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, 2003

Commission File Number 1-16463

                           PEABODY ENERGY CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            DELAWARE                                             13-4004153
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

    701 MARKET STREET, ST. LOUIS, MISSOURI                       63101-1826
--------------------------------------------------------------------------------
   (Address of principal executive offices)                      (Zip Code)

                                 (314) 342-3400
--------------------------------------------------------------------------------
              (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.                        [X] Yes         [ ] No

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

Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of April 30, 2003: Common Stock, par value $0.01 per share, 52,477,020
shares outstanding.



                                      INDEX



                                                                                                    Page
                                                                                                    ----
                                                                                                 
PART I.    FINANCIAL INFORMATION

     Item 1.  Financial Statements

              Unaudited Condensed Consolidated Statements of Operations for the Quarters
              Ended March 31, 2003 and 2002......................................................    2

              Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and
              December 31, 2002..................................................................    3

              Unaudited Condensed Consolidated Statements of Cash Flows for the Quarters
              Ended March 31, 2003 and 2002......................................................    4

              Notes to Unaudited Condensed Consolidated Financial Statements.....................    5

     Item 2.  Management's Discussion and Analysis of Financial Condition and Results of
              Operations.........................................................................   20

     Item 3.  Quantitative and Qualitative Disclosures About Market Risk.........................   24

     Item 4.  Controls and Procedures............................................................   25

PART II.   OTHER INFORMATION

     Item 1.  Legal Proceedings..................................................................   25

     Item 6.  Exhibits and Reports on Form 8-K...................................................   25




                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

                           PEABODY ENERGY CORPORATION
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
             (In thousands, except share and per share information)



                                                                           Quarter Ended
                                                                             March 31,
                                                                        2003           2002
                                                                    ------------   ------------
                                                                             
REVENUES
   Sales                                                            $    657,829   $    652,283
   Other revenues                                                         23,465         23,483
                                                                    ------------   ------------
      Total revenues                                                     681,294        675,766

COSTS AND EXPENSES
   Operating costs and expenses                                          566,620        536,161
   Depreciation, depletion and amortization                               56,047         58,677
   Asset retirement obligation expense                                     6,490              -
   Selling and administrative expenses                                    25,324         26,283
   Net gain on property and equipment disposals                           (7,718)          (305)
                                                                    ------------   ------------

OPERATING PROFIT                                                          34,531         54,950
   Interest expense                                                       26,152         24,903
   Early debt extinguishment costs                                        21,184              -
   Interest income                                                          (672)          (519)
                                                                    ------------   ------------
INCOME (LOSS) BEFORE INCOME TAXES
 AND MINORITY INTERESTS                                                  (12,133)        30,566
   Income tax provision (benefit)                                        (12,246)         4,585
   Minority interests                                                      1,050          3,666
                                                                    ------------   ------------

INCOME (LOSS) BEFORE ACCOUNTING CHANGES                                     (937)        22,315
   Cumulative effect of accounting changes, net of taxes                 (10,144)             -
                                                                    ------------   ------------
NET INCOME (LOSS)                                                   $    (11,081)  $     22,315
                                                                    ============   ============

BASIC EARNINGS PER COMMON SHARE:
   Income (loss) before accounting changes                          $      (0.02)  $       0.43
   Cumulative effect of accounting changes, net of taxes                   (0.19)             -
                                                                    ------------   ------------
   Net income (loss)                                                $      (0.21)  $       0.43
                                                                    ============   ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                            52,414,041     52,018,238
                                                                    ============   ============

DILUTED EARNINGS PER COMMON SHARE:
   Income (loss) before accounting changes                          $      (0.02)  $       0.42
   Cumulative effect of accounting changes, net of taxes                   (0.19)             -
                                                                    ------------   ------------
   Net income (loss)                                                $      (0.21)  $       0.42
                                                                    ============   ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                            52,414,041     53,731,426
                                                                    ============   ============

DIVIDENDS DECLARED PER SHARE                                        $       0.10   $       0.10
                                                                    ============   ============


           See accompanying notes to unaudited condensed consolidated
                             financial statements.

