UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

or

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

For the transition period from                      to                     

PEABODY ENERGY CORPORATION

(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 þ      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 268,793,357 shares of common stock with a par value of $0.01 per share outstanding at April 30, 2010.

 

 

INDEX

PART I — FINANCIAL INFORMATION

		Page
Item 1. Financial Statements.
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009			1
Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009			2
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009			3
Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2010			4
Notes to Unaudited Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 6. Exhibits			41
SIGNATURE			42
EXHIBIT INDEX			43
EX-4.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PEABODY ENERGY CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended March 31,
		2010				2009
Revenues
Sales		$	1,385.1			$	1,280.0
Other revenues			130.5				173.0
Total revenues			1,515.6				1,453.0
Costs and expenses
Operating costs and expenses			1,108.7				1,080.7
Depreciation, depletion and amortization			105.5				96.3
Asset retirement obligation expense			9.5				9.4
Selling and administrative expenses			55.4				46.1
Other operating (income) loss:
Net gain on disposal or exchange of assets			(7.3	)			(3.3	)
Loss from equity affiliates			1.6				4.1
Operating profit			242.2				219.7
Interest expense			50.0				51.1
Interest income			(1.0	)			(2.8	)
Income from continuing operations before income taxes			193.2				171.4
Income tax provision			56.1				30.2
Income from continuing operations, net of income taxes			137.1				141.2
Income (loss) from discontinued operations, net of income taxes			(0.4	)			34.0
Net income			136.7				175.2
Less: Net income attributable to noncontrolling interests			3.0				5.2
Net income attributable to common stockholders		$	133.7			$	170.0
Income From Continuing Operations
Basic earnings per share		$	0.50			$	0.51
Diluted earnings per share		$	0.50			$	0.50
Net Income Attributable to Common Stockholders
Basic earnings per share		$	0.50			$	0.64
Diluted earnings per share		$	0.50			$	0.63
Dividends declared per share		$	0.07			$	0.06

See accompanying notes to unaudited condensed consolidated financial statements.

PEABODY ENERGY CORPORATION

		(Unaudited)
		March 31, 2010				December 31, 2009
		(Amounts in millions, except share and per
		share data)
ASSETS
Current assets
Cash and cash equivalents		$	1,025.4			$	988.8
Accounts receivable, net of allowance for doubtful accounts of $20.5 at March 31, 2010 and $18.3 at December 31, 2009			305.6				303.0
Inventories			343.2				325.1
Assets from coal trading activities, net			278.7				276.8
Deferred income taxes			29.4				40.0
Other current assets			266.3				255.3
Total current assets			2,248.6				2,189.0
Property, plant, equipment and mine development
Land and coal interests			7,576.0				7,557.3
Buildings and improvements			910.1				908.0
Machinery and equipment			1,456.6				1,391.2
Less: accumulated depreciation, depletion and amortization			(2,696.9	)			(2,595.0	)
Property, plant, equipment and mine development, net			7,245.8				7,261.5
Investments and other assets			560.9				504.8
Total assets		$	10,055.3			$	9,955.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt		$	14.3			$	14.1
Liabilities from coal trading activities, net			76.6				110.6
Accounts payable and accrued expenses			1,076.1				1,187.7
Total current liabilities			1,167.0				1,312.4
Long-term debt, less current maturities			2,734.7				2,738.2
Deferred income taxes			379.7				299.1
Asset retirement obligations			458.4				452.1
Accrued postretirement benefit costs			912.6				914.1
Other noncurrent liabilities			459.2				483.5
Total liabilities			6,111.6				6,199.4
Stockholders’ equity
Preferred Stock – $0.01 per share par value; 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2010 or December 31, 2009			—				—
Series A Junior Participating Preferred Stock – 1,500,000 shares authorized, no shares issued or outstanding as of March 31, 2010 or December 31, 2009			—				—
Perpetual Preferred Stock – 750,000 shares authorized, no shares issued or outstanding as of March 31, 2010 or December 31, 2009			—				—
Series Common Stock – $0.01 per share par value; 40,000,000 shares authorized, no shares issued or outstanding as of March 31, 2010 or December 31, 2009			—				—
Common Stock – $0.01 per share par value; 800,000,000 shares authorized, 277,597,943 shares issued and 268,779,512 shares outstanding as of March 31, 2010 and 276,848,279 shares issued and 268,203,815 shares outstanding as of December 31, 2009			2.8				2.8
Additional paid-in capital			2,083.8				2,067.7
Retained earnings			2,298.7				2,183.8
Accumulated other comprehensive loss			(121.0	)			(183.5	)
Treasury shares, at cost: 8,818,431 shares as of March 31, 2010 and 8,644,464 shares as of December 31, 2009			(328.9	)			(321.1	)
Peabody Energy Corporation’s stockholders’ equity			3,935.4				3,749.7
Noncontrolling interests			8.3				6.2
Total stockholders’ equity			3,943.7				3,755.9
Total liabilities and stockholders’ equity		$	10,055.3			$	9,955.3

See accompanying notes to unaudited condensed consolidated financial statements.

