illinois. In 1926, Peabody Coal Company was listed on the Chicago Stock Exchange and, beginning in 1949, on the New York Stock Exchange.

      In 1955, Peabody Coal Company, primarily an underground mine operator, merged with Sinclair Coal Company, a major surface mining company. Peabody Coal Company was acquired by Kennecott Copper Company in 1968. The company was then sold to Peabody Holding Company in 1977, which was formed by a consortium of companies.

      During the 1980s, Peabody grew through expansion and acquisition, opening the North Antelope Mine in Wyoming’s coal-rich Powder River Basin in 1983 and the Rochelle Mine in 1985, and completing the acquisitions of the West Virginia coal properties of ARMCO Steel and Eastern Associated Coal Corp., which included seven operating mines and substantial low-sulfur coal reserves in West Virginia.

      In July 1990, Hanson, PLC acquired Peabody Holding Company. In the 1990’s, Peabody continued to grow through expansion and acquisitions. In February 1997, Hanson spun off its energy-related businesses, including Eastern Group and Peabody Holding Company, into The Energy Group, plc. The Energy Group was a publicly traded company in the United Kingdom and its American Depository Receipts (ADR’s) were publicly traded on the New York Stock Exchange.

      In May 1998, Lehman Brothers Merchant Banking Partners II L.P. and affiliates (“Merchant Banking Fund”), an affiliate of Lehman Brothers Inc. (“Lehman Brothers”), purchased Peabody Holding Company and its affiliates, Peabody Resources Limited and Citizens Power LLC in a leveraged buyout transaction that coincided with the purchase by Texas Utilities of the remainder of The Energy Group.

      In August 2000, Citizens Power, our subsidiary that marketed and traded electric power and energy-related commodity risk management products, was sold to Edison Mission Energy.

      In January 2001, we sold our Peabody Resources Limited (in Australia) operations to Coal & Allied, a 71%-owned subsidiary of Rio Tinto Limited for $575 million (including debt assumed by the buyer).

      In April 2001, we changed our name to Peabody Energy Corporation (“Peabody”), reflecting our position as a premier energy supplier. In May 2001, after having reduced the debt incurred in the leveraged buyout by more than $1 billion, we completed an initial public offering of common stock, and the Company’s shares began trading on the New York Stock Exchange under the ticker symbol “BTU,” the globally recognized symbol for energy.

      In April 2004, we acquired three coal operations from RAG Coal International AG for a combined purchase price of $421 million, net of cash received in the transaction. The purchase included two mines in Queensland, Australia that produce a combined 7 to 8 million tons per year of metallurgical coal, and the Twentymile Mine in Colorado, which historically produced 7 to 8 million tons per year of low-sulfur, steam coal. In December 2004, we completed the purchase of a 25.5% equity interest in Carbones del Guasare, S.A. from RAG Coal International AG for a net purchase price of $32.5 million. Carbones del Guasare, a joint venture that also includes Anglo American plc and a Venezuelan governmental partner, operates the Paso Diablo surface mine in northwestern Venezuela, which produces approximately 7 million tons per year of coal for electricity generators and steel producers.

      From 1990 to 2004, Peabody redefined its business, as the company transformed itself into a more productive, low-cost, low-sulfur energy company, tripling its productivity and reducing costs 32% while improving safety performance 74%. In the 1990’s, we established our three core strategies: 1) managing safe, low-cost operations; 2) utilizing world-class sales and trading practices; and 3) creating value from our natural resource position.

Mining Operations

      The following provides a description of the operating characteristics of the principal mines and reserves of each of our business units and affiliates. The maps below show the mines we operated in 2004.

      Within the United States, we conduct operations in the Powder River Basin, Southwest, Colorado, Appalachia and Midwest regions. Internationally, we operate mines in Queensland, Australia and have a 25.5% interest in a mine in Venezuela. All of our operating segments are discussed in Note 26 to our consolidated financial statements.

      Included in the descriptions of our mining operations are discussions of the subsidiaries which manage the respective mining operation. The subsidiary that manages a particular mining operation is not necessarily indicative of the subsidiary or subsidiaries which own the assets utilized in that mining operation.

Powder River Basin Operations

      We control approximately 3.1 billion tons of proven and probable coal reserves in the Southern Powder River Basin, the largest and fastest growing major U.S. coal-producing region. Our subsidiaries, Powder River Coal Company and Caballo Coal Company, manage three low-sulfur, non-union surface mining complexes in Wyoming that sold 115.8 million tons of coal during the year ended December 31, 2004, or approximately 51% of our total coal sales volume. The North Antelope Rochelle and Caballo

mines are serviced by both major western railroads, the Burlington Northern Santa Fe Railway and the Union Pacific Railroad. The Rawhide Mine is serviced by the Burlington Northern Santa Fe Railway.

      Our Wyoming Powder River Basin reserves are classified as surface mineable, subbituminous coal with seam thickness varying from 70 to 105 feet. The sulfur content of the coal in current production ranges from 0.2% to 0.4% and the heat value ranges from 8,300 to 9,000 Btu’s per pound.

      The North Antelope Rochelle Mine is located 65 miles south of Gillette, Wyoming. This mine is one of the largest in North America, selling 82.5 million tons of compliance coal (defined as having sulfur dioxide content of 1.2 pounds or less per million Btu) during 2004. The North Antelope Rochelle facility is capable of loading its production in up to 2,000 railcars per day. The North Antelope Rochelle Mine produces premium quality coal with a sulfur content averaging 0.2% and a heat value ranging from 8,500 to 8,900 Btu per pound. The North Antelope Rochelle Mine produces the lowest sulfur coal in the United States, using two draglines along with six truck-and-shovel fleets.

