(Mark One)

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

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

(Exact name of registrant as specified in its charter)

Delaware		13-4004153
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
701 Market Street, St. Louis, Missouri		63101-1826
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes o      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

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

There were 267,356,026 shares of common stock with a par value of $0.01 per share outstanding at May 1, 2009.

 

 

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008			1
Condensed Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008			2
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008			3
Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2009			4
Notes to Unaudited Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			46
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 6. Exhibits			47
SIGNATURE			48
EXHIBIT INDEX			49
EX-4.1
EX-4.2
EX-4.3
EX-4.4
EX-4.5
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

PEABODY ENERGY CORPORATION

		Three Months Ended March 31,
		2009				2008
		(Dollars in millions, except share and
		per share data)
Revenues
Sales		$	1,287.0			$	1,180.5
Other revenues			173.1				85.6
Total revenues			1,460.1				1,266.1
Costs and Expenses
Operating costs and expenses			1,086.7				995.7
Depreciation, depletion and amortization			97.3				92.0
Asset retirement obligation expense			9.4				6.7
Selling and administrative expenses			47.2				50.9
Other operating (income) loss:
Net gain on disposal or exchange of assets			(3.3	)			(59.4	)
(Income) loss from equity affiliates			4.1				(2.7	)
Operating profit			218.7				182.9
Interest expense			51.1				59.5
Interest income			(2.8	)			(1.1	)
Income from continuing operations before income taxes			170.4				124.5
Income tax provision			29.9				46.4
Income from continuing operations, net of income taxes			140.5				78.1
Income (loss) from discontinued operations, net of income taxes			34.7				(20.2	)
Net income			175.2				57.9
Less: Net income attributable to noncontrolling interests			5.2				0.9
Net income attributable to common stockholders		$	170.0			$	57.0
Income From Continuing Operations
Basic earnings per share		$	0.51			$	0.29
Diluted earnings per share		$	0.50			$	0.28
Net Income Attributable to Common Stockholders
Basic earnings per share		$	0.64			$	0.21
Diluted earnings per share		$	0.63			$	0.21
Dividends declared per share		$	0.06			$	0.06

See accompanying notes to unaudited condensed consolidated financial statements.

		(Unaudited)
		March 31, 2009				December 31, 2008
		(Dollars in millions, except
		share and per share data)
ASSETS
Current assets
Cash and cash equivalents		$	526.7			$	449.7
Accounts receivable, net of allowance for doubtful accounts of $14.0 at March 31, 2009 and $24.8 at December 31, 2008			290.6				383.6
Inventories			327.0				277.7
Assets from coal trading activities, net			570.3				662.8
Deferred income taxes			—				1.7
Other current assets			235.1				195.8
Total current assets			1,949.7				1,971.3
Property, plant, equipment and mine development
Land and coal interests			7,429.0				7,354.7
Buildings and improvements			862.7				861.3
Machinery and equipment			1,287.3				1,265.8
Less accumulated depreciation, depletion and amortization			(2,270.3	)			(2,166.6	)
Property, plant, equipment and mine development, net			7,308.7				7,315.2
Investments and other assets			408.9				409.2
Total assets		$	9,667.3			$	9,695.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt		$	16.7			$	17.0
Liabilities from coal trading activities, net			206.2				304.2
Deferred income taxes			35.0				—
Accounts payable and accrued expenses			1,387.5				1,535.0
Total current liabilities			1,645.4				1,856.2
Long-term debt, less current maturities			2,769.4				2,776.6
Deferred income taxes			34.1				21.5
Asset retirement obligations			424.9				422.6
Accrued postretirement benefit costs			782.8				766.1
Other noncurrent liabilities			677.2				733.2
Total liabilities			6,333.8				6,576.2
Stockholders’ equity
Preferred Stock — $0.01 per share par value; 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2009 or December 31, 2008			—				—
Series A Junior Participating Preferred Stock — 1,500,000 shares authorized, no shares issued or outstanding as of March 31, 2009 or December 31, 2008			—				—
Perpetual Preferred Stock — 750,000 shares authorized, no shares issued or outstanding as of March 31, 2009 or December 31, 2008			—				—
Series Common Stock — $0.01 per share par value; 40,000,000 shares authorized, no shares issued or outstanding as of March 31, 2009 or December 31, 2008			—				—
Common Stock — $0.01 per share par value; 800,000,000 shares authorized, 275,986,452 shares issued and 267,355,507 shares outstanding as of March 31, 2009 and 275,211,240 shares issued and 266,644,979 shares outstanding as of December 31, 2008			2.8				2.8
Additional paid-in capital			2,031.0				2,020.2
Retained earnings			1,956.3				1,802.4
Accumulated other comprehensive loss			(341.3	)			(388.5	)
Treasury shares, at cost: 8,630,945 shares as of March 31, 2009 and 8,566,261 shares as of December 31, 2008			(320.6	)			(318.8	)
Peabody Energy stockholders’ equity			3,328.2				3,118.1
Noncontrolling interests			5.3				1.4
Total equity			3,333.5				3,119.5
Total liabilities and stockholders’ equity		$	9,667.3			$	9,695.7

See accompanying notes to unaudited condensed consolidated financial statements.

		Three Months Ended March 31,
		2009				2008
		(Dollars in millions)
Cash Flows From Operating Activities
Net income		$	175.2			$	57.9
(Income) loss from discontinued operations, net of income taxes			(34.7	)			20.2
Income from continuing operations, net of income taxes			140.5				78.1
Adjustments to reconcile income from continuing operations, net of income taxes to net cash provided by operating activities:
Depreciation, depletion and amortization			97.3				92.0
Deferred income taxes			10.2				31.3
Stock compensation			8.6				7.6
Amortization of debt discount and debt issuance costs			1.9				1.7
Net gain on disposal or exchange of assets			(3.3	)			(59.4	)
(Income) loss from equity affiliates			4.1				(2.7	)
Dividends received from equity affiliates			—				19.9
Changes in current assets and liabilities:
Accounts receivable, including securitization			93.0				(14.8	)
Inventories			(49.3	)			17.1
Net assets from coal trading activities			20.9				(79.6	)
Other current assets			11.9				11.2
Accounts payable and accrued expenses			(124.4	)			1.5
Asset retirement obligations			8.5				6.6
Workers’ compensation obligations			0.5				0.1
Accrued postretirement benefit costs			5.1				(0.7	)
Contributions to pension plans			(1.0	)			—
Distributions to noncontrolling interests			(1.3	)			(0.9	)
Other, net			(3.4	)			(11.7	)
Net cash provided by continuing operations			219.8				97.3
Net cash used in discontinued operations			(29.6	)			(38.4	)
Net cash provided by operating activities			190.2				58.9
Cash Flows From Investing Activities
Additions to property, plant, equipment and mine development			(35.7	)			(59.3	)
Investment in Prairie State Energy Campus			(12.6	)			(10.8	)
Federal coal lease expenditures			(59.8	)			(59.8	)
Proceeds from disposal of assets, net of notes receivable			4.5				23.7
Additions to advance mining royalties			(2.4	)			(1.9	)
Net cash used in investing activities			(106.0	)			(108.1	)
Cash Flows From Financing Activities
Change in revolving line of credit			—				93.3
Payments of long-term debt			(3.0	)			(9.4	)
Dividends paid			(16.0	)			(16.3	)
Excess tax benefit related to stock options exercised			—				10.5
Proceeds from stock options exercised			—				5.5
Change in bank overdraft facility			9.6				—
Proceeds from employee stock purchases			2.2				2.8
Net cash (used in) provided by financing activities			(7.2	)			86.4
Net increase in cash and cash equivalents			77.0				37.2
Cash and cash equivalents at beginning of period			449.7				45.3
Cash and cash equivalents at end of period		$	526.7			$	82.5

See accompanying notes to unaudited condensed consolidated financial statements.