PEABODY ENERGY CORPORATION

		Three Months Ended March 31,
		2010				2009
		(Dollars in millions)
Cash Flows From Operating Activities
Net income		$	136.7			$	175.2
(Income) loss from discontinued operations, net of income taxes			0.4				(34.0	)
Income from continuing operations, net of income taxes			137.1				141.2
Adjustments to reconcile income from continuing operations, net of income taxes to net cash provided by operating activities:
Depreciation, depletion and amortization			105.5				96.3
Deferred income taxes			49.8				10.2
Share-based compensation			11.4				8.6
Amortization of debt discount and debt issuance costs			2.0				1.9
Net gain on disposal or exchange of assets			(7.3	)			(3.3	)
Loss from equity affiliates			1.6				4.1
Changes in current assets and liabilities:
Accounts receivable, including securitization			(2.0	)			92.7
Inventories			(18.1	)			(49.7	)
Net assets from coal trading activities			(6.2	)			20.9
Other current assets			3.7				11.9
Accounts payable and accrued expenses			(92.1	)			(124.4	)
Asset retirement obligations			6.7				8.5
Workers’ compensation obligations			2.5				0.5
Accrued postretirement benefit costs			5.4				5.1
Contributions to pension plans			(16.5	)			(1.0	)
Other, net			(12.9	)			(3.3	)
Net cash provided by continuing operations			170.6				220.2
Net cash used in discontinued operations			(6.6	)			(28.7	)
Net cash provided by operating activities			164.0				191.5
Cash Flows From Investing Activities
Additions to property, plant, equipment and mine development			(88.4	)			(35.7	)
Investment in Prairie State Energy Campus			(12.2	)			(12.6	)
Federal coal lease expenditures			—				(59.8	)
Proceeds from disposal of assets, net of notes receivable			4.4				4.5
Additions to advance mining royalties			(0.8	)			(2.4	)
Investments in equity affiliates and joint ventures			(15.7	)			—
Net cash used in investing activities			(112.7	)			(106.0	)
Cash Flows From Financing Activities
Payments of long-term debt			(2.6	)			(3.0	)
Dividends paid			(18.8	)			(16.0	)
Proceeds from stock options exercised			2.0				—
Other, net			4.7				10.5
Net cash used in financing activities			(14.7	)			(8.5	)
Net change in cash and cash equivalents			36.6				77.0
Cash and cash equivalents at beginning of period			988.8				449.7
Cash and cash equivalents at end of period		$	1,025.4			$	526.7

See accompanying notes to unaudited condensed consolidated financial statements.

PEABODY ENERGY CORPORATION

		Peabody Energy Corporation’s Stockholders’ Equity
																		Accumulated
						Additional												Other								Total
						Paid-in								Retained				Comprehensive				Noncontrolling				Stockholders’
		Common Stock				Capital				Treasury Stock				Earnings				Loss				Interests				Equity
		(Dollars in millions)
December 31, 2009		$	2.8			$	2,067.7			$	(321.1	)		$	2,183.8			$	(183.5	)		$	6.2			$	3,755.9
Comprehensive income:
Net income			—				—				—				133.7				—				3.0				136.7
Increase in fair value of cash flow hedges (net of $33.4 tax provision)			—				—				—				—				55.0				—				55.0
Postretirement plans and workers’ compensation obligations (net of $6.3 tax provision)			—				—				—				—				7.5				—				7.5
Comprehensive income															133.7				62.5				3.0				199.2
Dividends paid			—				—				—				(18.8	)			—				—				(18.8	)
Share-based compensation			—				11.4				—				—				—				—				11.4
Stock options exercised			—				2.0				—				—				—				—				2.0
Employee stock purchases			—				2.7				—				—				—				—				2.7
Shares relinquished			—				—				(7.8	)			—				—				—				(7.8	)
Distributions to noncontrolling interests			—				—				—				—				—				(0.9	)			(0.9	)
March 31, 2010		$	2.8			$	2,083.8			$	(328.9	)		$	2,298.7			$	(121.0	)		$	8.3			$	3,943.7

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 accompanying condensed consolidated financial statements as of March 31, 2010 and for the three months ended March 31, 2010 and 2009, 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, 2009 has been derived from the Company’s audited consolidated balance sheet. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2010.

     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.

     Certain amounts in prior periods have been reclassified to conform with the current year presentations with no effect on previously reported net income or stockholders’ equity.