      The Caballo Mine is located 20 miles south of Gillette, Wyoming. During 2004, it sold 26.5 million tons of compliance coal. Caballo is a truck-and-shovel operation with a coal handling system that includes two 12,000-ton silos and two 11,000-ton silos.

      The Rawhide Mine is located ten miles north of Gillette, Wyoming and uses truck-and-shovel mining methods. During 2004, it sold 6.9 million tons of compliance coal.

Southwest Operations

      We own and operate three mines in our Southwest operations — two in Arizona and one in New Mexico. The Arizona mines, which are managed by our Peabody Western Coal Company subsidiary, supply primarily bituminous compliance coal under long-term coal supply agreements to electricity generating stations in the region. In New Mexico, we own and manage, through our Peabody Natural Resources Company subsidiary, the Lee Ranch Mine, which mines and produces subbituminous medium sulfur coal. Together, these three mines sold 18.7 million tons of coal during 2004 and control 1.0 billion of proven and probable coal reserves.

      The Black Mesa Mine, which is located on the reservations of the Navajo Nation and Hopi Tribe in Arizona, uses two draglines and sold 4.7 million tons of coal during 2004. The Black Mesa Mine coal is crushed, mixed with water and then transported 273 miles through an underground pipeline owned by a third party. The coal is conveyed to the Mohave Generating Station near Laughlin, Nevada, which is operated and partially owned by Southern California Edison. The mine and pipeline were designed to deliver coal exclusively to the plant, which has no other source of coal. The Mohave Generating Station coal supply agreement extends until December 31, 2005. Further discussion of the issues surrounding the future of the Black Mesa Mine and Mohave Generating Station is provided in Item 3. Legal Proceedings of this report. Hourly workers at this mine are members of the United Mine Workers of America.

      The Kayenta Mine is adjacent to the Black Mesa Mine and uses four draglines in three mining areas. It sold approximately 8.4 million tons of coal during 2004. The Kayenta Mine coal is crushed, then carried 17 miles by conveyor belt to storage silos where it is loaded onto a private rail line and transported 83 miles to the Navajo Generating Station, operated by the Salt River Project near Page, Arizona. The

mine and railroad were designed to deliver coal exclusively to the power plant, which has no other source of coal. The Navajo coal supply agreement extends until 2011. Hourly workers at this mine are members of the United Mine Workers of America.

      The Lee Ranch Mine, located near Grants, New Mexico, sold approximately 5.6 million tons of medium sulfur coal during 2004. Lee Ranch shipped the majority of its coal to two customers in Arizona and New Mexico under coal supply agreements extending until 2020 and 2014, respectively. Lee Ranch is a non-union surface mine that uses a combination of dragline and truck-and-shovel mining techniques and ships coal to its customers via the Burlington Northern Santa Fe Railway.

Colorado Operations

      We control approximately 0.3 billion tons of coal reserves and currently have two mines operating in the Colorado Region. Our Twentymile underground mine is managed by our Twentymile Coal Company subsidiary and our Seneca surface mine is managed by our Seneca Coal Company subsidiary. During 2004, these operations sold approximately 7.6 million tons of compliance, low-sulfur, steam coal of above average heat content to customers throughout the United States.

      On April 15, 2004, we purchased the Twentymile Mine from RAG Coal International AG as discussed in Note 5 to our consolidated financial statements. The Twentymile Mine is located in Routt County, Colorado, and sold approximately 6.2 million tons of steam coal since the acquisition. This mine uses both longwall and continuous mining equipment and has perennially been one of the largest and most productive underground mines in the United States. The coal quality is high enough that only a small portion of the coal is washed, normally less than 15%. Approximately 95% all coal shipped is loaded on the Union Pacific railroad; the remainder is hauled by truck.

      The Seneca Mine near Hayden, Colorado shipped 1.5 million tons of compliance coal during 2004, operating with two draglines and a highwall miner in three separate mining areas. The mine’s coal is hauled by truck to the nearby Hayden Generating Station, operated by the Public Service of Colorado, under a coal supply agreement that extends until 2011. This mine is near the exhaustion of its economically recoverable reserves and upon closure (expected in late 2005) the Twentymile Mine is expected to supply the Hayden Generating Station. The mine’s closure is not expected to have a material adverse effect on our financial condition, results of operations or cash flows. Hourly workers at Seneca are members of the United Mine Workers of America.

Appalachia Operations

      We manage five wholly-owned business units and related facilities in West Virginia and one in Western Kentucky. Our subsidiary, Pine Ridge Coal Company, manages the Big Mountain business unit, and our subsidiary, Rivers Edge Mining, Inc. manages our Rivers Edge Mine. Our Eastern Associated Coal Corp. subsidiary manages the remaining wholly-owned West Virginia facilities. In addition, Highland Mining manages the Highland Mine in Western Kentucky. During 2004, these operations sold approximately 19.2 million tons of compliance, medium-sulfur, high-sulfur steam and metallurgical coal to customers in the United States and abroad. Metallurgical coal accounted for 5.0 million tons of total sales for the year. All of the hourly workers at these subsidiaries are members of the United Mine Workers of America. In addition to our wholly-owned facilities, we own a 49% interest in Kanawha Eagle Mine, a joint venture which owns and manages underground mining operations. We control approximately 0.8 billion tons of proven and probable coal reserves in our Appalachia Operations.