                                       2



                           PEABODY ENERGY CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
             (In thousands, except share and per share information)



                                                                              (Unaudited)
                                                                            March 31, 2003      December 31, 2002
                                                                            --------------      -----------------
                                                                                          
ASSETS
Current assets
   Cash and cash equivalents                                                  $    71,718          $    71,210
   Restricted cash                                                                509,592                    -
   Accounts receivable, less allowance for doubtful accounts of $1,309
    at March 31, 2003 and $1,331 at December 31, 2002                             249,612              153,212
   Materials and supplies                                                          41,623               39,416
   Coal inventory                                                                 206,351              190,272
   Assets from coal and emission allowance trading activities                      42,272               69,898
   Deferred income taxes                                                           10,380               10,361
   Other current assets                                                            16,477               15,554
                                                                              -----------          -----------
      Total current assets                                                      1,148,025              549,923

Property, plant, equipment and mine development, net of accumulated
 depreciation, depletion and amortization of $898,510 at March 31,
 2003 and $858,187 at December 31, 2002                                         4,303,150            4,273,042
Investments and other assets                                                      332,689              317,212
                                                                              -----------          -----------
      Total assets                                                            $ 5,783,864          $ 5,140,177
                                                                              ===========          ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Short-term borrowings and current maturities of long-term debt             $    21,522          $    47,515
   Notes called for redemption                                                    465,004                    -
   Liabilities from coal and emission allowance trading activities                 31,012               37,008
   Accounts payable and accrued expenses                                          590,155              547,013
                                                                              -----------          -----------
      Total current liabilities                                                 1,107,693              631,536
Long-term debt, less current maturities                                         1,173,057              981,696
Deferred income taxes                                                             479,661              499,310
Asset retirement obligations                                                      392,205              386,777
Workers' compensation obligations                                                 214,702              209,798
Accrued postretirement benefit costs                                              963,469              959,599
Obligation to industry fund                                                        47,814               49,760
Other noncurrent liabilities                                                      302,462              303,442
                                                                              -----------          -----------
      Total liabilities                                                         4,681,063            4,021,918
Minority interests                                                                 36,821               37,121
Stockholders' equity
   Preferred Stock - $0.01 per share par value; 10,000,000
      shares authorized, no shares issued or outstanding
      as of March 31, 2003 or December 31, 2002                                         -                    -
   Series Common Stock - $0.01 per share par value; 40,000,000
      shares authorized, no shares issued or outstanding
      as of March 31, 2003 or December 31, 2002                                         -                    -
   Common Stock - $0.01 per share par value; 150,000,000 shares authorized,
      52,440,718 shares issued and 52,423,513 shares outstanding as of
      March 31, 2003 and 150,000,000 shares authorized, 52,417,483 shares
      issued and 52,400,278 shares outstanding as of December 31, 2002                524                  524
   Additional paid-in capital                                                     958,993              958,567
   Retained earnings                                                              184,536              200,859
   Employee stock loans                                                              (407)              (1,142)
   Accumulated other comprehensive loss                                           (77,623)             (77,627)
   Treasury shares, at cost: 17,205 shares as of March 31, 2003
    and December 31, 2002, respectively                                               (43)                 (43)
                                                                              -----------          -----------
      Total stockholders' equity                                                1,065,980            1,081,138
                                                                              -----------          -----------
         Total liabilities and stockholders' equity                           $ 5,783,864          $ 5,140,177
                                                                              ===========          ===========


           See accompanying notes to unaudited condensed consolidated
                             financial statements.