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

     In January 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance that requires new fair value disclosures, including significant transfers in and out of Level 1 and Level 2 fair-value measurements and a description of the reasons for the transfers. In addition, the guidance requires new disclosures regarding activity in Level 3 fair value measurements, including a gross basis reconciliation. The new disclosure requirements became effective for interim and annual periods beginning January 1, 2010, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010 (January 1, 2011 for the Company). While the adoption of the guidance had an impact on the Company’s disclosures, it did not affect the Company’s results of operations, financial condition or cash flows. Further, the adoption of the gross presentation of Level 3 activity will also impact the Company’s disclosures, but will not affect its results of operations, financial condition or cash flows.

     In June 2009, the FASB issued accounting guidance on consolidations which clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The guidance also requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity, and additional disclosures about a company’s involvement in variable interest entities and any associated changes in risk exposure. The guidance became effective January 1, 2010, at which time there was no impact to the Company’s results of operations, financial condition or cash flows. The Company will continue monitoring and assessing its business ventures in accordance with the guidance.

     In June 2009, the FASB issued accounting guidance that seeks to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The guidance, which became January 1, 2010, had an impact on the Company’s disclosures, but did not affect the Company’s results of operations, financial condition or cash flows.

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

     In May 2009, the FASB issued guidance which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The guidance was subsequently amended in February 2010. The new guidance no longer requires Securities and Exchange Commission (SEC) filers to disclose the date through which subsequent events have been evaluated. The adoption of the guidance, which was effective upon issuance, did not have a material impact on the Company’s results of operations, financial condition or cash flows.

(3) Discontinued Operations

     Revenues resulting from discontinued operations (including assets held for sale) were $27.6 million and $80.6 million for the three months ended March 31, 2010 and 2009, respectively. Income (loss) before income taxes reflects a loss of $0.7 million for the three months ended March 31, 2010 and income of $54.1 million for the three months ended March 31, 2009. The income for the three months ended March 31, 2009 relates primarily to a coal excise tax refund.

     Total assets related to discontinued operations were $32.0 million and $40.6 million as of March 31, 2010 and December 31, 2009, respectively. Total liabilities associated with discontinued operations were $33.8 million and $47.1 million as of March 31, 2010 and December 31, 2009, respectively.

     See Note 2 to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for additional information regarding the Company’s discontinued operations.

(4) Assets and Liabilities from Coal Trading Activities

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

		March 31, 2010								December 31, 2009
		(Dollars in millions)
		Gross Basis				Net Basis				Gross Basis				Net Basis
Assets from coal trading activities		$	928.3			$	278.7			$	949.8			$	276.8
Liabilities from coal trading activities			(711.5	)			(76.6	)			(779.3	)			(110.6	)
Subtotal			216.8				202.1				170.5				166.2
Net margin held (1)			(14.7	)			—				(4.3	)			—
Net fair value of coal trading positions		$	202.1			$	202.1			$	166.2			$	166.2

     As of March 31, 2010, forward contracts made up 41% and 62% of the Company’s trading assets and liabilities, respectively; financial swaps represent most of the remaining balances. The net fair value of coal trading positions designated as cash flow hedges of anticipated future sales was an asset of $93.4 million as of March 31, 2010 and an asset of $93.0 million as of December 31, 2009. The net fair value of trading positions, including those designated as hedges of future cash flows, represents the net fair value of the trading portfolio.

     As of March 31, 2010, the estimated future realization of the value of the Company’s trading portfolio was as follows:

Year of
Expiration						Portfolio Total
	2010						34	%
	2011						59	%
	2012						7	%
							100	%

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

     At March 31, 2010, 56% of the Company’s credit exposure related to coal trading activities with investment grade counterparties and 44% with non-investment grade counterparties.

(5) Inventories

     Inventories consisted of the following:

		March 31, 2010				December 31, 2009
		(Dollars in millions)
Materials and supplies		$	101.8			$	106.5
Raw coal			69.3				80.5
Saleable coal			172.1				138.1
Total		$	343.2			$	325.1

(6) Income Taxes

     The income tax rate differed from the United States (U.S.) federal statutory rate as follows:

		Three Months Ended March 31,
		2010				2009
		(Dollars in millions)
Federal statutory rate		$	67.6			$	60.0
Excess depletion			(9.7	)			(16.7	)
Foreign earnings rate differential			(14.0	)			(15.5	)
Remeasurement of foreign income tax accounts			5.4				(0.9	)
State income taxes, net of U.S. federal tax benefit			2.4				(1.2	)
Tax credits			(3.6	)			(4.3	)
Changes in valuation allowance			4.4				0.8
Changes in tax reserves			1.8				6.6
Other, net			1.8				1.4
Total provision		$	56.1			$	30.2

     The change in the deferred tax balances during the three months ended March 31, 2010 was driven by utilization of net operating loss carryforwards and changes in the value of the Company’s cash flow hedges.