		Peabody Energy’s Stockholders’ Equity
														Accumulated
						Additional								Other												Total
		Common				Paid-in				Treasury				Comprehensive				Retained				Noncontrolling				Stockholders’
		Stock				Capital				Stock				Loss				Earnings				Interests				Equity
		(Dollars in millions)
December 31, 2008		$	2.8			$	2,020.2			$	(318.8	)		$	(388.5	)		$	1,802.4			$	1.4			$	3,119.5
Comprehensive income:
Net income			—				—				—				—				170.0				5.2				175.2
Increase in fair value of cash flow hedges (net of $32.2 tax provision)			—				—				—				56.9				—				—				56.9
Postretirement plans and workers’ compensation obligations (net of $6.1 tax benefit)			—				—				—				(9.7	)			—				—				(9.7	)
Comprehensive income															47.2				170.0				5.2				222.4
Dividends paid			—				—				—				—				(16.1	)			—				(16.1	)
Employee stock purchases			—				2.2				—				—				—				—				2.2
Share-based compensation			—				8.6				—				—				—				—				8.6
Shares relinquished			—				—				(1.8	)			—				—				—				(1.8	)
Distributions to noncontrolling interests			—				—				—				—				—				(1.3	)			(1.3	)
March 31, 2009		$	2.8			$	2,031.0			$	(320.6	)		$	(341.3	)		$	1,956.3			$	5.3			$	3,333.5

See accompanying notes to unaudited condensed consolidated financial statements.

PEABODY ENERGY CORPORATION

(1) Basis of Presentation

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

     The Company classifies items within discontinued operations in the unaudited condensed consolidated statements of operations when the operations and cash flows of a particular component (defined as operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity) of the Company have been (or will be) eliminated from the ongoing operations of the Company as a result of a disposal transaction, and the Company will no longer have any significant continuing involvement in the operations of that component. See Note 3 for additional details related to discontinued operations and assets held for sale.

     The accompanying condensed consolidated financial statements as of March 31, 2009 and for the three months ended March 31, 2009 and 2008, 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, 2008 has been derived from the Company’s audited consolidated balance sheet. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2009. Certain amounts in prior periods have been reclassified to conform to classifications as of March 31, 2009 and for the three months ended March 31, 2009, with no material effect on previously reported net income or stockholders’ equity.

(2) Newly Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Implemented

     Newly Adopted Accounting Pronouncements

     In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. Emerging Issues Task Force (EITF) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1, which became effective for the Company on January 1, 2009, addresses whether instruments granted in share-based payment awards that entitle their holders to receive nonforfeitable dividends or dividend equivalents before vesting should be considered participating securities and need to be included in the earnings allocation in computing earnings per share (EPS) under the “two-class method.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In accordance with FSP EITF 03-6-1, the Company’s unvested restricted stock awards are considered participating securities because they entitle holders to receive nonforfeitable dividends during the vesting term. In applying the two-class method, undistributed earnings are allocated between common shares and unvested restricted stock awards. The Company applied the two-class method of computing basic and diluted EPS for all periods presented. See Note 9 for additional information.

     In March 2008, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. This statement specifically requires entities to provide enhanced disclosures addressing the following: (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133) and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 was effective for the Company for the fiscal year beginning January 1, 2009. While SFAS No. 161 had an impact on the Company’s disclosures, it did not affect the Company’s results of operations or financial condition. These additional disclosures are included in Note 12.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In May 2008, the FASB issued FSP No. Accounting Principles Board (APB) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are not considered debt instruments within the scope of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” FSP APB 14-1 also specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the issuer’s nonconvertible debt borrowing rate when recognizing interest cost in subsequent periods. FSP APB 14-1 was effective for the Company for the fiscal year beginning January 1, 2009. Prior period balances have been adjusted to conform with the provisions of FSP APB 14-1. See Note 8 for additional information.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests in partially-owned consolidated subsidiaries and the loss of control of subsidiaries. SFAS No. 160 requires noncontrolling interests (minority interests) to be reported as a separate component of equity. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS No. 160 was effective for the Company for the fiscal year beginning January 1, 2009. The adoption of SFAS No. 160 did not have a material effect on the Company’s results of operations or financial condition. The December 31, 2008 stockholders’ equity amount increased $1.4 million for the inclusion of noncontrolling interests.

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)), which replaces SFAS No. 141. SFAS No. 141(R) changes the principles and requirements for the recognition and measurement of identifiable assets acquired, liabilities assumed, and any noncontrolling interest of an acquiree in the financial statements of an acquirer. This statement also provides guidance for the recognition and measurement of goodwill acquired in a business combination and related disclosure. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning January 1, 2009. In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP 141(R)-1), to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination under SFAS No. 141(R). Under the new guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. FSP 141(R)-1 is effective for business combinations with an acquisition date that is on or after the beginning of the first annual reporting period beginning January 1, 2009.

     Accounting Pronouncements Not Yet Implemented

     In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures in its interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not on the company’s balance sheet. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions, in both interim and annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009 (the quarter ending June 30, 2009 for the Company). While the adoption of FSP FAS 107-1 and APB 28-1 will have an impact on the Company’s disclosures, it will not affect the Company’s results of operations or financial condition.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 amends SFAS No. 157 “Fair Value Measurements” to require that a reporting entity: (1) disclose in interim and annual periods the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period, and (2) define the “major category” for any equity securities and debt securities to be based on the “major security types” (nature and risk of the security). This FSP is effective for interim reporting periods ending after June 15, 2009 (the quarter ending June 30, 2009 for the Company). Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate according to SFAS No. 154, “Accounting Changes and Error Corrections.” The Company does not expect the adoption of FSP FAS 157-4 to have a significant impact on its results of operations or financial condition.

     In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP 132R-1). This FSP amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance and additional transparency on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan, including the concentrations of risk in those plans. The effective date of FSP FAS 132R-1 is for fiscal years and interim periods beginning after December 15, 2009 (January 1, 2010 for the Company). While the adoption of FSP FAS 132R-1 will have an impact on the Company’s disclosures, it will not affect the Company’s results of operations or financial condition.