      The Big Mountain business unit is based near Prenter, West Virginia. This business unit’s primary mine is Big Mountain No. 16, and includes a small amount of contract mine production from coal reserves we control. During 2004, the Big Mountain business unit sold approximately 1.9 million tons of steam coal. Big Mountain No. 16 is an underground mine using continuous mining equipment. Processed coal is loaded on the CSX railroad.

      The Harris business unit consists of the Harris No. 1 Mine near Bald Knob, West Virginia, which sold approximately 3.1 million tons of primarily metallurgical product during 2004. This mine uses both longwall and continuous mining equipment.

      The Rocklick preparation plant, located near Wharton, West Virginia, processes coal produced by the Harris No. 1 Mine and contract mining operations from coal reserves that we control. This preparation plant shipped approximately 2.0 million tons of steam and metallurgical coal sourced from the contract mines during 2004. Processed coal is loaded at the plant site on the CSX railroad or transferred via conveyor to our Kopperston loadout facility and loaded on the Norfolk Southern railroad.

      The Wells business unit, in Boone County, West Virginia, sold approximately 4.0 million tons of metallurgical and steam coal during 2004. The unit consists of the Wells preparation plant, which processes purchased coal and production from our River’s Edge Mine and contract mines. The preparation plant is located near Wharton, West Virginia and the processed coal is loaded on the CSX railroad.

      The Federal No. 2 Mine, near Fairview, West Virginia, uses longwall mining methods and shipped approximately 4.8 million tons of steam coal during 2004. Coal shipped from the Federal No. 2 Mine has a sulfur content only slightly above that of medium sulfur coal and has above average heating content. As a result, it is more marketable than some other medium sulfur coals. The CSX and Norfolk Southern railroads jointly serve the mine.

      The Highland No. 9 Mine, which is managed by our Highland Mining Company subsidiary, is located near Waverly, Kentucky, and produced 3.3 million tons during 2004. Hourly workers at these operations are members of the United Mine Workers of America.

      We have a 49% interest in the Kanawha Eagle Joint Venture, which owns and manages underground mining operations, a preparation plant and barge-and-rail loading facilities near Marmet, West Virginia. The mines are non-union and use continuous mining equipment. They shipped 2.5 million tons during 2004.

Midwest Operations

      Our Midwest operations consist of 13 wholly-owned mines in the Illinois basin and are comprised of our Patriot Coal Company, Indian Hill Company and Black Beauty Coal Company subsidiaries. Our Midwest Operations control approximately 3.8 billion tons of proven and probable coal reserves. In 2004, these operations collectively sold 32.5 million tons of coal, more than any other midwestern coal producer.

We ship coal from these mines primarily to electricity generators in the Midwestern United States, and to industrial customers that generate their own power.

      Patriot Coal Company, owns and manages three mines. Patriot, a surface mine, and Freedom, an underground mine, are located in Henderson County, Kentucky. The Big Run underground mine is located in Ohio County, Kentucky. These mines sold 1.4 million tons, 1.5 million tons and 1.3 million tons, respectively, in 2004. The underground mines use continuous mining equipment and the surface mine uses truck and shovel equipment. Patriot Coal Company also manages a preparation plant and a dock. Patriot Coal Company operations utilize a non-union workforce.

      In late 2004, we purchased, through our wholly-owned subsidiary, Indian Hill Company, the remaining 55% interest of Dodge Hill Holding JV, LLC. Dodge Hill Holding manages Dodge Hill No. 1, an underground operation located in Union County, Kentucky which mined 1.2 million tons in 2004 utilizing non-union labor.

      Black Beauty Coal Company currently manages six mines in Indiana and three mines in Illinois. The Black Beauty mines produced and sold 27.1 million tons of compliance, medium sulfur and high sulfur steam coal during 2004.

      Black Beauty’s principal Indiana mines include Air Quality, Farmersburg, Francisco and Somerville. Air Quality is an underground coal mine located near Monroe City, Indiana that shipped 1.7 million tons of compliance coal during 2004. Farmersburg is a surface mine situated in Vigo and Sullivan counties in Indiana that sold 4.3 million tons of medium sulfur coal during 2004. The Francisco Mine, located in Gibson County, Indiana mines coal by utilizing both surface mining and underground mining methods and sold 3.1 million tons of medium sulfur coal during 2004. The Somerville mine complex, also located in Gibson County, shipped a total of 7.2 million tons of medium sulfur coal in 2004. Two other surface mines located in Indiana, Viking and Miller Creek, collectively shipped 2.3 million tons of medium sulfur coal during 2004.

      In east-central Illinois, Black Beauty’s Riola Complex is an underground mining facility with two active portals. The Riola Complex sold 2.3 million tons of medium sulfur coal during 2004. We operate the Cottage Grove surface mine and Willow Lake underground mining complex situated in Gallatin and Saline counties in southern Illinois. During 2004, these mines sold 2.7 million tons and 3.5 million tons, respectively, of medium sulfur coal that is primarily shipped by barge to downriver utility plants. Black Beauty provides a non-union contract workforce for the Arclar surface operation. The workforce at the Willow Lake underground mine is represented under a non-UMWA labor agreement that expires in late 2006. All other Black Beauty Coal Company operations utilize non-union labor.

