UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2005

Commission File Number 1-16463

PEABODY ENERGY CORPORATION

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

(314) 342-3400

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

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

Number of shares outstanding of each of the Registrant’s classes of Common Stock, as of April 30, 2005: Common Stock, par value $0.01 per share, 130,762,235 shares outstanding.

INDEX

PART I – FINANCIAL INFORMATION

See accompanying notes to unaudited condensed consolidated financial statements.

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PEABODY ENERGY CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

their fair values. The Company expects to adopt this standard on January 1, 2006. Based on stock option grants made in 2005 and currently anticipated for 2006, the Company estimates it will (assuming the modified prospective method is used) recognize expense for stock options for the year ending December 31, 2006 of $3.9 million, net of taxes. In addition, the Company began utilizing restricted stock as part of its equity-based compensation strategy in January 2005. Based on restricted stock grants made in 2005 and currently anticipated for 2006, the Company estimates it will recognize expense related to restricted stock of $0.8 million, net of taxes, in 2005 and $1.7 million, net of taxes, in 2006.

(3) Significant Transactions and Events

      Gain on Sale of Penn Virginia Resource Partners, L.P. Units

     In December 2002, the Company entered into a transaction with Penn Virginia Resource Partners, L.P. (“PVR”) whereby the Company sold 120 million tons of coal reserves in exchange for $72.5 million in cash and 2.76 million units, or 15%, of the PVR master limited partnership. The Company’s subsidiaries leased back the coal and pay royalties as the coal is mined. No gain or loss was recorded at the inception of this transaction.

     In March 2005, the Company sold its remaining 0.838 million PVR units for net proceeds of $41.9 million and recognized a $31.1 million gain on the sale. In the first quarter of 2004, the Company sold 0.575 million PVR units for net proceeds of $18.5 million and recognized a $9.9 million gain on the sale. The sales of the PVR units were accounted for under SFAS No. 66, “Sales of Real Estate.” As of March 31, 2005, a remaining deferred gain from the sales of the reserves and units of $19.0 million will be amortized over the minimum term of the leases.

      Contract Losses

     The Company recorded contract losses of approximately $34 million in the quarter ended March 31, 2005, primarily related to the breach of a coal supply contract by a producer (see Note 12, Commitments and Contingencies, for more details on the breach of contract and subsequent lawsuit by the Company). The estimated loss related to the supply contract breach reflects amounts accrued for estimated costs to obtain replacement coal in the current market, and no offsetting receivable from the producer who breached the contract has been assumed. The loss recorded is not equivalent to, nor indicative of, the economic losses (i.e. legal damages) sought by the Company as a result of the breach.

(4) Acquisition of Mining Assets

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

(5) Business Combinations

     On April 15, 2004, the Company purchased, through two separate agreements, all of the equity interests in three coal operations from RAG Coal International AG. The combined purchase price, including related costs and fees, of $442.2 million was funded from the Company’s equity and debt offerings in March 2004. Net proceeds from the equity and debt offerings were $383.1 million and $244.7 million, respectively. The purchases included two mines in Queensland, Australia that collectively produce 7 to 8 million tons per year of metallurgical coal and the Twentymile Mine in Colorado, which produces 7 to 8 million tons per year of steam coal. The results of operations of the two mines in Queensland, Australia are included in the Company’s Australian Mining Operations segment and the results of operations of the Twentymile Mine are included in the Company’s Western U.S. Mining segment. The acquisition was accounted for as a purchase.

     The preliminary purchase accounting allocations related to the acquisition have been recorded in the accompanying consolidated financial statements as of, and for periods subsequent to, April 15, 2004. The final valuation of the net assets acquired is expected to be finalized once third-party appraisals are completed. Given the size and complexity of the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

acquisition, the fair valuation of certain assets is still preliminary. Additionally, adjustment to the estimated liabilities assumed in connection with the acquisition may still be required. The Company expects to complete the valuations of the assets and liabilities acquired in the second quarter of 2005.

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

     The following unaudited pro forma financial information presents the combined results of operations of the Company and the operations acquired from RAG Coal International AG, on a pro forma basis, as though the companies had been combined as of the beginning of the quarter ended March 31, 2004. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and the operations acquired from RAG Coal International AG constituted a single entity during this period (dollars in thousands, except per share data):

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(7) Assets and Liabilities from Coal Trading Activities

     The Company’s coal trading portfolio included forward and swap contracts as of March 31, 2005 and December 31, 2004. The fair value of coal trading derivatives and related hedge contracts as of March 31, 2005 and December 31, 2004 is set forth below (dollars in thousands):

     Ninety-nine percent of the contracts in the Company’s trading portfolio as of March 31, 2005 were valued utilizing prices from over-the-counter market sources, adjusted for coal quality and traded transportation differentials, and 1% of the Company’s contracts were valued based on similar market transactions.