(3) Discontinued Operations and Assets Held for Sale

     Patriot Coal Corporation

     On October 31, 2007, the Company spun-off portions of its formerly Eastern United States (U.S.) Mining operations business segment through a dividend of all outstanding shares of Patriot Coal Corporation (Patriot), which is now an independent public company traded on the New York Stock Exchange (symbol PCX). The spin-off included eight company-operated mines, two joint venture mines, and numerous contractor operated mines serviced by eight coal preparation facilities along with 1.2 billion tons of proven and probable coal reserves. Revenues, pretax income (loss) and the income tax provision (benefit) related to the spun-off operations were as follows:

		Three Months Ended March 31,
		2009				2008
		(Dollars in millions)
Revenues		$	68.3			$	115.3
Income (loss) before income taxes			54.4				(20.5	)
Income tax provision (benefit)			20.1				(8.1	)

     Revenues from the spun-off operations are the result of supply agreements the Company entered into with Patriot to meet commitments under non-assignable pre-existing customer agreements sourced from Patriot mining operations. The Company makes no profit as part of these arrangements. The loss from discontinued operations for three months ended March 31, 2008 was primarily related to the write-off of a $19.4 million receivable related to excise taxes previously paid on export shipments produced from discontinued operations. As part of the Patriot spin-off, the Company retained a receivable for excise tax refunds on export shipments that had previously been ruled unconstitutional by the appellate court. The U.S. Supreme Court reversed the appellate court’s ruling on April 15, 2008, and the Company recorded the charge to discontinued operations.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In October 2008, the Energy Improvement and Extension Act of 2008 was enacted, which contained provisions that allow for the refund of coal excise tax collected on coal exported from the U.S. between January 1, 1990 and the date of the legislation. The Company’s claim for refund was approved by the Internal Revenue Service (IRS) in 2009 and is expected to be approximately $58 million, which includes accrued interest. Approximately $37 million (net of income taxes) is recorded in “Income (loss) from discontinued operations, net of income taxes” in the unaudited condensed consolidated statement of operations. The receivable is reflected as an asset of discontinued operations and the Company expects payment in 2009.

The assets and liabilities of these discontinued operations are shown below:

		March 31, 2009				December 31, 2008
		(Dollars in millions)
Assets
Current assets
Other current assets		$	102.3			$	51.0
Total current assets			102.3				51.0
Noncurrent assets
Investments and other assets			4.9				4.9
Total assets		$	107.2			$	55.9
Liabilities
Current liabilities
Accounts payable and accrued expenses		$	46.2			$	69.1
Total current liabilities			46.2				69.1
Noncurrent liabilities
Other noncurrent liabilities			8.7				12.8
Total liabilities		$	54.9			$	81.9

     “Other current assets” included receivables from customers in relation to the supply agreements with Patriot and “Accounts payable and accrued expenses” included the amounts due to Patriot on these pass-through transactions. Also included in “Other current assets” is the refund of the coal excise tax discussed above and the current portion of deferred taxes related to these operations.

     Other

     In December 2008, the Company sold its Baralaba Mine, a non-strategic Australian mine. Revenues related to these operations for the three months ended March 31, 2008 were $3.7 million. Loss before income taxes related to these operations was $4.0 million for the three months ended March 31, 2008. Income tax benefit for the three months ended March 31, 2008 was completely offset by valuation allowances recorded against the deferred tax assets created by the operating losses.

     The fair value of assets and liabilities from coal trading activities is set forth below:

		March 31, 2009								December 31, 2008
		(Dollars in millions)
		Gross Basis				Net Basis				Gross Basis				Net Basis
Assets from coal trading activities		$	1,789.1			$	570.3			$	1,969.7			$	662.8
Liabilities from coal trading activities			(1,371.6	)			(206.2	)			(1,548.5	)			(304.2	)
Subtotal			417.5				364.1				421.2				358.6
Net margin held (1)			(53.4	)			—				(62.6	)			—
Net value of coal trading positions		$	364.1			$	364.1			$	358.6			$	358.6

     As of March 31, 2009, forward contracts made up 55% and 88% of the Company’s trading assets and liabilities, respectively; financial swaps represent most of the remaining balances. The fair value of coal trading positions designated as cash flow hedges of anticipated future sales was an asset of $209.1 million as of March 31, 2009 and an asset of $220.4 million as of December 31, 2008. The net value of trading positions, including those designated as hedges of future cash flows, represents the fair value of the trading portfolio.

     Of the coal trading derivatives and related hedge contracts in the Company’s trading portfolio as of March 31, 2009, 97% were valued utilizing prices from over-the-counter market sources, adjusted for coal quality and traded transportation differentials and 3% of the Company’s contracts were valued based on similar market transactions.

     As of March 31, 2009, the estimated future realization of the value of the Company’s trading portfolio was as follows:

Year of				Percentage of
Expiration				Portfolio
	2009				72	%
	2010				15	%
	2011				13	%
					100	%

     At March 31, 2009, 74% of the Company’s credit exposure related to coal trading activities was with investment grade counterparties and 26% was with non-investment grade counterparties. The Company’s coal trading operations traded 47.0 million tons for the three months ended March 31, 2009 and 53.2 million tons for the three months ended March 31, 2008.

     In March 2008, the Company sold approximately 58 million tons of non-strategic coal reserves and surface lands located in Kentucky for $21.5 million cash proceeds and a note receivable of $54.9 million, and recognized a gain of $54.0 million. The note receivable is being paid in two installments, $30.0 million of which was received in December 2008. The balance is due in June 2009. The non-cash portion of this transaction was excluded from the investing section of the unaudited condensed consolidated statement of cash flows.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(6) Inventories

     Inventories as of March 31, 2009 and December 31, 2008 consisted of the following:

		March 31, 2009				December 31, 2008
		(Dollars in millions)
Materials and supplies		$	116.0			$	110.2
Raw coal			54.4				24.0
Saleable coal			156.6				143.5
Total		$	327.0			$	277.7

(7) Comprehensive Income

     The following table sets forth the after-tax components of comprehensive income for the three months ended March 31, 2009:

						Net Actuarial
						Loss
						Associated with
						Postretirement				Prior Service								Total
		Foreign				Plans and				Cost Associated								Accumulated
		Currency				Workers’				with								Other
		Translation				Compensation				Postretirement				Cash Flow				Comprehensive
		Adjustment				Obligations				Plans				Hedges				Loss
		(Dollars in millions)
December 31, 2008		$	3.1			$	(220.4	)		$	(18.7	)		$	(152.5	)		$	(388.5	)
Net decrease in value of cash flow hedges			—				—				—				(16.6	)			(16.6	)
Reclassification from other comprehensive income to earnings			—				3.1				0.5				73.5				77.1
Current period change			—				(13.3	)			—				—				(13.3	)
March 31, 2009		$	3.1			$	(230.6	)		$	(18.2	)		$	(95.6	)		$	(341.3	)

     Comprehensive income differs from net income by the amount of unrealized gain or loss resulting from valuation changes of the Company’s cash flow hedges (which include fuel and explosives hedges, currency forwards, traded coal index contracts and interest rate swaps) and the change in actuarial loss and prior service cost for the three months ended March 31, 2009 and 2008. The values of the Company’s cash flow hedging instruments are primarily affected by changes in interest rates, crude oil, diesel fuel, natural gas and coal prices and the U.S. dollar/Australian dollar exchange rate.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(8) Convertible Junior Subordinated Debentures

     As discussed in Note 2, the Company adopted FSP APB 14-1 on January 1, 2009. FSP APB 14-1 requires retrospective application. The following table illustrates the effect of FSP APB 14-1 on the Company’s balance sheet as of December 31, 2008:

						Increase (decrease)
						due to application of
		As previously stated				FSP APB 14-1				As adjusted
		(Dollars in millions)
Investments and other assets		$	417.5			$	(8.4	)		$	409.1
Deferred income taxes (long-term asset)			118.4				(118.4	)			—
Long-term debt, less current maturities			3,139.2				(362.6	)			2,776.6
Deferred income taxes (long-term liability)			—				21.5				21.5
Additional paid-in capital			1,804.8				215.4				2,020.2
Retained earnings			1,803.5				(1.1	)			1,802.4

     The following table illustrates the effect on the Company’s statement of operations for the three months ended March 31, 2008:

						Increase due to
						application of FSP
		As previously stated				APB 14-1				As adjusted
						(Dollars in millions)
Interest expense		$	59.3			$	0.2			$	59.5

     The following table illustrates the carrying amount of the equity and debt components of the Company’s Convertible Junior Subordinated Debentures (the Debentures) as of March 31, 2009 and December 31, 2008:

		March 31, 2009				December 31, 2008
		(Dollars in millions)
Carrying amount of the equity component		$	215.4			$	215.4
Principal amount of the liability component			732.5				732.5
Unamortized discount			(362.2	)			(362.6	)
Net carrying amount		$	370.3			$	369.9

     The following table illustrates the effective interest rate and the interest expense related to the Debentures:

		Three Months Ended March 31,
		2009				2008
		(Dollars in millions)
Effective interest rate			4.9	%			4.9	%
Interest expense — contractual interest coupon		$	8.7			$	8.7
Interest expense — amortization of debt discount		$	0.4			$	0.4

     The remaining period over which the discount will be amortized is 32.8 years as of March 31, 2009.