      Black Beauty also owns a 75% interest in United Minerals Company, LLC (“United Minerals”). United Minerals, which utilizes non-union labor, currently acts as a contract miner for Black Beauty at part of the Somerville Mine Complex and as contract operator for Black Beauty at the Evansville River Terminal.

Australian Mining Operations

      We manage four mines in Queensland, Australia through our wholly-owned subsidiary, Peabody Pacific Pty Limited. In addition to our Wilkie Creek Mine acquired in August 2002, we purchased two coal mines, Burton and North Goonyella, on April 15, 2004 and recently opened our Eaglefield Mine, which is a surface operation adjacent to, and fulfilling contract tonnages in conjunction with, the North Goonyella underground mine. During 2004, these operations sold 6.1 million tons of coal, 4.4 millions tons

of which were metallurgical coal. Coal from these mines is shipped via rail from the mine to the loading point at Dalrymple Bay, where the coal is loaded onto ocean-going vessels. All sales from our Australian mines are denominated in U.S. dollars. Our Australian mines operate with site-specific collective bargaining labor agreements. Our Australian operations control 0.2 billion tons of proven and probable reserves.

      Our Wilkie Creek Coal Mine is a surface, truck-and-shovel operation. For the year ended December 31, 2004, the mine’s contract workforce produced 1.3 million tons of steam coal, which was sold to the Asia export market.

      Burton is a surface mine using the truck-and-shovel mining technique. From the date of acquisition in 2004, the Burton Mine sold 3.1 million tons of metallurgical coal. We own 95% of the Burton operation and the remaining five percent interest is owned by the contract miner operating on reserves that we control.

      The North Goonyella Mine is a longwall underground operation. From the date of acquisition in 2004, the North Goonyella Mine sold 1.7 million tons of coal.

      Our recently opened Eaglefield Mine is a surface operation utilizing truck-and-shovel mining methods. It is adjacent to, and fulfills contract tonnages in conjunction with, the North Goonyella underground mine. Coal is mined by a contractor from reserves that we control.

Venezuelan Mining Operations

      In December 2004, we acquired 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 Mine in Venezuela. The Paso Diablo Mine is a surface operation in northwestern Venezuela that produces approximately 7 million tons of steam coal annually for export primarily to the United States and Europe. We are responsible for our pro-rata share of sales from Paso Diablo; the joint venture is responsible for production, processing and transportation of coal to ocean-going vessels for delivery to customers.

Long-Term Coal Supply Agreements

      We currently have a sales backlog in excess of one billion tons of coal, including backlog subject to price reopener and/or extension provisions, and our coal supply agreements have remaining terms ranging from one to 17 years and an average volume-weighted remaining term of approximately 3.4 years. For 2004, we sold approximately 90% of our sales volume under long-term coal supply agreements. In 2004, we sold coal to over 300 electricity generating and industrial plants in 16 countries. Our primary customer base is in the United States, although customers in the Pacific Rim and other international locations represent an increasing portion of our revenue stream. Two of our largest coal supply agreements are the subject of ongoing litigation and arbitration, as discussed at Item 3. Legal Proceedings.

      We expect to continue selling a significant portion of our coal under long-term supply agreements. Our strategy is to selectively renew, or enter into new, long-term supply contracts when we can do so at prices we believe are favorable. As of December 31, 2004, we had 5 to 10 million tons, 65 to 75 million tons and 130 to 140 million tons for 2005, 2006 and 2007, respectively, of expected production (including steam and metallurgical coal production) available for sale or repricing at market prices. We have an

annual metallurgical coal production capacity of 12 to 14 million tons. Approximately 90% of our expected 2005 metallurgical coal production is priced, and our 2006 metallurgical production is mostly unpriced. The portion of 2006 that is priced primarily relates to tonnage committed at our Australian operations for delivery in the period from April 1, 2005 to March 31, 2006, the traditional contract year for many customers purchasing seaborne metallurgical coal. The metallurgical production we priced for 2005 and 2006 is priced, on average, at levels significantly above historical metallurgical coal prices.

      Long-term contracts are attractive for regions where market prices are expected to remain stable, for cost-plus arrangements serving captive electricity generating plants and for the sale of high-sulfur coal to “scrubbed” generating plants. To the extent we do not renew or replace expiring long-term coal supply agreements, our future sales will be subject to market fluctuations, including unexpected downturns in market prices.

      Typically, customers enter into coal supply agreements to secure reliable sources of coal at predictable prices, while we seek stable sources of revenue to support the investments required to open, expand and maintain or improve productivity at the mines needed to supply these contracts. The terms of coal supply agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these contracts vary significantly in many respects, including price adjustment features, price reopener terms, coal quality requirements, quantity parameters, permitted sources of supply, treatment of environmental constraints, extension options, force majeure, and termination and assignment provisions.

      Each contract sets a base price. Some contracts provide for a predetermined adjustment to base price at times specified in the agreement. Base prices may also be adjusted quarterly, annually or at other periodic intervals for changes in production costs and/or changes due to inflation or deflation. Changes in production costs may be measured by defined formulas that may include actual cost experience at the mine as part of the formula. The inflation/deflation adjustments are measured by public indices, the most common of which is the implicit price deflator for the gross domestic product as published by the U.S. Department of Commerce. In most cases, the components of the base price represented by taxes, fees and royalties which are based on a percentage of the selling price are also adjusted for any changes in the base price and passed through to the customer. Some contracts allow the base price to be adjusted to reflect the cost of capital.