     The Company and the Internal Revenue Service (IRS) recently completed an alternative dispute resolution program (Fast Track Settlement) for two notices of proposed adjustments to decrease the Company’s net operating losses. A settlement agreement for the adjustment related to the liquidation of an insolvent subsidiary was reached, but no agreement was reached for the adjustment of interest income accrued by a foreign subsidiary. The Company will now begin the formal IRS appeals process to resolve the remaining issue. The Company expects to reduce its net unrecognized tax benefits by approximately $21 million within 12 months of this reporting date, subject to the applicable IRS approval process.

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

(7) Accumulated Other Comprehensive Income (Loss)

     The following table sets forth the after-tax components of comprehensive income (loss):

						Net Actuarial
						Loss
						Associated
						with				Prior Service
						Postretirement				Cost								Total
		Foreign				Plans and				Associated								Accumulated
		Currency				Workers’				with								Other
		Translation				Compensation				Postretirement				Cash Flow				Comprehensive
		Adjustment				Obligations				Plans				Hedges				Loss
		(Dollars in millions)
December 31, 2009		$	3.1			$	(343.5	)		$	(10.4	)		$	167.3			$	(183.5	)
Net increase in value of cash flow hedges			—				—				—				70.4				70.4
Reclassification from other comprehensive income to earnings			—				8.0				0.5				(15.4	)			(6.9	)
Current period change			—				(1.0	)			—				—				(1.0	)
March 31, 2010		$	3.1			$	(336.5	)		$	(9.9	)		$	222.3			$	(121.0	)

     Comprehensive income (loss) 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 during the periods. The values of the Company’s cash flow hedging instruments are affected by changes in interest rates, crude oil, diesel fuel, natural gas and coal prices and the U.S. dollar/Australian dollar exchange rate. The change in the value of the cash flow hedges during 2010 was primarily due to the strengthening of the Australian dollar against the U.S. dollar and higher commodity prices.

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

(8) Earnings per Share (EPS)

     The Company uses 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,
		2010				2009
		(In millions, except per share amounts)
EPS numerator:
Income from continuing operations, net of income taxes		$	137.1			$	141.2
Less: Net income (loss) attributable to noncontrolling interests			3.0				5.2
Income from continuing operations attributable to common stockholders before allocation of earnings to participating securities			134.1				136.0
Less: Earnings allocated to participating securities			(0.9	)			(1.2	)
Income from continuing operations attributable to common stockholders (1)			133.2				134.8
Income (loss) from discontinued operations, net of income taxes			(0.4	)			34.0
Net income attributable to common stockholders (1)		$	132.8			$	168.8
Weighted average shares outstanding — basic			266.5				265.3
Dilutive impact of share-based compensation			1.7				2.0
Weighted average shares outstanding — diluted (2)			268.2				267.3
Basic EPS attributable to common stockholders:
Income from continuing operations		$	0.50			$	0.51
Income (loss) from discontinued operations			—				0.13
Net income		$	0.50			$	0.64
Diluted EPS attributable to common stockholders:
Income from continuing operations		$	0.50			$	0.50
Income (loss) from discontinued operations			—				0.13
Net income		$	0.50			$	0.63

(9) Pension and Postretirement Benefit Costs

     Net periodic pension costs included the following components:

		Three Months Ended March 31,
		2010				2009
		(Dollars in millions)
Service cost for benefits earned		$	0.4			$	0.4
Interest cost on projected benefit obligation			12.6				12.8
Expected return on plan assets			(14.2	)			(15.2	)
Amortization of prior service cost and actuarial loss			5.8				0.8
Net periodic pension (benefit) costs		$	4.6			$	(1.2	)

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

     Net periodic postretirement benefit costs included the following components:

		Three Months Ended March 31,
		2010				2009
		(Dollars in millions)
Service cost for benefits earned		$	3.1			$	2.7
Interest cost on accumulated postretirement benefit obligation			14.5				14.0
Amortization of prior service cost and actuarial loss			6.9				4.3
Net periodic postretirement benefit costs		$	24.5			$	21.0

     During the three months ended March 31, 2010, the Company made discretionary contributions of approximately $16 million to its defined benefit pension plans. The Company expects to make additional discretionary contributions to such plans of approximately $12 million during the remainder of 2010, for a total of approximately $28 million.

     In March 2010, President Obama signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the Acts). Based on the Company’s analyses to date, it does not currently believe the Acts will result in a remeasurement of the Company’s postretirement health care liabilities, but will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available. The extent of the impact cannot be actuarially determined until related regulations are promulgated and additional interpretations of the Acts become available. Provisions within the Acts for which financial impacts to the Company’s postretirement health care liabilities are possible, but not currently determinable, include application of the excise tax on high-cost employer coverage. The Company does not expect the other provisions of the Acts to materially impact its postretirement health care liabilities or results of operations. The Acts also impact active employees through various changes and/or expansions of healthcare benefits and coverage. While the Company will continue to monitor and assess the effect of the Acts on its active employee population, the Company cannot reasonably predict at this time what the amount of any additional cost may be.