                                       3



                           PEABODY ENERGY CORPORATION
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)



                                                                                        Quarter Ended
                                                                                          March 31,
                                                                               ------------------------------
                                                                                  2003                 2002
                                                                               ---------            ---------
                                                                                              
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                              $ (11,081)           $  22,315
   Cumulative effect of accounting changes, net of taxes                          10,144                    -
                                                                               ---------            ---------
      Income (loss) before accounting changes                                       (937)              22,315
Adjustments to reconcile income (loss) before accounting changes to
 net cash provided by operating activities:
   Depreciation, depletion and amortization                                       56,047               58,677
   Deferred income taxes                                                         (13,112)               4,585
   Early debt extinguishment costs                                                21,184                    -
   Amortization of debt discount and debt issuance costs                           2,289                2,859
   Net gain on property and equipment disposals                                   (7,718)                (305)
   Minority interests                                                              1,050                3,666
   Changes in current assets and liabilities:
      Accounts receivable                                                        (12,500)             (14,648)
      Materials and supplies                                                      (2,207)              (1,687)
      Coal inventory                                                             (16,079)             (21,833)
      Net assets from coal and emission allowance trading activities             (12,014)              (9,137)
      Other current assets                                                          (659)              (4,185)
      Accounts payable and accrued expenses                                       43,142              (17,851)
   Asset retirement obligations                                                   (2,237)                (265)
   Workers' compensation obligations                                               4,904                1,362
   Accrued postretirement benefit costs                                            5,363                  477
   Obligation to industry fund                                                    (1,946)                (761)
   Other, net                                                                     (7,019)              (1,854)
                                                                               ---------            ---------
      Net cash provided by operating activities                                   57,551               21,415
                                                                               ---------            ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, equipment and mine development                     (58,844)             (47,064)
Additions to advance mining royalties                                             (2,354)              (2,104)
Investment in joint venture                                                            -                 (475)
Proceeds from property and equipment disposals                                     8,139                  833
                                                                               ---------            ---------
   Net cash used in investing activities                                         (53,059)             (48,810)
                                                                               ---------            ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in revolving lines of credit                                         (121,584)              25,000
Proceeds from long-term debt, net of restricted cash proceeds                    591,311                2,375
Payments of long-term debt                                                      (361,915)             (14,687)
Reduction of securitized interests in accounts receivable                        (83,900)                   -
Payment of debt issuance costs                                                   (22,687)                   -
Distributions to minority interests                                               (1,350)              (2,825)
Dividend paid                                                                     (5,242)              (5,202)
Other                                                                              1,014                  227
                                                                               ---------            ---------
   Net cash provided by (used in) financing activities                            (4,353)               4,888
                                                                               ---------            ---------
Effect of exchange rate changes on cash and cash equivalents                         369                    -
Net increase (decrease) in cash and cash equivalents                                 508              (22,507)
Cash and cash equivalents at beginning of year                                    71,210               38,622
                                                                               ---------            ---------
Cash and cash equivalents at end of period                                     $  71,718            $  16,115
                                                                               =========            =========


           See accompanying notes to unaudited condensed consolidated
                              financial statements.

                                       4



                           PEABODY ENERGY CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003

(1)  BASIS OF PRESENTATION

     The condensed consolidated financial statements include the accounts of
Peabody Energy Corporation (the "Company") and its controlled affiliates. All
significant intercompany transactions, profits and balances have been eliminated
in consolidation. Certain prior year amounts have been reclassified to conform
with the current year presentation.

          The accompanying condensed consolidated financial statements as of
March 31, 2003 and for the quarters ended March 31, 2003 and 2002, 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, 2002 has been derived from the Company's audited
consolidated balance sheet. The results of operations for the quarter ended
March 31, 2003 are not necessarily indicative of the results to be expected for
the year ending December 31, 2003.