      Most contracts contain provisions to adjust the base price due to new statutes, ordinances or regulations that impact our cost of performance of the agreement. Additionally, some contracts contain provisions that allow for the recovery of costs impacted by the modifications or changes in the interpretation or application of any existing statute by local, state or federal government authorities. Some agreements provide that if the parties fail to agree on a price adjustment caused by cost increases due to changes in applicable laws and regulations, the purchaser may terminate the agreement.

      Price reopener provisions are present in many of our multi-year coal contracts. These provisions may allow either party to commence a renegotiation of the contract price at various intervals. In a limited number of agreements, if the parties do not agree on a new price, the purchaser or seller has an option to terminate the contract. Under some contracts, we have the right to match lower prices offered to our customers by other suppliers.

      Quality and volumes for the coal are stipulated in coal supply agreements, and in some limited instances buyers have the option to vary annual or monthly volumes if necessary. Variations to the quality and volumes of coal may lead to adjustments in the contract price. Most coal supply agreements contain provisions requiring us to deliver coal within certain ranges for specific coal characteristics such as heat (Btu), sulfur, and ash content, grindability and ash fusion temperature. Failure to meet these specifications can result in economic penalties, suspension or cancellation of shipments or termination of the contracts. Coal supply agreements typically stipulate procedures for quality control, sampling and weighing. In the eastern United States, approximately half of our customers require that the coal is sampled and weighed at the destination, whereas in the western United States, samples and weights are usually taken at the shipping source.

      Contract provisions in some cases set out mechanisms for temporary reductions or delays in coal volumes in the event of a force majeure, including events such as strikes, adverse mining conditions or serious transportation problems that affect the seller or unanticipated plant outages that may affect the buyer. More recent contracts stipulate that this tonnage can be made up by mutual agreement. Buyers often negotiate similar clauses covering changes in environmental laws. We often negotiate the right to supply coal that complies with a new environmental requirement to avoid contract termination. Coal supply agreements typically contain termination clauses if either party fails to comply with the terms and conditions of the contract, although most termination provisions provide the opportunity to cure defaults.

      In some of our contracts, we have a right of substitution, allowing us to provide coal from different mines, including third party production, as long as the replacement coal meets the contracted quality specifications and will be sold at the same delivered cost.

Sales and Marketing

      Our sales, trading, brokerage and marketing operations include COALSALES, LLC; COALSALES II, LLC (formerly Peabody COALSALES Company); COALTRADE, LLC (formerly Peabody COALTRADE, Inc.) and COALTRADE International, LLC. Through our sales, trading, brokerage and marketing, we sell coal produced by our diverse portfolio of operations, broker coal sales of other coal producers, both as principal and agent, trade coal and emission allowances, and provide transportation-related services. As of December 31, 2004, we had 74 employees in our sales, trading, brokerage, marketing and transportation operations, including personnel dedicated to performing market research, contract administration and risk/credit management activities. These operations also include seven employees at our COALTRADE Australia operation, which brokers coal in the Australia and Pacific Rim markets, and is based in Newcastle, Australia.

Transportation

      Coal consumed domestically is usually sold at the mine, and transportation costs are borne by the purchaser. Export coal is usually sold at the loading port, with purchasers paying ocean freight. Producers usually pay shipping costs from the mine to the port, including any demurrage costs.

      The majority of our sales volume is shipped by rail, but a portion of our production is shipped by other modes of transportation, including barge and ocean-going vessels. Our transportation department manages the loading of trains and barges.

      Coal from our Black Mesa Mine in Arizona is transported by a 273-mile coal-water pipeline to the Mohave Generating Station in southern Nevada. Coal from the Seneca Mine in Colorado is transported by truck to the nearby Hayden Plant. All coal from our southern Powder River Basin mines in Wyoming is shipped by rail, and two competing railroads, the Burlington Northern Santa Fe Railway and the Union Pacific Railroad, serve our North Antelope Rochelle and Caballo mines. The Rawhide Mine is serviced by the Burlington Northern Santa Fe Railway. Approximately 12,000 unit trains are loaded each year to accommodate the coal shipped by our mines overall. A unit train generally consists of 100 to 150 cars, each of which can hold 100 to 120 tons of coal. We believe we enjoy good relationships with rail carriers and barge companies due, in part, to our modern coal-loading facilities and the experience of our transportation coordinators.

Suppliers

      The main types of goods we purchase are mining equipment and replacement parts, explosives, fuel, tires, steel-related products and lubricants. We have many long, established relationships with our key suppliers, and do not believe that we are dependent on any of our individual suppliers, except as noted below. The supplier base providing mining materials has been relatively consistent in recent years, although there has been some consolidation. Recent consolidation of suppliers of explosives has limited the number of sources for these materials. Although our current supply of explosives is concentrated with one supplier, alternative sources are available to us in the regions where we operate. Further, purchases of certain

underground mining equipment are concentrated with one principal supplier; however, supplier competition continues to develop. In the past year, demand for certain surface and underground mining equipment and off-the-road tires has increased. As a result, lead times for certain items have generally increased by up to several months, although no material impact is currently expected to our financial condition, results of operations or cash flows.

Technical Innovation

      We continue to place great emphasis on the application of technical innovation to improve new and existing equipment performance. This research and development effort is typically undertaken and funded by equipment manufacturers using our input and expertise. Our engineering, maintenance and purchasing personnel work together with manufacturers to design and produce equipment that we believe will add value to the business.