(10) Segment Information

     The Company reports its operations primarily through the following reportable operating segments: “Western U.S. Mining,” “Midwestern U.S. Mining,” “Australian Mining,” “Trading and Brokerage” and “Corporate and Other.” The Company’s chief operating decision maker uses Adjusted EBITDA as the primary measure of segment profit and loss. The Company defines Adjusted EBITDA 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, 2010 and 2009 were as follows:

		Three Months Ended
		March 31,
		2010				2009
		(Dollars in millions)
Revenues:
Western U.S. Mining		$	662.1			$	653.8
Midwestern U.S. Mining			309.4				310.7
Australian Mining			446.5				360.3
Trading and Brokerage			90.1				123.5
Corporate and Other			7.5				4.7
Total		$	1,515.6			$	1,453.0
Adjusted EBITDA:
Western U.S. Mining		$	207.9			$	183.2
Midwestern U.S. Mining			74.1				67.1
Australian Mining			123.3				83.2
Trading and Brokerage			32.4				65.5
Corporate and Other			(80.5	)			(73.6	)
Total		$	357.2			$	325.4

     A reconciliation of adjusted EBITDA to consolidated income from continuing operations follows:

		Three Months Ended
		March 31,
		2010				2009
		(Dollars in millions)
Total Adjusted EBITDA		$	357.2			$	325.4
Depreciation, depletion and amortization			105.5				96.3
Asset retirement obligation expense			9.5				9.4
Interest expense			50.0				51.1
Interest income			(1.0	)			(2.8	)
Income tax provision			56.1				30.2
Income from continuing operations, net of income taxes		$	137.1			$	141.2

(11) 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.

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. From time to time, the Company manages the interest rate risk associated with the fair value of its fixed rate borrowings 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 result 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. As of March 31, 2010, the Company had only one cash flow hedge in place.

     Foreign Currency Hedges. 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. As of March 31, 2010, the Company had only forward contracts in place.

     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.

     Notional Amounts and Fair Value. The following summarizes the Company’s interest rate, foreign currency and commodity positions at March 31, 2010:

		Notional Amount by Year of Maturity
																										2015 and
		Total				2010				2011				2012				2013				2014				thereafter
Interest Rate Swaps
Floating-to-fixed (dollars in millions)		$	120.0			$	—			$	120.0			$	—			$	—			$	—			$	—
Foreign Currency
A$:US$ hedge contracts (A$ millions)		$	3,834.7			$	1,082.1			$	1,138.8			$	957.2			$	377.6			$	279.0			$	—
Commodity Contracts
Diesel fuel hedge contracts (million gallons)			212.4				61.5				81.6				65.8				3.5				—				—
U.S. explosives hedge contracts (million MMBtu)			2.2				2.2				—				—				—				—				—

		Account Classification by
		Cash flow				Fair value				Economic					Fair Value
		hedge				hedge				hedge					Asset (Liability)
															(Dollars in millions)
Interest Rate Swaps
Floating-to-fixed (dollars in millions)		$	120.0			$	—			$	—				$	(7.7	)
Foreign Currency
A$:US$ hedge contracts (A$ millions)		$	3,834.7			$	—			$	—				$	249.6
Commodity Contracts
Diesel fuel hedge contracts (million gallons)			212.4				—				—				$	(4.8	)
U.S. explosives hedge contracts (million MMBtu)			2.2				—				—				$	(6.3	)

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

     Hedge Ineffectiveness. 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 impacts reported earnings, at which time gains and losses are reclassified to the consolidated statements of operations at the time of the recognition of the underlying hedged item. The ineffective portion of the derivative’s change in fair value is recorded in the consolidated statements 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 and refined petroleum products.

     The Company’s hedging of future explosives purchases also has an inherent measure of ineffectiveness as the derivative positions are primarily 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.

     With respect to the interest rate swaps, there was no hedge ineffectiveness recognized in the unaudited condensed consolidated statements of operations during the three months ended March 31, 2010 and 2009.