     For additional information describing the Company’s Debentures, including the conditions under which it is convertible, see Note 12 in Part IV, Item 15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

     There were no other significant changes to the Company’s long-term debt since December 31, 2008.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(9) Earnings Per Share

     As discussed in Note 2, the Company adopted FSP EITF 03-6-1 and began using the two-class method to compute basic and diluted EPS for all periods presented. The following illustrates the earnings allocation method utilized in the calculation of basic and diluted EPS.

		Three Months Ended
		March 31,
		2009				2008
		(Dollars in millions, except
		per share amounts)
Basic earnings per share using two-class method:
Income from continuing operations, net of income taxes		$	140.5			$	78.1
Less: Net income attributable to noncontrolling interests			(5.2	)			(0.9	)
Income from continuing operations attributable to common stockholders before allocation of earnings to participating securities			135.3				77.2
Less: Earnings allocated to participating securities			(1.2	)			(0.3	)
Income from continuing operations attributable to common stockholders			134.1				76.9
Income (loss) from discontinued operations, net of income taxes			34.7				(20.2	)
Net income attributable to common stockholders (numerator)		$	168.8			$	56.7
Weighted average shares outstanding — basic (denominator)			265,254,478				269,204,883
Basic earnings per share attributable to common stockholders:
Income from continuing operations		$	0.51			$	0.29
Income (loss) from discontinued operations			0.13				(0.08	)
Net income		$	0.64			$	0.21
Diluted earnings per share using two-class method:
Income from continuing operations attributable to common stockholders before the reallocation of the earnings of participating securities		$	134.1			$	76.9
Reallocation of the earnings of participating securities			—				—
Income from continuing operations attributable to common stockholders			134.1				76.9
Income (loss) from discontinued operations, net of income taxes			34.7				(20.2	)
Net income attributable to common stockholders (numerator)		$	168.8			$	56.7
Weighted average shares outstanding — basic			265,254,478				269,204,883
Dilutive impact of share-based compensation (1)			2,019,815				2,253,379
Weighted average shares outstanding — diluted (denominator)			267,274,293				271,458,262
Diluted earnings per share attributable to common stockholders:
Income from continuing operations		$	0.50			$	0.28
Income (loss) from discontinued operations			0.13				(0.07	)
Net income		$	0.63			$	0.21

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(10) Pension and Postretirement Benefit Costs

     Net periodic pension benefit included the following components:

		Three Months Ended March 31,
		2009				2008
		(Dollars in millions)
Service cost for benefits earned		$	0.4			$	0.7
Interest cost on projected benefit obligation			12.8				12.7
Expected return on plan assets			(15.2	)			(15.2	)
Amortization of prior service cost and actuarial loss			0.8				0.2
Net periodic pension benefit		$	(1.2	)		$	(1.6	)

     Net periodic postretirement benefit costs included the following components:

		Three Months Ended March 31,
		2009				2008
		(Dollars in millions)
Service cost for benefits earned		$	2.7			$	2.6
Interest cost on accumulated postretirement benefit obligation			14.0				13.5
Amortization of prior service cost and actuarial loss			4.3				4.5
Net periodic postretirement benefit costs		$	21.0			$	20.6

(11) Segment Information

     The Company reports its operations primarily through the following reportable operating segments: Western U.S. Mining, Midwestern U.S. Mining, Australian Mining and Trading and Brokerage. The Company’s chief operating decision maker uses Adjusted EBITDA as the primary measure of segment profit and loss. Adjusted EBITDA is defined as income from continuing operations before deducting net interest expense, income taxes, asset retirement obligation expense and depreciation, depletion and amortization.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Operating segment results for the three months ended March 31, 2009 and 2008 were as follows:

		Three Months Ended
		March 31,
		2009				2008
		(Dollars in millions)
Revenues:
Western U.S. Mining		$	653.8			$	591.5
Midwestern U.S. Mining			310.7				260.7
Australian Mining			367.4				296.5
Trading and Brokerage			123.5				110.1
Corporate and Other			4.7				7.3
Total		$	1,460.1			$	1,266.1
Adjusted EBITDA:
Western U.S. Mining		$	183.2			$	153.7
Midwestern U.S. Mining			67.1				38.0
Australian Mining			83.2				7.0
Trading and Brokerage			65.5				91.8
Corporate and Other (1)			(73.6	)			(8.9	)
Total		$	325.4			$	281.6

     A reconciliation of Adjusted EBITDA to consolidated income from continuing operations, net of income taxes follows:

		Three Months Ended
		March 31,
		2009				2008
		(Dollars in millions)
Total Adjusted EBITDA		$	325.4			$	281.6
Depreciation, depletion and amortization			97.3				92.0
Asset retirement obligation expense			9.4				6.7
Interest expense			51.1				59.5
Interest income			(2.8	)			(1.1	)
Income tax provision			29.9				46.4
Income from continuing operations, net of income taxes		$	140.5			$	78.1

(12) Risk Management and Fair Value Measurements

Risk Management — Non Coal Trading

     The Company is exposed to various types of risk in the normal course of business, including fluctuations in commodity prices, interest rates and foreign currency exchange rates. These risks are actively monitored in an effort to ensure compliance with the risk management policies of the Company. In most cases, commodity price risk (excluding coal trading activities) related to the sale of coal is mitigated through the use of long-term, fixed-price contracts rather than financial instruments. Commodity price risk (diesel fuel and explosives), interest rate risk and foreign currency exchange risk are discussed in detail below.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Interest Rate Swaps

     The Company is exposed to interest rate risk on its fixed rate and variable rate long-term debt. The interest rate risk associated with the fair value of the Company’s fixed rate borrowings is managed using fixed-to-floating interest rate swaps to effectively convert a portion of the underlying cash flows on the debt into variable rate cash flows. The Company designates these swaps as fair value hedges, with the objective of hedging against changes in the fair value of the fixed rate debt that results from market interest rate changes. The interest rate risk associated with the Company’s variable rate borrowings is managed using floating-to-fixed interest rate swaps. The Company designates these swaps as cash flow hedges, with the objective of reducing the variability of cash flows associated with market interest rate changes.

Foreign Currency Risk

     The Company is exposed to foreign currency exchange rate risk on Australian dollar expenditures made in its Australian Mining segment. This risk is managed by entering into forward contracts and options that the Company designates as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted Australian dollar expenditures.