(2)  DEBT REFINANCING

     During March 2003, the Company entered into a series of transactions,
discussed in detail below, to refinance a substantial portion of its outstanding
indebtedness. The refinancing expanded the Company's revolving line of credit
capacity and will lower its overall borrowing costs. The Company's total
indebtedness (in thousands) consisted of the following at:



                                                                March 31, 2003   December 31, 2002
                                                                --------------   -----------------
                                                                           
Term Loan under Senior Secured Credit Facility                    $  450,000         $        -
6.875% Senior Notes due 2013                                         650,000                  -
9.625% Senior Subordinated Notes to be redeemed May 15, 2003         257,553            391,490
8.875% Senior Notes to be redeemed May 15, 2003                      207,451            316,498
5.0% Subordinated Note                                                76,207             85,055
Senior unsecured notes under various agreements                            -             58,214
Unsecured revolving credit agreement                                       -            116,584
Other                                                                 18,372             61,370
                                                                  ----------         ---------
                                                                  $1,659,583         $1,029,211
                                                                  ==========         ==========


     The following table shows the sources and uses (in thousands), through
March 31, 2003, of cash related to the refinancing transactions:


                                                                   
SOURCES:
   Revolving Credit Facility                                          $        -
   Term Loan under Senior Secured Credit Facility                        450,000
   6.875% Senior Notes due 2013                                          650,000
                                                                      ----------
      Total                                                           $1,100,000
                                                                      ==========

USES:
   Repayment of 9.625% Senior Subordinated Notes                      $  133,964
   Repayment of 8.875% Senior Notes                                      109,082
   Repayment of Black Beauty indebtedness                                203,215
   Fees and prepayment premiums paid in connection with refinancing       41,023
   Cash restricted for notes to be redeemed May 15, 2003                 509,592
   Cash                                                                  103,124
                                                                      ----------
      Total                                                           $1,100,000
                                                                      ==========


                                       5



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Use of Proceeds

     The Company has used and will use the $1.1 billion of proceeds from the
$450.0 million term loan under its Senior Secured Credit Facility and the $650.0
million in 6.875 % Senior Notes to repay and retire the following indebtedness:

    -    All of its 9.625% Senior Subordinated Notes

    -    All of its 8.875% Senior Notes

    -    Substantially all of Black Beauty's indebtedness

     During March 2003, the Company completed a tender offer to retire $134.0
million of its 9.625% Senior Subordinated Notes and $109.1 million of its 8.875%
Senior Notes. In addition, $203.2 million of Black Beauty indebtedness was
retired. The Company also incurred cash expenses related to the refinancing and
prepayment premiums related to the early extinguishment of debt totaling $41.0
million during the quarter. The remaining 9.625% Senior Subordinated Notes and
8.875% Senior Notes have been called for redemption and will be redeemed on May
15, 2003. The Company's balance sheet at March 31, 2003 reflects $509.6 million
in restricted cash that will be used to pay prepayment premiums, accrued
interest and the remaining principal balance of $465.0 million of the 9.625%
Senior Subordinated Notes and 8.875% Senior Notes (classified on the March 31,
2003 balance sheet as "Notes called for redemption"). The remaining cash
proceeds of $103.1 million were temporarily used to reduce the Company's $140.0
million accounts receivable securitization by $83.9 million and for investments
in cash equivalents. The reduction in securitized interests in accounts
receivable resulted in an $83.9 million increase in accounts receivable as of
March 31, 2003. On April 7, 2003, the securitization returned to near its total
capacity of $140.0 million as the Company used $90.0 million to acquire the
remaining 18.3% of Black Beauty. This acquisition is discussed in Note 10 to the
unaudited condensed consolidated financial statements. The Company's new debt
instruments are described in greater detail below.