     The tables below show the classification and amounts of pre-tax gains and losses related to the Company’s non-trading hedges during the three months ended March 31, 2010 and 2009:

						Three Months Ended March 31, 2010
										Gain (loss)				Gain (loss)
						Gain (loss)				recognized in other				reclassified from				Gain (loss)
						recognized in				comprehensive				other				reclassified from
						income on non				income on				comprehensive				other comprehensive
		Income Statement Classification				designated				derivative				income into income				income into income
Financial Instrument		Gains (Losses) - Realized				derivatives				(effective portion)				(effective portion)				(ineffective portion)
						(Dollars in millions)
Interest rate swaps:
- Cash flow hedges		Interest expense				$	—			$	0.9			$	(1.2	)		$	—
Diesel fuel hedge contracts:
- Cash flow hedges		Operating costs and expenses					—				10.4				(7.1	)			1.0
Explosives cash flow hedge contracts:
- Cash flow hedges		Operating costs and expenses					—				(3.8	)			(2.3	)			—
Foreign currency cash flow hedge contracts		Operating costs and expenses					—				82.0				38.8				—
Total						$	—			$	89.5			$	28.2			$	1.0

						Three Months Ended March 31, 2009
						Gain (loss)				Gain (loss)				Gain (loss)				Gain (loss)
						recognized in				recognized in other				reclassified from				reclassified from
						income on non				comprehensive				other comprehensive				other comprehensive
		Income Statement Classification				designated				income on derivative				income into income				income into income
Financial Instrument		Gains (Losses) - 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 hedge contracts		Operating costs and expenses					—				(9.6	)			(44.2	)			—
Total						$	(4.0	)		$	(24.9	)		$	(82.2	)		$	(1.9	)

     The classification and amount of derivatives presented on a gross basis as of March 31, 2010 and December 31, 2009 are as follows:

		Fair Value as of March 31, 2010
		Current				Noncurrent				Current				Noncurrent
Financial Instrument		Assets				Assets				Liabilities				Liabilities
						(Dollars in millions)
Interest rate swap cash flow hedges		$	—			$	—			$	—			$	7.7
Diesel fuel cash flow hedge contracts			9.9				21.8				25.1				11.4
Explosives cash flow hedge contracts			—				—				6.3				—
Foreign currency cash flow hedge contracts			126.0				123.9				0.2				0.1
Total		$	135.9			$	145.7			$	31.6			$	19.2

		Fair Value as of December 31, 2009
		Current				Noncurrent				Current				Noncurrent
Financial Instrument		Assets				Assets				Liabilities				Liabilities
						(Dollars in millions)
Interest rate swaps:
- Fair value hedges		$	—			$	1.5			$	—			$	—
- Cash flow hedges			—				—				—				9.8
Diesel fuel cash flow hedge contracts			6.7				18.0				31.3				15.6
Explosives cash flow hedge contracts			0.1				—				4.9				—
Foreign currency cash flow hedge contracts			110.6				100.2				1.6				3.1
Total		$	117.4			$	119.7			$	37.8			$	28.5

     After netting, the fair values of the respective derivatives are reflected in “Other current assets,” “Investments and other assets,” “Accounts payable and accrued expenses,” and “Other noncurrent liabilities” in the condensed consolidated balance sheets.

     The Company elected the trading exemption under U.S. generally accepted accounting principles (GAAP) for its coal trading transactions which allows for reduced disclosure since it is the Company’s policy to include these instruments as a part of its trading book. For further information, see Risk Management — Coal Trading below.

     The Company engages in trading activities which include over-the-counter direct and brokered trading of coal and the related ocean freight along with the related fuel commodities (coal trading), some of which is subsequently exchange-cleared and some of which is bilaterally-cleared. Except those for which the Company has elected to apply a normal purchases and normal sales exception, derivative coal trading contracts are accounted for on a fair value basis. For derivative trading contracts, the Company establishes fair values using bid/ask price quotations or other market assessments obtained from multiple, independent third-party brokers to value its trading 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, such events could erode the quality of market information and therefore in valuing its market positions should the number of third-party brokers decrease or if market liquidity is reduced. For its exchange-cleared positions, the Company utilizes exchange-published settlement prices. See Note 4 for information related to the maturity and valuation of the Company’s trading portfolio.

		Three Months Ended March 31,
Trading Revenue by Type of Instrument		2010				2009
		(Dollars in millions)
Commodity swaps and options		$	27.4			$	57.0
Physical commodity purchase / sale contracts			28.6				19.2
Total trading revenue		$	56.0			$	76.2

     Trading revenues are recorded in “Other revenues” in the consolidated statements of operations and include realized and unrealized gains and losses on derivative instruments, including those under the normal purchases and normal sales exception.

     Hedge Ineffectiveness. 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 different time or has a different location basis than the occurrence of the cash flow being hedged. These collectively yield ineffectiveness to the extent that the derivative hedge contract does not exactly offset changes in the fair value or expected cash flows of the hedged item. The ineffective portion of the derivative’s change in fair value is recorded in the consolidated statements of operations.

Nonperformance and Credit Risk

     The fair value of the Company’s assets and liabilities reflects adjustments for nonperformance and credit risk. The concentration of nonperformance and credit risk is substantially with electric utilities, steel producers, 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. Also, 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 or perform. 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-cleared positions.

     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 trading 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 trading instruments in net liability positions which, based on an aggregate fair value at March 31, 2010 and December 31, 2009, could require the Company to post collateral of $55.8 million and $83.8 million, respectively, to its counterparties.