Diesel Fuel and Explosives Hedges

     The Company is exposed to commodity price risk associated with diesel fuel in the U.S. and Australia and explosives in the U.S. Explosives costs, and a portion of the diesel fuel costs in Australia are included in the fees paid to the Company’s contract miners. This risk is managed through the use of fixed price contracts, cost plus contracts and derivatives, primarily swaps. The Company has generally designated the swap contracts as cash flow hedges, with the objective of reducing the variability of cash flows associated with the forecasted purchase of diesel fuel and explosives.

     The following summarizes the Company’s interest rate, foreign currency and commodity positions at March 31, 2009:

		Notional Amount by Term to Maturity
																										2014 and
		Total				2009				2010				2011				2012				2013				Thereafter
Interest Rate Swaps
Fixed-to-floating (dollars in millions)		$	150.0			$	—			$	—			$	—			$	—			$	50.0			$	100.0
Floating-to-fixed (dollars in millions)		$	186.0			$	—			$	—			$	120.0			$	—			$	—			$	66.0
Foreign Currency
A$:US$ forwards and options (A$ millions)			2,430.4				891.1				919.3				540.0				80.0				—				—
Commodity Contracts
Diesel fuel hedge contracts (million gallons)			168.7				73.8				64.4				27.9				2.6				—				—
U.S. explosives hedge contracts (million MMBtu)			5.2				2.2				3.0				—				—				—				—

		Account Classification by												Fair Value -
		Cash Flow				Fair Value				Economic				Asset
		Hedge				Hedge				Hedge				(Liability)
Interest Rate Swaps
Fixed-to-floating (dollars in millions)		$	—			$	150.0			$	—			$	4.8
Floating-to-fixed (dollars in millions)		$	186.0			$	—			$	—			$	(17.7	)
Foreign Currency
A$:US$ forwards and options (A$ millions)			2,430.4				—				—				(249.2	)
Commodity Contracts
Diesel fuel hedge contracts (million gallons)			165.3				—				3.4				(157.5	)
U.S. explosives hedge contracts (million MMBtu)			4.8				—				0.4				(18.6	)

     The Company assesses both at inception and at least quarterly thereafter, whether the derivatives used in hedging activities are highly effective at offsetting the changes in the anticipated cash flows of the hedged item. The effective portion of the change in the fair value is recorded as a separate component of stockholders’ equity until the hedged transaction occurs, whereby gains and losses are reclassified to the consolidated statement of operations in conjunction with the recognition of the underlying hedged item. The ineffective portion of the derivative’s change in fair value is recorded in the consolidated statement of operations. In addition, if the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, gains and losses on the derivative are recorded to the consolidated statements of operations.

     A measure of ineffectiveness is inherent in hedging future diesel fuel purchases with derivative positions based on crude oil or other mid-distillate commodities, especially given the recent volatility in the prices of refined products.

     The Company’s hedging of future explosives purchases is primarily through the use of derivative positions based on natural gas, which closely matches the contractual purchase price of explosives since price changes occur in a constant ratio of MMBtu per ton in the manufacture of explosives and generally carry a fixed surcharge.

     In some instances, the Company has designated an existing coal trading derivative as a hedge and, thus, the derivative has a non-zero fair value at hedge inception. The “off-market” nature of these derivatives, which is best described as an embedded financing element within the derivative, is a source of ineffectiveness. In other instances, the Company uses a coal trading derivative that settles at a time later than the occurrence of the cash flow being hedged. The hedge yields ineffectiveness to the extent that the derivative hedge contract is not highly effective in offsetting changes in the fair value of the hedged item.

     The table below shows the classification and amounts of gains and losses related to the Company’s non-trading hedges during the three months ended March 31, 2009:

				Gain (loss)				Gain (loss)				Gain (loss)				Gain (loss)
				recognized in				recognized in other				reclassified from				reclassified from
		Income Statement		income on non				comprehensive				other comprehensive				other comprehensive
		Classification Gains (Losses) -		designated				income on derivative				income into income				income into income
Financial Instrument		Realized		derivatives(1)				(effective portion)				(effective portion)				(ineffective portion)
		(Dollars in millions)
Interest rate swaps:
- Cash flow hedges		Interest expense		$	—			$	1.1			$	(3.0	)		$	—
Diesel fuel hedge contracts:
- Cash flow hedges		Operating costs and expenses			—				(10.5	)			(29.5	)			(1.9	)
- Economic hedges		Operating costs and expenses			(2.0	)			—				—				—
Explosives cash flow hedge contracts:
- Cash flow hedges		Operating costs and expenses			—				(5.9	)			(5.5	)			—
- Economic hedges		Operating costs and expenses			(2.0	)			—				—				—
Foreign currency cash flow forwards and options		Operating costs and expenses			—				(9.6	)			(44.2	)			—
Total				$	(4.0	)		$	(24.9	)		$	(82.2	)		$	(1.9	)

     Because the critical terms of the interest rate swaps and the respective debt instruments they hedge coincide, there was no hedge ineffectiveness recognized in the condensed consolidated statements of operations for these instruments during the three months ended March 31, 2009.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     As of March 31, 2009, the classification and amount of derivatives under SFAS No. 133 are as follows:

Current Assets

Noncurrent Assets

Financial Instrument

Balance Sheet Classification

Fair Value

Balance Sheet Classification

Fair Value

(Dollars in millions)

Interest rate swaps:

- Fair value hedges

Other current assets

$

—

Investments and other assets

$

4.8

Total

$

—

$

4.8

		Fair Value
		Current				Noncurrent
Financial Instrument		Liabilities(1)				Liabilities(2)
Interest rate swaps:
- Cash flow hedges		$	—			$	17.7
Diesel fuel hedge contracts:
- Cash flow hedges			90.2				65.3
- Economic hedges			2.0				—
Explosives cash flow hedge contracts:
- Cash flow hedges			11.7				4.9
- Economic hedges			2.0				—
Foreign currency cash flow forwards and options			143.3				105.9
Total		$	249.2			$	193.8

     In accordance with SFAS No. 161, the Company elected the trading exemption which allows alternate disclosures for its coal trading transactions. For further information, see Risk Management — Coal Trading below.

Risk Management — Coal Trading

     The Company buys and sells coal, freight and emissions allowances, both in over-the-counter markets and on exchanges. Under SFAS No. 133, all derivative coal trading contracts are accounted for on a fair value basis (as defined by SFAS No. 157), except those for which the Company has elected to apply a normal purchases and normal sales exception. For certain derivative coal trading contracts, the Company establishes fair values using bid/ask price quotations obtained from multiple, independent third-party brokers to value coal, freight and emission allowance positions from the over-the-counter market. Prices from these sources are then averaged to obtain trading position values. While the Company does not anticipate any decrease in the number of third-party brokers or market liquidity, the Company could experience difficulty in valuing its market positions should the number of third-party brokers decrease or if market liquidity is reduced. For its exchange-based positions, the Company utilizes published settlement prices. Non-derivative coal contracts and derivative contracts for which the Company has elected to apply a normal purchases and normal sales exception are accounted for on an accrual basis. See Note 4 for information related to the maturity and valuation of its trading portfolio.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Three Months
		Ended March 31,
Trading Revenue by Type of Instrument		2009
		(Dollars in millions)
Commodity swaps and options		$	75.3
Physical commodity purchase / sale contracts			0.9
Total Trading Revenue		$	76.2

     Trading revenues are recorded in “Other revenues” in the accompanying unaudited condensed consolidated statement of operations and include realized and unrealized gains and losses on both derivative instruments and nonderivative instruments.