     As of March 31, 2005, the timing of the estimated future realization of the value of the Company’s trading portfolio was as follows:

     At March 31, 2005, 64% of the Company’s credit exposure related to coal trading activities was with investment grade counterparties. The Company’s coal trading operations traded 9.2 million tons and 9.9 million tons for the quarters ended March 31, 2005 and 2004, respectively.

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      Stock Compensation

     These interim financial statements include the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” The Company applies Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for its equity incentive plans. The Company recorded in “Selling and administrative expenses” in the condensed consolidated statements of operations $0.4 million and $0.1 million of compensation expense for equity-based compensation during each of the quarters ended March 31, 2005 and 2004, respectively. The following table reflects pro forma net income and basic and diluted earnings per share had compensation cost been determined for the Company’s non-qualified and incentive stock options based on the fair value at the grant dates consistent with the methodology set forth under SFAS No. 123 (dollars in thousands, except per share data):

(9) Comprehensive Income

     The following table sets forth the after-tax components of comprehensive income for the quarters ended March 31, 2005 and 2004 (dollars in thousands):

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

     Other 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 hedges and interest rate swaps) during the period. Increases in crude and heating oil prices and interest rates during the quarter ended March 31, 2005 resulted in increased valuations of these hedging instruments.

(10) Pension and Postretirement Benefit Costs

      Components of Net Periodic Pension Costs

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

      Curtailment

     The curtailment loss resulted from the planned closure of two of the three operating mines that participate in the Western Surface UMWA Pension Plan (the “Plan”) during 2005. The loss is actuarially determined and consists of an increase in the actuarial liability, the accelerated recognition of previously unamortized prior service cost and contractual termination benefits under the Plan resulting from the closures.

      Contributions

     The Company previously disclosed in its financial statements for the year ended December 31, 2004 that it expected to contribute $4.6 million to its funded pension plans and make $1.2 million in expected benefit payments attributable to its unfunded pension plans during 2005. As of March 31, 2005, $0.8 million of contributions have been made to the funded pension plans and $0.3 million of expected benefit payments attributable to the unfunded pension plans have been made.

      Components of Net Periodic Postretirement Benefits Costs

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

      Cash Flows

     The Company previously disclosed in its financial statements for the year ended December 31, 2004 that it expected to pay $85.7 million attributable to its postretirement benefit plans during 2005. As of March 31, 2005, payments of $20.8 million attributable to the Company’s postretirement benefit plans have been made.

(11) Segment Information

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

     Operating segment results for the quarters ended March 31, 2005 and 2004 are as follows (dollars in thousands):

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(12) Commitments and Contingencies

      Massey Coal Supply Agreement

     On March 9, 2005, the Company’s subsidiary, COALTRADE, LLC (“COALTRADE”), filed a lawsuit against Massey Coal Sales Company, Inc., (“Massey”) in the U.S. District Court for the Eastern District of Kentucky. The lawsuit sought to enforce COALTRADE’s contractual rights under a three-year coal supply agreement entered into by the parties effective January 1, 2003, and to recover damages caused by Massey’s repudiation and material breach of that agreement. On April 8, 2005, COALTRADE cancelled the coal supply agreement based upon Massey’s continuing refusal to deliver coal in accordance with its terms, and filed an amended complaint seeking recovery of damages for breach of contract and breach of duty of good faith and fair dealing. On April 18, 2005, Massey filed a counterclaim.

     While the outcome of litigation is subject to uncertainties, based on a preliminary evaluation of the issues and their potential impact, the Company believes it has a significant contractual and factual basis for its claim, and the Massey counterclaim has no merit.

      Environmental

     Superfund and similar state laws create liability for investigation and remediation in response to releases of hazardous substances in the environment and for damages to natural resources. Under that legislation and many state Superfund statutes, joint and several liability may be imposed on waste generators, site owners and operators and others regardless of fault.

     Environmental claims have been asserted against a subsidiary of the Company, Gold Fields Mining, LLC (“Gold Fields”), at 22 sites in the United States and remediation has been completed or substantially completed at four of those sites. Gold Fields is a dormant, non-coal producing entity that was previously managed and owned by Hanson PLC, a predecessor owner of the Company. In the February 1997 spin-off of its energy businesses, Hanson PLC combined Gold Fields with the Company. These sites are related to activities of Gold Fields or its former subsidiaries. Some of these claims are based on the Comprehensive Environmental Response Compensation and Liability Act of 1980 (“CERCLA”), as amended, and on similar state statutes.