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

     Certain of the Company’s other derivative trading 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 derivative trading instruments typically require additional collateralization, which is commensurate with the severity of the credit downgrade. If a credit downgrade were to occur below contractually specified levels, the Company’s additional collateral requirements owed to its counterparties are estimated to be approximately $9 million at March 31, 2010 and approximately $16 million at December 31, 2009 based on the aggregate fair value of all derivative trading instruments with such features that are in a net liability position. No such collateral was posted at March 31, 2010 and $0.8 million was posted at December 31, 2009.

     The Company is required to post collateral on its exchange-settled positions for its entire net liability position, which was $14.6 million as of March 31, 2010 and $18.1 million as of December 31, 2009. In addition, the Company had posted $19.1 million and $29.7 million of collateral to meet the requirements of the respective exchanges at March 31, 2010 and December 31, 2009, respectively (reflected in “Other current assets”).

Fair Value Measurements

     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 tables set forth the hierarchy of the Company’s net financial asset (liability) positions for which fair value is measured on a recurring basis:

		March 31, 2010
		Level 1				Level 2				Level 3				Total
						(Dollars in millions)
Commodity swaps and options — coal trading activities		$	0.8			$	124.8			$	—			$	125.6
Commodity swaps and options — diesel fuel			—				(4.8	)			—				(4.8	)
Commodity swaps and options — explosives			—				(6.3	)			—				(6.3	)
Physical commodity purchase/sale contracts — coal trading activities			—				64.0				12.5				76.5
Interest rate swaps			—				(7.7	)			—				(7.7	)
Foreign currency hedge contracts			—				249.6				—				249.6
Total net financial assets (liabilities)		$	0.8			$	419.6			$	12.5			$	432.9

		December 31, 2009
		Level 1				Level 2				Level 3				Total
						(Dollars in millions)
Commodity swaps and options — coal trading activities		$	(1.7	)		$	80.7			$	—			$	79.0
Commodity swaps and options — diesel fuel			—				(22.2	)			—				(22.2	)
Commodity swaps and options — explosives			—				(4.8	)			—				(4.8	)
Physical commodity purchase/sale contracts — coal trading activities			—				70.2				17.0				87.2
Interest rate swaps			—				(8.3	)			—				(8.3	)
Foreign currency hedge contracts			—				206.1				—				206.1
Total net financial assets (liabilities)		$	(1.7	)		$	321.7			$	17.0			$	337.0

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

     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 and Intercontinental Exchange indices (ICE), broker quotes, published 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 modeling observable market data and corroborated with statements from counterparties (Level 2).
	•		Foreign currency hedge contracts: valued utilizing inputs obtained in quoted public markets (Level 2).

     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 Company did not have any transfers between Level 1 and Level 2 during the three months ended March 31, 2010. The Company’s policy is to value all transfers between levels using the beginning of period valuation. This represents a change in policy from those in effect at December 31, 2009. Previously, the end of the period values were used for transfers into Level 3 and beginning of period values for transfers out of Level 3.

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

		Three Months Ended March 31,
		2010				2009
		(Dollars in millions)
Beginning of period		$	17.0			$	37.8
Total gains or losses (realized/unrealized):
Included in earnings			(4.7	)			(14.1	)
Included in other comprehensive income			0.3				(13.7	)
Purchases, issuances and settlements			(0.1	)			(6.1	)
Transfers out			—				(7.5	)
End of period		$	12.5			$	(3.6	)

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

     The following table summarizes the changes in unrealized gains (losses) relating to Level 3 net financial assets still held at the end of the period:

		Three Months Ended March 31,
		2010				2009
		(Dollars in millions)
Changes in unrealized gains (losses) (1)		$	(1.2	)		$	(13.1	)

Fair Value — Other Financial Instruments

     The following methods and assumptions were used by the Company in estimating fair values for other financial instruments as of March 31, 2010 and December 31, 2009:

	•		Cash and cash equivalents, accounts receivable, including accounts receivable within the Company’s securitization program, and accounts payable and accrued expenses have carrying values which approximate fair value due to the short maturity or the financial nature of these instruments.
	•		Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available, and otherwise on estimated borrowing rates to discount the cash flows to their present value. The carrying amounts of the 7.875% Senior Notes due 2026 and the Convertible Junior Subordinated Debentures due 2066 are net of the respective unamortized note discounts.

     The carrying amounts and estimated fair values of the Company’s debt are summarized as follows:

		March 31, 2010								December 31, 2009
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
						(Dollars in millions)
Long-term debt		$	2,749.0			$	2,844.6			$	2,752.3			$	2,828.8

Commitments

     As of March 31, 2010, purchase commitments for capital expenditures were $68.2 million.