      A major effort has been under way to improve the performance of our draglines which move a third of the billion tons of overburden handled annually. The dragline improvement effort includes more efficient bucket design, faster cycle times, improved swing motion controls to increase component life and better monitors to enable increased payloads. A new digital drive design has been tested on an overburden shovel in the Powder River Basin with excellent results and will be installed on our other shovels. Blasting performance has improved through the use of new products including digital detonation, air decking, blast-hole sleeving and new blasting agents. Filtered used lubrication oils are also utilized in our blasting products.

      We plan to install a longwall system at our Twentymile Mine with state-of-the-art controls and software to enable increased mine output beginning in 2006. In addition, the North Goonyella Mine in Australia has purchased upgraded longwall components to widen the longwall face and improve operating performance. We have two state-of-the-art flexible coal train conveyor systems in operation at our Highland Mine that continuously transport coal from the continuous miner to the conveyor belt system. Upgrades at four preparation plants are scheduled in 2005 which will improve coal recovery and output.

      World-class maintenance standards based on condition-based maintenance practices are being implemented at all operations. Using these techniques allows us to increase equipment utilization and reduce capital through extending the equipment life while minimizing the risk of premature failures. Lubrication is replaced and work is scheduled on condition rather than time. Benefits from sophisticated lubrication analysis and quality control include lower lubrication consumption, optimum equipment performance and extended component life. We are upgrading our computerized maintenance management system to support our maintenance practices. Also, a remote data acquisition system is being installed to more efficiently dispatch mobile equipment and monitor equipment performance on a real-time basis.

      Our mines use sophisticated software to schedule and monitor trains, mine and pit blending, quality and customer shipments. The integrated software has been developed in-house and provides a competitive tool to differentiate our reliability and product consistency. We are the largest user of advanced coal quality analyzers among coal producers, according to the manufacturer of this sophisticated equipment. These analyzers allow continuous analysis of certain coal quality parameters, such as sulfur content. Their use helps ensure consistent product quality and helps customers meet stringent air emission requirements.

      We also support the Power Systems Development Facility, a highly efficient electricity generating plant using coal gasification generation technology, funded primarily through the U.S. Department of Energy and operated by an affiliate of Southern Company. Peabody is a member of the multi-company alliance working with the Department of Energy on FutureGen, a long-term project to develop near-zero emission power generation technology that will produce both power and hydrogen from coal and will capture and sequester carbon dioxide.

Competition

      The markets in which we sell our coal are highly competitive. According to the National Mining Association’s “2003 Coal Producer Survey,” the top 10 coal companies in the United States produced approximately 69% of total domestic coal in 2003. Our principal U.S. competitors are other large coal producers, including Kennecott Energy Company, Arch Coal, Inc., Foundation Coal, CONSOL Energy Inc. and Massey Energy Company, which collectively accounted for approximately 41% of total U.S. coal production in 2003. Major international competitors include Rio Tinto, Anglo-American PLC, and BHP Billiton.

      A number of factors beyond our control affect the markets in which we sell our coal. Continued demand for our coal and the prices obtained by us depend primarily on the coal consumption patterns of the electricity and steel industries in the United States, China, India and elsewhere around the world; the availability, location, cost of transportation and price of competing coal; and other electricity generation and fuel supply sources such as natural gas, oil, nuclear and hydroelectric. Coal consumption patterns are affected primarily by the demand for electricity, environmental and other governmental regulations and technological developments. We compete on the basis of coal quality, delivered price, customer service and support and reliability.

Generation Development

      To best maximize our coal assets and land holdings for long-term growth, we are developing coal-fueled generating projects in areas of the country where electricity demand is strong and where there is access to land, water, transmission lines and low-cost coal.

      We are continuing to progress on the permitting processes, transmission access agreements and contractor-related activities for developing clean, low-cost mine-mouth generating plants using our surface lands and coal reserves. Because coal costs just a fraction of natural gas, mine-mouth generating plants can provide low-cost electricity to satisfy growing baseload generation demand. The plants will be designed to comply with all current clean air standards using advanced emissions control technologies.

      The plants described below are expected to be operational following a four-year construction phase, which is conditioned upon the company completing all necessary permitting, selection of partners, securing financing and selling the majority of the output of the plant. These plants will not be operational until at least 2010.

      Our Prairie State Energy Campus is a planned 1,500-megawatt coal-fueled electricity generation project located in Washington County, Illinois. Prairie State would be fueled by 6 million tons of coal each year produced from an adjacent underground mine. During August of 2004, Prairie State signed a letter of intent with Fluor Daniel Illinois, Inc. for engineering, design and construction of Prairie State’s power-related facilities. In January 2005, Prairie State achieved a major milestone when the State of Illinois issued the final air permit for the electric generating station and adjoining coal mine. In February 2005, a group of Midwest rural electric cooperatives and municipal joint action agencies entered into definitive agreements to acquire approximately 47% of the project. This group of investors is comprised of Soyland Power Cooperative, Inc, Kentucky Municipal Power Agency, Wolverine Power Cooperative, Northern Illinois Municipal Power Agency, Indiana Municipal Power Agency and the Missouri Joint Municipal Electric Utility Commission. In February 2005, certain parties filed an appeal with the Environmental Appeals Board in Washington, D.C. challenging the air permit issued by the Illinois Environmental Protection Agency. The appeal must be resolved before construction of the project can begin.