Performance and Credit Risk

     The Company’s concentration of performance and credit risk is substantially with electric utilities, energy producers and energy marketers. The Company’s policy is to independently evaluate each customer’s creditworthiness prior to entering into transactions and to regularly monitor the credit extended. If the Company engages in a transaction with a counterparty that does not meet its credit standards, the Company seeks to protect its position by requiring the counterparty to provide an appropriate credit enhancement. These steps include obtaining letters of credit or cash collateral, requiring prepayments for shipments or the creation of customer trust accounts held for the Company’s benefit to serve as collateral in the event of a failure to pay. To reduce its credit exposure related to trading and brokerage activities, the Company seeks to enter into netting agreements with counterparties that permit the Company to offset receivables and payables with such counterparties and, to the extent required, will post or receive margin amounts associated with exchange-traded positions.

     In addition to credit risk, performance risk includes the possibility that a counterparty fails to deliver or accept agreed production or trading volumes. When appropriate (as determined by its credit management function), the Company has taken steps to reduce its exposure to customers or counterparties whose credit has deteriorated and who may pose a higher risk of failure to perform under their contractual obligations. These steps include obtaining letters of credit or cash collateral, requiring prepayments for shipments or the creation of customer trust accounts held for the Company’s benefit to serve as collateral in the event of a failure to pay.

     The Company conducts its various hedging activities related to foreign currency, interest rate, and fuel and explosives exposures with a variety of highly-rated commercial banks. In light of the recent turmoil in the financial markets the Company continues to closely monitor counterparty creditworthiness.

     Certain of the Company’s derivative instruments require the parties to provide additional performance assurances whenever a material adverse event jeopardizes one party’s ability to perform under the instrument. In the event the Company were to sustain a material adverse event (using commercially reasonable standards), the counterparties could request collateralization on derivative instruments in net liability positions, which had an aggregate fair value on March 31, 2009 of $108.7 million with no collateral posted. As of March 31, 2009, if such an event were to occur, the Company could be required to post up to $108.7 million of collateral to its counterparties.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Certain of the Company’s other derivative instruments require the parties to provide additional performance assurances whenever a credit downgrade occurs below a certain level as specified in each underlying contract. The terms of such instruments typically require additional collateralization on an incremental basis, which is commensurate with the severity of the credit downgrade. The aggregate fair value of all derivative instruments with such features that are in a net liability position on March 31, 2009, is $26.5 million for which the Company has posted collateral of $0.3 million in the normal course of business. As of March 31, 2009, if a credit downgrade were to occur below a certain level, the Company could be required to post a maximum amount of $26.2 million of collateral to its counterparties.

     The Company also has exchange-traded positions that require collateral be posted for its entire net liability position. As of March 31, 2009, the Company has posted collateral of $23.5 million for exchange-traded positions.

Fair Value Measurements

     In accordance with SFAS No. 157, the Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. These levels include: Level 1, inputs are quoted prices in active markets for the identical assets or liabilities; Level 2, inputs other than quoted prices included in Level 1 that are directly or indirectly observable through market-corroborated inputs; and Level 3, inputs are unobservable, or observable but cannot be market-corroborated, requiring the Company to make assumptions about pricing by market participants.

     The following table sets forth as of March 31, 2009, the hierarchy of the Company’s net financial asset (liability) positions for which fair value is measured on a recurring basis:

		Level 1				Level 2				Level 3				Total
		(Dollars in millions)
Commodity swaps and options — coal trading activities		$	(1.5	)		$	245.0			$	—			$	243.5
Commodity swaps and options — other than coal			—				(176.1	)			—				(176.1	)
Physical commodity purchase/sale contracts — coal trading activities			—				124.2				(3.6	)			120.6
Interest rate swaps			—				(12.9	)			—				(12.9	)
Foreign currency forwards and options			—				(249.2	)			—				(249.2	)
Total net financial assets (liabilities)		$	(1.5	)		$	(69.0	)		$	(3.6	)		$	(74.1	)

     For Level 1 and 2 financial assets and liabilities, the Company utilizes both direct and indirect observable price quotes, including LIBOR yield curves, New York Mercantile Exchange indices and other market quotes. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:

	•		Commodity swaps and options — coal trading activities: generally valued based on unadjusted quoted prices in active markets (Level 1) or a valuation that is corroborated by the use of market-based pricing (Level 2).
	•		Commodity swaps and options — other than coal: generally valued based on a valuation that is corroborated by the use of market-based pricing (Level 2).
	•		Physical commodity purchase/sale contracts — coal trading activities: purchases and sales at locations with significant market activity corroborated by market-based information (Level 2).
	•		Interest rate swaps: valued based on quoted inputs from counterparties corroborated with observable market data (Level 2).
	•		Foreign currency forwards and options: valued utilizing inputs obtained in quoted public markets (Level 2).

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Commodity swaps and options and physical commodity purchase/sale contracts transacted in less liquid markets or contracts, such as long-term arrangements with limited price availability were classified in Level 3. These instruments or contracts are valued based on quoted inputs from brokers or counterparties, or reflect methodologies that consider historical relationships among similar commodities to derive the Company’s best estimate of fair value. The Company has consistently applied these valuation techniques in all periods presented, and believes it has obtained the most accurate information available for the types of derivative contracts held.

     The following table summarizes the changes in the Company’s recurring Level 3 net financial assets (liabilities):

		Three Months Ended March 31,
		2009				2008
		(Dollars in millions)
Beginning of period		$	37.8			$	128.7
Total gains or losses (realized/unrealized):
Included in earnings			(4.7	)			26.7
Included in other comprehensive income			(11.2	)			(1.2	)
Purchases, issuances and settlements			(18.0	)			19.7
Net transfers out			(7.5	)			—
End of period		$	(3.6	)		$	173.9

     The following table summarizes the changes in unrealized gains (losses) relating to Level 3 net financial assets (liabilities) held both as of the beginning and the end of the period:

		Three Months Ended March 31,
		2009				2008
		(Dollars in millions)
Changes in unrealized gains (losses) (1)		$	(3.3	)		$	32.3

(13) Commitments and Contingencies

Commitments

     As of March 31, 2009, purchase commitments currently outstanding for capital expenditures were $45.6 million. Federal coal reserve lease payments due over the next 12 months are $63.9 million.

     From time to time, the Company or its subsidiaries are involved in legal proceedings arising in the ordinary course of business or related to indemnities or historical operations. The Company believes it has recorded adequate reserves for these liabilities and that there is no individual case pending that is likely to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company discusses its significant legal proceedings below.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Litigation Relating to Continuing Operations

Navajo Nation Litigation

     On June 18, 1999, the Navajo Nation served three of the Company’s subsidiaries, including Peabody Western Coal Company (Peabody Western), with a complaint that had been filed in the U.S. District Court for the District of Columbia. The Navajo Nation has alleged 16 claims, including Civil Racketeer Influenced and Corrupt Organizations Act (RICO) violations and fraud. The complaint alleges that the defendants jointly participated in unlawful activity to obtain favorable coal lease amendments. The plaintiff is seeking various remedies including actual damages of at least $600 million, which could be trebled under the RICO counts, punitive damages of at least $1 billion, a determination that Peabody Western’s two coal leases have terminated due to Peabody Western’s breach of these leases and a reformation of these leases to adjust the royalty rate to 20%. Subsequently, the court allowed the Hopi Tribe to intervene in this lawsuit and the Hopi Tribe is also seeking unspecified actual damages, punitive damages and reformation of its coal lease. One of the Company’s subsidiaries named as a defendant is now a subsidiary of Patriot. However, the Company is responsible for this litigation under the Separation Agreement entered into with Patriot in connection with the spin-off. On February 9, 2005, the U.S. District Court for the District of Columbia granted a consent motion to stay the litigation until further order of the court to allow parties to mediate. The mediation terminated without resolution and in March 2008 the court lifted the stay and litigation resumed. On April 6, 2009, the U.S. Supreme Court ruled against the Navajo Nation in a related case against the U.S. Government, and remanded that case to the lower court to dismiss the complaint. The U.S. Supreme Court said that none of the sources relied on by the Navajo Nation provided a basis for its breach-of-trust lawsuit against the U.S. Government, which undermines some of the claims the Navajo Nation asserts in its litigation against the Company.