     The Company controls a 17.7% interest in the Newcastle Coal Infrastructure Group (NCIG), which is currently completing construction of a coal transloading facility in Newcastle, Australia. The facility, which is expected to be completed in 2010, is backed by take or pay agreements. Financing for the next stage of construction is currently being sought by NCIG. In the event there is a financing shortfall, the Company has committed to fund a pro-rata share of the financing along with the other NCIG shareholders. The Company’s share could be as much as $85 million Australian dollars (approximately $78 million U.S. dollars).

     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 alleged 16 claims, including Civil Racketeer Influenced and Corrupt Organizations Act (RICO) violations and fraud. On April 12, 2010, the Navajo Nation filed an amended complaint to substantially narrow the scope of the Navajo Nation’s claims by removing the RICO allegations but leaving the other 12 common law tort and contractual claims. 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, 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%. The court has 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 Coal Corporation (Patriot). However, the Company is responsible for this litigation under the Separation Agreement entered into with Patriot in connection with the spin-off. The U.S. Supreme Court has 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 (Gulf Power) 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 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. Gulf Power filed a motion for partial summary judgment on liability, and the Company subsidiary filed a motion for summary judgment seeking complete dismissal. On September 30, 2009, the court granted Gulf Power’s motion for partial summary judgment and denied the Company subsidiary’s motion for summary judgment. In October 2009, the Company subsidiary filed a motion for reconsideration which the court denied. The damages portion of the trial was held in February 2010; however, the court has not yet rendered its decision in the case.

     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 several other companies are defendants in two property damage lawsuits arising from past operations near Picher, Oklahoma. The plaintiffs are seeking compensatory damages for diminution in property values and punitive damages. These cases were originally filed as putative class actions, but the court has denied class certification and the cases were subsequently amended to include a number of individual plaintiffs. 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 12 additional sites, bringing the total to 17, which have since been reduced to 11 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 $48.8 million as of March 31, 2010 and $49.5 million as of December 31, 2009, $7.2 million and $7.9 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 continues to participate 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 consolidated balance sheets. Based on the Company’s evaluation of the issues and their potential impact, the total 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.

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

     Comer, et al v. Murphy Oil Co., et al. In April 2006, residents and owners of land and property along the Mississippi Gulf coast filed a purported class action lawsuit in the U.S. District Court in the Southern District of Mississippi against more than 45 oil, chemical, utility and coal companies, including the Company. The plaintiffs alleged that defendants’ greenhouse gas emissions “were a proximate and direct cause of the increase in the destructive capacity of Hurricane Katrina,” and sought damages based on several legal theories. The defendants filed motions to dismiss on the grounds of lack of personal and subject matter jurisdiction. In August 2007, the court granted defendants’ motion to dismiss for lack of subject matter jurisdiction finding that plaintiffs’ claims are barred by the political question doctrine and for lack of standing. In October 2009, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit reversed in part the decision of the trial court, holding that the plaintiffs had standing to assert their public and private nuisance, trespass and negligence claims. The court held that plaintiffs did not satisfy the prudential standing requirement for their unjust enrichment, fraudulent misrepresentation and civil conspiracy claims and dismissed those claims and ordered that the case be remanded to the district court for further proceedings. In March 2010, the Fifth Circuit ordered a hearing en banc before the full Fifth Circuit to consider plaintiffs’ appeal. Plaintiffs have filed their briefs, and defendants’ briefs are due in April. Oral argument is scheduled for May 24, 2010. 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.

     Native Village of Kivalina and City of Kivalina v. ExxonMobil Corporation, et al. 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. The defendants filed motions to dismiss on the grounds of lack of personal and subject matter jurisdiction. In September 2009, the court granted defendants’ motion to dismiss for lack of subject matter jurisdiction finding that plaintiffs’ federal claim for nuisance is barred by the political question doctrine and for lack of standing. The plaintiffs are appealing the court’s dismissal to the U.S. Court of Appeals for the Ninth Circuit. Plaintiffs filed their briefs, and defendants’ briefs are due June 20, 2010, with plaintiffs’ reply briefs due September 15, 2010.

Other

     In addition, at times the Company becomes 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.

     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.

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

(13) 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.

Letters of Credit and Bonding

     The Company has letters of credit, surety bonds and corporate guarantees (such as self bonds) in support of the Company’s reclamation, coal lease obligations, and workers’ compensation as follows as of March 31, 2010:

										Workers’
		Reclamation				Lease				Compensation
		Obligations				Obligations				Obligations				Other (1)				Total
										(Dollars in millions)
Self bonding		$	823.4			$	—			$	—			$	—			$	823.4
Surety bonds			748.7				116.4				8.1				58.2				931.4
Letters of credit			34.9				—				47.8				211.5				294.2
		$	1,607.0			$	116.4			$	55.9			$	269.7			$	2,049.0