     The Company’s policy is to accrue environmental cleanup-related costs of a noncapital nature when those costs are believed to be probable and can be reasonably estimated. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. For certain sites, the Company also assesses the financial capability of other potentially responsible parties and, where allegations are based on tentative findings, the reasonableness of the Company’s apportionment. The Company has not anticipated any recoveries from insurance carriers or other

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

potentially responsible third parties in the estimation of liabilities recorded on its consolidated balance sheets. Undiscounted liabilities for environmental cleanup-related costs totaled $40.0 million at March 31, 2005 and $40.5 million at December 31, 2004, $14.9 million and $15.1 million of which was a current liability, respectively. These amounts represent those costs that the Company believes are probable and reasonably estimable. Significant uncertainty exists as to whether claims will be pursued against Gold Fields in all cases, and where they are pursued, the amount of the eventual costs and liabilities, which could be greater or less than this provision. The Company anticipates that all significant remaining environmental remediation costs discussed above will be paid by the end of 2009.

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

      Navajo Nation

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

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

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

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

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

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

     Peabody Western filed a motion to compel arbitration of these claims, which was granted in part by the trial court. Specifically, the trial court ruled that the mine decommissioning costs were subject to arbitration but that the retiree health care costs were not subject to arbitration. This ruling was subsequently upheld on appeal. As a result, Peabody Western, Salt River Project and the other owners of the Navajo Generating Station will arbitrate the mine decommissioning costs issue and will litigate the retiree health care costs issue. The Company has recorded a receivable for mine decommissioning costs of $70.3 million and $68.6 million included in “Investments and other assets” in the condensed consolidated balance sheets at March 31, 2005 and December 31, 2004, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

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

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

     Peabody Western has a long-term coal supply agreement with the owners of the Mohave Generating Station that expires on December 31, 2005. Southern California Edison (the majority owner and operator of the plant) is involved in a California Public Utilities Commission proceeding related to the operation of the Mohave plant beyond 2005 or a temporary or permanent shutdown of the plant. In filings with the California Public Utilities Commission, the operator affirmed that the Mohave plant was not forecast to return to service as a coal-fueled resource until mid-2009 at the earliest if the plant is shutdown at December 31, 2005. On December 2, 2004, the California Public Utilities Commission issued an opinion authorizing Southern California Edison to make necessary expenditures at the Mohave plant to preserve the “Mohave-open” option while Southern California Edison continues to seek resolution of the water and coal issues. There is a dispute with the Hopi Tribe regarding the use of groundwater in the transportation of the coal by pipeline from Peabody Western’s Black Mesa Mine to the Mohave plant. As a part of the alternate dispute resolution referenced in the Navajo Nation litigation, Peabody Western has been participating in mediation with the owners of the Mohave Generating Station and the Navajo Generating Station, and the two tribes to resolve the complex issues surrounding the groundwater dispute and other disputes involving the two generating stations. Resolution of these issues is critical to the continuation of the operation of the Mohave Generating Station and the renewal of the coal supply agreement after December 31, 2005. There is no assurance that the issues critical to the continued operation of the Mohave plant will be resolved. Since these issues have not been resolved, it is more likely than not that the operation of the Mohave plant will cease or be suspended on December 31, 2005. In the event the Mohave plant shuts down, the operations of the Black Mesa Mine could be adversely impacted starting in the third quarter of 2005, and the mine would be shut down at the end of 2005. The Mohave plant is the sole customer of the Black Mesa Mine, which sold 1.3 million tons of coal in the first quarter of 2005 and 4.7 million tons during the year ended December 31, 2004. During the first quarter of 2005, the mine generated $4.5 million of Adjusted EBITDA (reconciled to its most comparable measure under generally accepted accounting principles in Note 11), which represented 2.7% of the Company’s total of $166.0 million. In 2004, the mine contributed $25.2 million, or 4.5% of the Company’s total Adjusted EBITDA of $559.2 million.

      Oklahoma Lead Litigation

     Gold Fields and three other companies are defendants in two class action lawsuits filed in the U.S. District Court for the Northern District of Oklahoma. The plaintiffs have asserted nuisance and trespass claims predicated on allegations of intentional lead exposure by the defendants and are seeking compensatory damages for diminution of property value, punitive damages and the implementation of medical monitoring and relocation programs for the affected individuals. A predecessor of Gold Fields formerly operated two lead mills near Picher, Oklahoma prior to the 1950’s. Gold Fields has agreed to indemnify one of the other defendants, which is a former subsidiary of Gold Fields.

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

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

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

      Other

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

     Accounts receivable in the consolidated balance sheets as of March 31, 2005 and December 31, 2004 includes $19.1 million and $18.1 million, respectively, of receivables billed between 2001 and 2005 related to legal fees incurred in the Company’s defense of the Navajo lawsuit discussed above. The billings have been disputed by two customers, who have withheld payment. The Company believes these billings were made properly under the coal supply agreement with each customer. The Company is in arbitration and litigation with these customers to resolve this issue and believes the receivables to be fully collectible under the terms of each agreement.