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

Gulf Power Company Litigation

     On June 22, 2006, Gulf Power Company filed a breach of contract lawsuit against a Company subsidiary in the U.S. District Court, Northern District of Florida, contesting the force majeure declaration by the Company’s subsidiary under a coal supply agreement with Gulf Power Company and seeking damages for alleged past and future tonnage shortfalls of nearly 5 million tons under the agreement, which expired on December 31, 2007. In February 2008, the Court denied the Company’s motion to dismiss the Florida lawsuit or to transfer it to Illinois and retained jurisdiction over the case. The parties filed motions for summary judgment, which are pending before the court.

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

Claims and Litigation Relating to Indemnities or Historical Operations

Oklahoma Lead Litigation

     Gold Fields Mining, LLC (Gold Fields) is a dormant, non-coal producing entity that was previously managed and owned by Hanson PLC, the Company’s predecessor owner. In a February 1997 spin-off, Hanson PLC transferred ownership of Gold Fields to the Company, despite the fact that Gold Fields had no ongoing operations and the Company had no prior involvement in its past operations. Gold Fields is currently one of the Company’s subsidiaries. The Company indemnified TXU Group with respect to certain claims relating to a former affiliate of Gold Fields. A predecessor of Gold Fields formerly operated two lead mills near Picher, Oklahoma prior to the 1950s and mined, in accordance with lease agreements and permits, approximately 0.15% of the total amount of the crude ore mined in the county.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Gold Fields and two other companies are defendants in two class action lawsuits allegedly involving past operations near Picher, Oklahoma. The plaintiffs have asserted claims predicated on allegations of intentional lead exposure by the defendants and are seeking compensatory damages, punitive damages and the implementation of medical monitoring and relocation programs for the affected individuals. In December 2003, the Quapaw Indian tribe and certain Quapaw land owners filed a lawsuit against Gold Fields, five other companies and the U.S. The plaintiffs are seeking compensatory and punitive damages based on a variety of theories. In December 2007, the court dismissed the tribe’s medical monitoring claim. In July 2008, the court dismissed the tribe’s claim for interim and lost use damages under the Comprehensive Environmental Response, Compensation and Liability Act without prejudice to refile at the point the U.S. Environmental Protection Agency (EPA) selects a final remedy for the site. Gold Fields has filed a third-party complaint against the U.S. and other parties. In February 2005, the state of Oklahoma on behalf of itself and several other parties sent a notice to Gold Fields and other companies regarding a possible natural resources damage claim. All of the lawsuits are pending in the U.S. District Court for the Northern District of Oklahoma.

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

Environmental Claims and Litigation

     Environmental claims have been asserted against Gold Fields related to activities of Gold Fields or a former affiliate. Gold Fields or the former affiliate has been named a potentially responsible party (PRP) at five national priority list sites based on the Superfund Amendments and Reauthorization Act of 1986. Claims were asserted at 11 additional sites, bringing the total to 16, which have since been reduced to 12 by completion of work, transfer or regulatory inactivity. The number of PRP sites in and of itself is not a relevant measure of liability, because the nature and extent of environmental concerns varies by site, as does the estimated share of responsibility for Gold Fields or the former affiliate. Undiscounted liabilities for environmental cleanup-related costs for all of the sites noted above were $44.9 million as of March 31, 2009 and $45.3 million as of December 31, 2008, $7.2 million and $7.6 million of which was reflected as a current liability, respectively. These amounts represent those costs that the Company believes are probable and reasonably estimable. In September 2005, Gold Fields and other PRPs received a letter from the U.S. Department of Justice alleging that the PRP’s mining operations caused the EPA to incur approximately $125 million in residential yard remediation costs at Picher, Oklahoma and will cause the EPA to incur additional remediation costs relating to historical mining sites. In September 2008, Gold Fields and other PRPs received letters from the U.S. Department of Justice and the EPA re-initiating settlement negotiations. Gold Fields is participating in the settlement discussions. Gold Fields believes it has meritorious defenses to these claims. Gold Fields is involved in other litigation in the Picher area, and the Company indemnified TXU Group with respect to a defendant as is more fully discussed under the “Oklahoma Lead Litigation” caption above. Gold Fields has also been contacted by the State of Kansas (Kansas Department of Health and Environment) and is in negotiations for final resolution of natural resource damages claims at two sites. Significant uncertainty exists as to whether claims will be pursued against Gold Fields in all cases, and where they are pursued, the amount of the eventual costs and liabilities, which could be greater or less than the liabilities recorded in the condensed consolidated balance sheets. Based on the Company’s evaluation of the issues and their potential impact, the amount of any future loss cannot be reasonably estimated. However, based on current information, the Company believes these claims and litigation are likely to be resolved without a material adverse effect on its financial condition, results of operations or cash flows.

Other

     In addition, at times the Company become a party to other claims, lawsuits, arbitration proceedings and administrative procedures in the ordinary course of business in the U.S., Australia and other countries where the Company does business. Based on current information, the Company believes that the ultimate resolution of such other pending or threatened proceedings is not reasonably likely to have a material adverse effect on its financial position, results of operations or liquidity.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

New York Office of the Attorney General Subpoena

     The New York Office of the Attorney General sent a letter to the Company dated September 14, 2007 that referred to the Company’s “plans to build new coal-fired electric generating units,” and said that the “increase in CO₂ emissions from the operation of these units, in combination with Peabody Energy’s other coal-fired power plants, will subject Peabody Energy to increased financial, regulatory, and litigation risks.” The Company currently has no electricity generating capacity in place. The letter included a subpoena issued under New York state law, which seeks information and documents relating to the Company’s analysis of the risks associated with climate change and possible climate change legislation or regulations, and its disclosure of such risks to investors. The Company believes that it has made full and proper disclosure of these potential risks.

Alaskan Villages’ Claims

     In February 2008, the Native Village of Kivalina and the City of Kivalina filed a lawsuit in the U.S. District Court for the Northern District of California against the Company, several owners of electricity generating facilities and several oil companies. The plaintiffs are the governing bodies of a village in Alaska that they contend is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for nuisance, and allege that the defendants have acted in concert and are jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. The Company filed a motion to dismiss, which is expected to be heard by the court on May 19, 2009. The Company believes that this lawsuit is without merit and intends to defend against and oppose it vigorously, but cannot predict its outcome. Based on the Company’s evaluation of the issues and their potential impact, the amount of any future loss cannot be reasonably estimated. However, based on current information, the Company believes this matter is likely to be resolved without a materially adverse effect on its financial condition, results of operations or cash flows.