Senior Secured Credit Facility

     On March 21, 2003, the Company entered into a new Senior Secured Credit
Facility that consists of a $600.0 million revolving credit facility and a
$450.0 million term loan. The new revolving credit facility, which currently
bears interest at LIBOR plus 2.0% and expires in March 2008, provides for
maximum borrowings and/or letters of credit of $600.0 million. The Company had
letters of credit outstanding under the facility of $231.2 million at March 31,
2003, leaving $368.8 million available for borrowing. The new $450.0 million
term loan, which is due in March 2010, currently bears interest at LIBOR plus
2.5%. The facility is secured by the capital stock and certain assets of the
Company's "restricted subsidiaries" (as defined in the facility). These
restricted subsidiaries are guarantors of the facility. Under the facility, the
Company must comply with certain financial covenants on a quarterly basis. These
covenants include a minimum EBITDA (as defined in the facility) interest
coverage ratio, a maximum "total obligations" (as defined in the facility) to
EBITDA ratio and a maximum senior secured debt to EBITDA ratio. The Company was
in compliance with these covenants as of March 31, 2003.

6.875% Senior Notes due 2013

     On March 21, 2003, the Company issued $650.0 million in senior notes, which
bear interest at 6.875% and are due in March 2013. The notes were sold in
accordance with Securities and Exchange Commission Rule 144A, and the Company
intends to file a registration statement with the Securities and Exchange
Commission that will enable the holders of these notes to exchange them for
publicly registered notes with substantially the same terms. The notes, which
are unsecured, are guaranteed by the Company's "restricted subsidiaries" as
defined in the note indenture. The note indenture contains covenants which,
among other things, limit the Company's ability to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, make other
restricted payments and investments, create liens, sell assets and merge or
consolidate with other entities. The notes are redeemable prior to March 15,
2008 at a redemption price equal to 100% of the principal amount plus a
make-whole premium (as defined in the indenture) and on or after March 15, 2008
at fixed redemption prices as set forth in the indenture.

                                       6



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Early Debt Extinguishment Costs

     In connection with the refinancing, the Company incurred early debt
extinguishment costs of $21.2 million during the quarter ended March 31, 2003.
These costs are comprised of the following:

    -    Payment of prepayment premiums and tender fees totaling $18.9 million;

    -    A non-cash charge to write-off debt issuance costs associated with the
         debt extinguished of $8.1 million; and

    -    A $5.8 million gain related to the termination and monetization of
         interest rate swaps associated with the debt extinguished.

     As a result of the adoption on January 1, 2003 of Statement of Financial
Accounting Standards ("SFAS") No. 145 "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections," gains or
losses on debt extinguishment previously reported as extraordinary items are
presented as a component of results from continuing operations unless the
extinguishment meets the criteria for classification as an extraordinary item in
Accounting Principles Board Opinion No. 30. The effect of the adoption and
application of this new standard in 2003 was to decrease income before
accounting changes for the quarter by $21.2 million, before taxes. Prior year
results of operations included no debt extinguishment costs.

     Upon the redemption and repayment of the remaining 9.625% Senior
Subordinated Notes and 8.875% Senior Notes on May 15, 2003, the Company will
incur early debt extinguishment costs of approximately $31.1 million, consisting
of $21.7 million of prepayment premiums and a non-cash charge to write-off $9.4
million of debt issuance costs associated with the debt to be retired.

(3)  CUMULATIVE EFFECT OF ACCOUNTING CHANGES

     On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs.

     For the Company, asset retirement obligation expense represents the
systematic accretion and depreciation of future mine reclamation costs, which
includes the costs to reclaim the land disturbed during the mining process and
the removal of mine plant, equipment, transportation and other support
facilities.

     SFAS No. 143 requires the fair value of a liability for an asset's
retirement obligation to be recorded in the period in which it is incurred if a
reasonable estimate of fair value can be made, and that the corresponding cost
is capitalized as part of the carrying amount of the related long-lived asset.
The liability is accreted to its then present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. If
the liability is settled for an amount other than the recorded amount, a gain or
loss is recognized.

     Under its previous accounting method, the Company accrued the estimated
future costs to reclaim the land as the acreage was disturbed at surface mine
operations and the estimated costs to reclaim support acreage and to perform
other related functions at both surface and underground mines ratably over the
lives of the mines.