      In 2003, we achieved a major milestone in the development of the 1,500 megawatt Thoroughbred Energy Campus in Muhlenberg County, Kentucky, when we received a conditional Certificate to Construct

from the Commonwealth of Kentucky. We and the Commonwealth of Kentucky are defending the air permit granted in 2002 to Thoroughbred Energy Campus, as certain environmental groups are challenging the air permit. Hearings and final briefings were completed before year end and we now await the findings of the Administrative Law Judge.

      In October 2004, our Mustang Energy Project was awarded a $19.7 million Clean Coal Power Initiative grant from the Department of Energy to demonstrate technology to achieve ultra-low emissions at the proposed 300 megawatt generating station near Grants, New Mexico. The project is in the early stages of obtaining all necessary permits. If successfully completed, the Mustang Energy project would be located near our Lee Ranch Coal Company operations using lands and coal reserves controlled by us. The plant would be fueled by about 1 million tons of coal each year. The plant is expected to use proprietary technology to remove 99.5% of sulfur dioxide, 98% of nitrogen oxide and 90% of mercury from the plant’s emissions. By-products from the scrubbing process would be used to create high value, granular fertilizer.

Coalbed Methane

      We continue to evaluate the potential of the coalbed methane business and will make acquisitions, develop our properties, enter into partnerships with other companies or make property sales as appropriate. Our subsidiary, Peabody Natural Gas, LLC, produces coalbed methane from its operations in the Southern Powder River Basin near the Caballo Mine and North Antelope Rochelle Mine. At December 31, 2004, we operated 60 coalbed methane wells with net production of approximately 2.4 million cubic feet per day. We are also evaluating the coalbed methane resources in several deep coal seams on more than 27,000 acres in the Western Powder River Basin near Buffalo, Wyoming. We purchased these coalbed methane assets in January 2001 and are engaged in an ongoing drilling and testing program to continue to evaluate the property. In Southern Illinois, Peabody Natural Gas is continuing a five-well coalbed methane pilot program at its Broughton project. More than 15,000 net coal acres and coalbed methane leases covering property near the Broughton project were purchased in December 2003 and have been added to the project. In June 2004, we purchased operating rights and a 50% working interest in a five-well coalbed methane pilot program on over 9,400 acres in Gallatin County, Illinois. The test program is being conducted with AFS Development Company, LLC, an affiliate of Ameren Corporation. A coalbed methane testing program is also being conducted in Western Kentucky.

Certain Liabilities

      We have significant long-term liabilities for reclamation (also called asset retirement obligations), work-related injuries and illnesses, pensions and retiree health care. In addition, labor contracts with the United Mine Workers of America and voluntary arrangements with non-union employees include long-term benefits, notably health care coverage for retired and future retirees and their dependents. The majority of our existing liabilities relate to our past operations, which had more mines and employees than we currently have.

      Asset Retirement Obligations. Asset retirement obligations primarily represent the present value of future anticipated costs to restore surface lands to productivity levels equal to or greater than pre-mining conditions, as required by the Surface Mining Control and Reclamation Act. Our asset retirement obligations totaled approximately $396.0 million as of December 31, 2004. Expense for the years ended December 31, 2004, 2003 and 2002 was $42.4 million, $31.2 million and $11.0 million, respectively. Our method for accounting for reclamation activities changed on January 1, 2003 as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” The effect of the adoption of SFAS No. 143 is discussed in Note 6 to our consolidated financial statements. Total asset retirement obligations as of December 31, 2004 of $396.0 million consisted of $303.7 million related to locations with active mining operations and $92.3 million related to locations that are closed or inactive.

      Workers’ Compensation. These liabilities represent the actuarial estimates for compensable, work-related injuries (traumatic claims) and occupational disease, primarily black lung disease (pneumoconiosis). The Federal Black Lung Benefits Act requires employers to pay black lung awards to former employees who filed claims after June 1973. These liabilities totaled approximately $268.9 million as of December 31, 2004, $41.4 million of which was a current liability. Expense for the years ended December 31, 2004, 2003 and 2002 was $59.2 million, $50.6 million and $55.4 million, respectively.

      Pension-Related Provisions. Pension-related costs represent the actuarially-estimated cost of pension benefits. Annual minimum contributions to the pension plans are determined by consulting actuaries based on the Employee Retirement Income Security Act minimum funding standards and an agreement with the Pension Benefit Guaranty Corporation. Pension-related liabilities totaled approximately $95.8 million as of December 31, 2004, $5.8 million of which was a current liability. Expense for the years ended December 31, 2004, 2003 and 2002 was $28.5 million, $20.7 million and $4.8 million, respectively.

      Retiree Health Care. Consistent with SFAS No. 106, we record a liability representing the estimated cost of providing retiree health care benefits to current retirees and active employees who will retire in the future. Provisions for active employees represent the amount recognized to date, based on their service to date; additional amounts are accrued periodically so that the total estimated liability is accrued when the employee retires.