(14) Guarantees and Financial Instruments with Off-Balance Sheet Risk

     In the normal course of business, the Company is a party to guarantees and financial instruments with off-balance-sheet risk, such as bank letters of credit, performance or surety bonds and other guarantees and indemnities, which are not reflected in the accompanying condensed consolidated balance sheets. Such financial instruments are valued based on the amount of exposure under the instrument and the likelihood of required performance. In the Company’s past experience, virtually no claims have been made against these financial instruments. Management does not expect any material losses to result from these guarantees or off-balance-sheet instruments.

     Under the Company’s accounts receivable securitization program, undivided interests in a pool of eligible trade receivables contributed to its wholly-owned, bankruptcy-remote subsidiary are sold, without recourse, to a multi-seller, asset-backed commercial paper conduit (Conduit). Purchases by the Conduit are financed with the sale of highly rated commercial paper. The Company utilizes proceeds from the sale of its accounts receivable as an alternative to other forms of debt, effectively reducing its overall borrowing costs. The securitization program and the underlying facilities will effectively expire in May 2009, which the Company anticipates renewing. The securitization transactions have been recorded as sales, with those accounts receivable sold to the Conduit removed from the condensed consolidated balance sheets. The amount of undivided interests in accounts receivable sold to the Conduit was $229.0 million as of March 31, 2009 and $275.0 million as of December 31, 2008.

     The Company owns a 37.5% interest in a partnership that leases a coal export terminal from the Peninsula Ports Authority of Virginia under a 30-year lease that permits the partnership to purchase the terminal at the end of the lease term for a nominal amount. The partners have severally (but not jointly) agreed to make payments under various agreements which in the aggregate provide the partnership with sufficient funds to pay rents and to cover the principal and interest payments on the floating-rate industrial revenue bonds issued by the Peninsula Ports Authority, and which are supported by letters of credit from a commercial bank. As of March 31, 2009, the Company’s maximum reimbursement obligation to the commercial bank was, in turn, supported by two letters of credit totaling $42.8 million.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The Company is party to an agreement with the Pension Benefit Guaranty Corporation (PBGC) and TXU Europe Limited, an affiliate of the Company’s former parent corporation, under which the Company is required to make special contributions to two of the Company’s defined benefit pension plans and to maintain a $37.0 million letter of credit in favor of the PBGC. If the Company or the PBGC gives notice of an intent to terminate one or more of the covered pension plans in which liabilities are not fully funded, or if the Company fails to maintain the letter of credit, the PBGC may draw down on the letter of credit and use the proceeds to satisfy liabilities under the Employee Retirement Income Security Act of 1974, as amended. The PBGC, however, is required to first apply amounts received from a $110.0 million guarantee in place from TXU Europe Limited in favor of the PBGC before it draws on the Company’s letter of credit. On November 19, 2002, TXU Europe Limited was placed under the administration process in the United Kingdom (a process similar to bankruptcy proceedings in the U.S.) and continues under this process as of March 31, 2009. As a result of these proceedings, TXU Europe Limited may be liquidated or otherwise reorganized in such a way as to relieve it of its obligations under its guarantee.

     At March 31, 2009, the Company has a $108.3 million letter of credit for collateral for bank guarantees issued with respect to certain reclamation and performance obligations related to the mines acquired in the Excel Coal Limited acquisition.

Other Guarantees

     As part of arrangements through which the Company obtains exclusive sales representation agreements with small coal mining companies (the Counterparties), the Company issued financial guarantees on behalf of the Counterparties. These guarantees facilitate the Counterparties’ efforts to obtain bonding or financing. In the event of default, the Company has multiple recourse options, including the ability to assume the loans and procure title and use of the equipment purchased through the loans. If default occurs, the Company has the ability and intent to exercise its recourse options, so the liability associated with the guarantee has been valued at zero. The aggregate amount guaranteed by the Company for all such Counterparties was $9.8 million at March 31, 2009 and $10.0 million at December 31, 2008. The Company’s obligations under the guarantees extend to July 2013.

     The Company has a liability recorded of $61.8 million as of March 31, 2009 and December 31, 2008 related to reclamation and bonding commitments associated with the purchase of approximately 427 million tons of coal reserves and surface lands in the Illinois Basin in 2007.

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

     Two of the Company’s affiliates collectively own a 5.06% interest in the development of the Prairie State Energy Campus. The Company issued a guarantee on behalf of its affiliates for its proportionate share of obligations.

     The Company has provided financial guarantees under certain long-term debt agreements entered into by its subsidiaries, and substantially all of the Company’s subsidiaries provide financial guarantees under long-term debt agreements entered into by the Company. The maximum amounts payable under the Company’s debt agreements are equal to the respective principal and interest payments. For the descriptions of the Company’s (and its subsidiaries’) debt, see Part IV, Item 15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Supplemental guarantor/non-guarantor financial information is provided in Note 15.

PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     As part of the Patriot spin-off, the Company agreed to maintain in force several letters of credit that secured Patriot obligations for certain employee benefits and workers’ compensation obligations. These letters of credit are to be released upon Patriot satisfying the beneficiaries with alternate letters of credit or insurance. If Patriot is unable to satisfy the primary beneficiaries by June 30, 2011, they are then required to provide directly to the Company a letter of credit in the amount of the remaining obligation. The amount of letters of credit maintained by the Company securing Patriot obligations was $7.0 million at March 31, 2009 and December 31, 2008.

(15) Supplemental Guarantor/Non-Guarantor Financial Information

     In accordance with the indentures governing the 6.875% Senior Notes due March 2013, the 5.875% Senior Notes due March 2016, the 7.375% Senior Notes due November 2016 and the 7.875% Senior Notes due November 2026, certain wholly-owned U.S. subsidiaries of the Company have fully and unconditionally guaranteed these Senior Notes, on a joint and several basis. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to the Senior Note holders. The following historical financial statement information is provided for the Guarantor/Non-Guarantor Subsidiaries.

Peabody Energy Corporation
Unaudited Supplemental Condensed Consolidated Statements of Operations

		Three Months Ended March 31, 2009
		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
		(Dollars in millions)
Total revenues		$	—			$	1,187.3			$	405.8			$	(133.0	)		$	1,460.1
Costs and expenses
Operating costs and expenses			83.2				917.2				219.3				(133.0	)			1,086.7
Depreciation, depletion and amortization			—				72.5				24.8				—				97.3
Asset retirement obligation expense			—				8.6				0.8				—				9.4
Selling and administrative expenses			7.2				36.4				3.6				—				47.2
Other operating income:
Net gain on disposal or exchange of assets			—				(3.3	)			—				—				(3.3	)
(Income) loss from equity affiliates			(214.4	)			1.6				2.5				214.4				4.1
Interest expense			49.9				16.9				4.5				(20.2	)			51.1
Interest income			(3.9	)			(14.5	)			(4.6	)			20.2				(2.8	)
Income from continuing operations before income taxes			78.0				151.9				154.9				(214.4	)			170.4
Income tax provision (benefit)			(53.9	)			41.0				42.8				—				29.9
Income from continuing operations, net of income taxes			131.9				110.9				112.1				(214.4	)			140.5
Income (loss) from discontinued operations, net of income taxes			38.1				(3.4	)			—				—				34.7
Net income			170.0				107.5				112.1				(214.4	)			175.2
Less: Net income attributable to noncontrolling interests			—				—				5.2				—				5.2
Net income attributable to common stockholders		$	170.0			$	107.5			$	106.9			$	(214.4	)		$	170.0