     At March 31, 2005, purchase commitments for capital expenditures were approximately $186.0 million.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

(13) Supplemental Guarantor/Non-Guarantor Financial Information

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

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

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(14) Guarantees

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

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

     The Company owns a 49.0% interest in a joint venture that operates an underground mine and preparation plant facility in West Virginia. The partners have severally agreed to guarantee the debt of the joint venture, which consists of an $18.0 million loan facility as of March 31, 2005. The total amount of the joint venture’s debt guaranteed by the Company was $8.8 million as of March 31, 2005.

     The Company has guaranteed the performance of Asset Management Group (“AMG”) under a coal purchase contract with a third party, which has terms extending through December 31, 2006. Default occurs upon AMG’s non-delivery of specified monthly tonnage. In the event of a default, the Company assumes AMG’s position for the remaining term of the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

purchase contract. The guarantee arose from an agreement by which AMG mines under a royalty-based contract with the Company. As of March 31, 2005, the maximum potential future payments under this guarantee are approximately $16 million, based on current spot coal prices. As a matter of recourse in the event of a default, the Company has access to a minimal amount of cash held in escrow and the ability to trigger an assignment of the AMG assets to the Company. Based on these recourse options and the remote probability of non-performance by AMG due to their proven operating history, the Company has valued the liability associated with the guarantee at zero.

     As part of an arrangement through which the Company obtained an exclusive sales representation agreement with a coal mining company (the “Counterparty”) that operates surface mining operations in Illinois, the Company issued a financial guarantee in May 2004 on behalf of the Counterparty. This guarantee facilitated the Counterparty’s efforts to obtain reclamation bonding for the surface mine that will produce the coal to be purchased under the sales representation agreement. The total amount guaranteed by the Company was $1.1 million, and the fair value of the guarantee recognized as a liability was less than $0.1 million as of March 31, 2005. The Company’s obligation under the guarantee is scheduled to expire by June 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 assume that no amounts could be recovered from third parties.

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

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

Cautionary Notice Regarding Forward-Looking Statements

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

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

	•	growth of domestic and international coal and power markets;
	•	coal’s market share of electricity generation;
	•	future worldwide economic conditions;
	•	economic and political stability of countries in which we have operations or serve customers;
	•	weather;
	•	transportation performance and costs, including demurrage;
	•	ability to renew sales contracts;
	•	successful implementation of business strategies;
	•	regulatory and court decisions;
	•	future legislation;
	•	variation in revenues related to synthetic fuel production;
	•	changes in postretirement benefit and pension obligations;
	•	labor relations and availability;
	•	availability and costs of credit, surety bonds and letters of credit;
	•	the effects of changes in currency exchange rates;
	•	price volatility and demand, particularly in higher-margin products;
	•	risks associated with customers;
	•	reductions of purchases by major customers;
	•	geology and equipment risks inherent to mining;
	•	terrorist attacks or threats;
	•	performance of contractors or third party coal suppliers;
	•	replacement of reserves;
	•	implementation of new accounting standards;
	•	inflationary trends, including those impacting materials used in our business;
	•	the effects of interest rate changes;
	•	the effects of acquisitions or divestitures;
	•	changes to contribution requirements to multi-employer benefit funds; and
	•	other factors, including those discussed in “Legal Proceedings.”

          When considering these forward-looking statements, you should keep in mind the cautionary statements in this document, the “Risks Relating to Our Company” section of Item 7 of our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission and all related documents incorporated by reference. We do not undertake any obligation to update these statements.

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Overview

     We are the largest private sector coal company in the world, with majority interests in 32 active coal operations located throughout all major U.S. coal producing regions and internationally in Australia. We also own a 25.5% interest in Carbones del Guasare, which owns and operates the Paso Diablo Mine in Venezuela. In the first quarter of 2005, we sold 59.1 million tons of coal. In 2004, we sold 227.2 million tons of coal that accounted for 20% of all U.S. coal sales, and were more than 85% greater than the sales of our closest competitor. The Energy Information Administration published that 1.1 billion tons of coal was consumed in the United States in 2004 and expects domestic consumption of coal by electricity generators to grow at a rate of 1.6% per year through 2025. Coal-fueled generation is used in most cases to meet baseload electricity requirements, and coal use generally grows at the pace of electricity growth. In 2004, coal’s share of electricity generation was approximately 52%.

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

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

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

     Our Australian Mining operations consist of four mines. The Burton and North Goonyella mines were acquired in April 2004. We recently opened the Eaglefield Mine, which is a surface operation adjacent to, and fulfilling contract tonnages in conjunction with, the North Goonyella underground mine. In addition, we have owned and operated our Wilkie Creek Mine since 2002. Our Australian Mining operations are characterized by surface and underground extraction processes, mining primarily low-sulfur, metallurgical coal sold to an international customer base.