      A second category of retiree health care obligations represents the liability for future contributions to certain multi-employer health funds. The United Mine Workers of America Combined Fund was created by federal law in 1992. This multi-employer fund provides health care benefits to a closed group of our retired former employees who last worked prior to 1976, as well as orphaned beneficiaries of out of business companies who were receiving benefits as orphans prior to the 1992 law; no new retirees will be added to this group. The liability is subject to increases or decreases in per capita health care costs, offset by the mortality curve in this aging population of beneficiaries. Another fund, the 1992 Benefit Plan also created by the same federal law in 1992 provides benefits to qualifying retired former employees of companies who have gone out of business and have defaulted in providing their former employees with retiree medical benefits. Beneficiaries continue to be added to this fund as employers go out of business, but the overall exposure for new beneficiaries into this fund is limited to retirees covered under their employer’s plan who retired prior to October 1, 1994. A third fund, the 1993 Benefit Fund was established through collective bargaining and provides benefits to qualifying retired former employees who retired after September 30, 1994 of certain signatory companies who have gone out of business and have defaulted in providing their former employees with retiree medical benefits. Beneficiaries continue to be added to this fund as employers go out of business, however our liability is limited to our contractual commitment of $0.50 per hour worked.

      Our retiree health care liabilities totaled approximately $1,020.8 million as of December 31, 2004, $81.3 million of which was a current liability. Expense for the years ended December 31, 2004, 2003 and 2002 was $58.4 million, $83.6 million and $74.4 million, respectively. Obligations to the United Mine Workers of America Combined Fund totaled $39.8 million as of December 31, 2004, $6.4 million of which was a current liability. Expense for the years ended December 31, 2004, 2003 and 2002 was $4.9 million, $1.2 million and $16.7 million, respectively. The expense recorded during the year ended December 31, 2002 reflects the reassignment of certain beneficiaries to us as a result of an adverse U.S. Supreme Court decision in January 2003. Those beneficiaries had been deemed improperly assigned to us in a prior U.S. Circuit Court decision. The 1992 Fund and the 1993 Fund are expensed as payments are made and no liability was recorded other than amounts due and unpaid. Expense related to these funds was $4.4 million, $5.3 million and $4.1 million for the years ended December 31, 2004, 2003 and 2002 respectively.

Employees

      As of December 31, 2004, we and our subsidiaries had approximately 7,900 employees. As of December 31, 2004, approximately 60% of our hourly employees were non-union and they generated 79%

of our 2004 coal production. Relations with our employees and, where applicable, organized labor are important to our success.

      Approximately 63% of our U.S. miners are non-union and are employed in the states of Wyoming, Colorado, Indiana, New Mexico, Illinois and Kentucky. The United Mine Workers of America represented approximately 30% of our hourly employees, who generated 16% of our domestic production during the year ended December 31, 2004. An additional 6% of our hourly employees are represented by labor unions other than the United Mine Workers of America. These employees generated 2% of our production during the year ended December 31, 2004. Hourly workers at our mines in Arizona and one of our mines in Colorado are represented by the United Mine Workers of America under the Western Surface Agreement, which was ratified in 2000 and is effective through September 1, 2005. Our union labor east of the Mississippi River is primarily represented by the United Mine Workers of America and the majority of union mines are subject to the National Bituminous Coal Wage Agreement. The current five-year labor agreement was ratified in December 2001 and is effective through December 31, 2006.

      The Australian coal mining industry is highly unionized and the majority of workers employed at our Australian Mining Operations are members of trade unions. These employees are represented by three unions: the Construction Forestry Mining and Energy Union (“CFMEU”), which represents the production employees, and two unions that represent the other staff. Our Australian employees are approximately 4% of our entire workforce and generated 3% of our total production in the year ended December 31, 2004. The miners at Wilkie Creek operate under a labor agreement that expires in June 2006. The miners at Burton operate under a labor agreement that is currently under negotiation. The miners at North Goonyella operate under a labor agreement which expires in March 2008. The miners at Eaglefield operate under a labor agreement that expires in May 2007.

      The Australian Federal Government, as part of micro-economic reform, has long had a Workplace Relations Strategy that seeks structural reform to encourage an enterprise focus and to facilitate enterprise agreements. Further industrial reform is likely from July 1, 2005 when the Federal Government has control of both Houses of Parliament.

Regulatory Matters — United States

      Federal, state and local authorities regulate the U.S. coal mining industry with respect to matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, the reclamation and restoration of mining properties after mining has been completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects of mining on groundwater quality and availability. In addition, the industry is affected by significant legislation mandating certain benefits for current and retired coal miners. Numerous federal, state and local governmental permits and approvals are required for mining operations. We believe that we have obtained all permits currently required to conduct our present mining operations. We may be required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that a proposed exploration for or production of coal may have on the environment. These requirements could prove costly and time-consuming and could delay commencing or continuing exploration or production operations. Future legislation and administrative regulations may emphasize the protection of the environment and, as a consequence, our activities may be more closely regulated. Such legislation and regulations, as well as future interpretations and more rigorous enforcement of existing laws, may require substantial increases in equipment and operating costs to us and delays, interruptions or a termination of operations, the extent of which we cannot predict.

      We endeavor to conduct our mining operations in compliance with all applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements,

violations during mining operations occur from time to time in the industry. None of the violations to date or the monetary penalties assessed has been material.

      Stringent health and safety standards have been in effect since Congress enacted the Coal Mine Health and Safety Act of 1969. The Federal Mine Safety and Health Act of 1977 significantly expanded the enforcement of safety and health standards and imposed safety and health standards on all aspects of mining operations.

      Most of the states in which we operate have state programs for mine safety and health regulation and enforcement. Collectively, federal and state safety and health regulation in the coal mining industry is perhaps