     Pursuant to the January 1, 2003 adoption of SFAS No. 143, the Company:

         -    recognized a credit to income during the first quarter of 2003 of
              $9.1 million, net of tax, for the cumulative effect of the
              accounting change;

         -    increased total liabilities by $0.5 million to record the asset
              retirement obligations;

         -    increased assets by $18.6 million to add the asset retirement
              costs to the carrying amount of our mine properties and reflect
              the incremental amount of reclamation obligations recoverable from
              third parties; and

         -    increased accumulated depreciation, depletion and amortization by
              $2.9 million for the amount of expense previously recognized.

     Adopting SFAS No. 143 had no impact on the Company's reported cash flows.
The Company's reclamation liabilities are unfunded.

                                       7



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

     On October 25, 2002, the Emerging Issues Task Force (EITF) rescinded EITF
Issue No. 98-10 "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." As a result of the rescission, trading contracts entered
into prior to October 25, 2002 that did not meet the definition of a derivative
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (as amended) were no longer accounted for on a fair value basis,
effective January 1, 2003. The Company recorded a cumulative effect charge in
the statement of operations of $20.2 million, net of income taxes, to reverse
the unrealized gains and losses on non-derivative energy trading contracts
recorded prior to December 31, 2002.

     Effective January 1, 2003, the Company changed its method of amortizing
actuarial gains and losses related to net periodic postretirement benefit costs.
The Company previously amortized actuarial gains and losses using a 5% corridor
with an amortization period of three years. Under the new method, the corridor
has been eliminated and all actuarial gains and losses are now amortized over
the average remaining service period of active plan participants, which is
currently estimated at 9.5 years. The Company considers this method preferable
in that the elimination of the corridor allows a closer approximation of the
fair value of the liability for postretirement benefit costs, and the
amortization of actuarial gains and losses over the average remaining service
period provides a better matching of the cost of the associated liability over
the working life of the active plan participants. As a result of this change,
the Company recognized a $0.9 million cumulative effect gain in the quarter
ended March 31, 2003.

     The effect of the changes for the quarter ended March 31, 2003 was to
increase income before accounting changes by $5.5 million, or $0.11 per share,
net of taxes. The cumulative effect charge of $10.1 million (net of income tax
benefit of $6.8 million) to apply retroactively the new methods described above
is included in results of operations for the quarter ended March 31, 2003. Below
are pro forma net income and earnings per share results for the Company assuming
the new methods had been retroactively applied (dollars in thousands, except per
share data):



                                              Quarter Ended
                                                March 31,
                                       ---------------------------
                                           2003           2002
                                       ------------   ------------
                                                
Net income (loss):
      As reported                      $    (11,081)  $     22,315
      Pro forma                                (937)        18,314

Basic earnings (loss) per share:
      As reported                      $      (0.21)  $       0.43
      Pro forma                               (0.02)          0.35

Diluted earnings (loss) per share:
      As reported                      $      (0.21)  $       0.42
      Pro forma                               (0.02)          0.34


(4)  COAL INVENTORY

     Inventories consisted of the following (dollars in thousands) at:



                                March 31,    December 31,
                                  2003          2002
                              ------------   ------------
                                       
Raw coal                      $     17,965   $     18,076
Work in process                    147,068        143,963
Saleable coal                       41,318         28,233
                              ------------   ------------
   Total                      $    206,351   $    190,272
                              ============   ============


                                       8



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

(5)  ASSETS AND LIABILITIES FROM COAL AND EMISSION ALLOWANCE TRADING ACTIVITIES

     On October 25, 2002, the EITF rescinded EITF Issue No. 98-10 "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities." As a
result of the rescission, trading contracts entered into prior to October 25,
2002 that did not meet the definition of a derivative under SFAS No. 133 (as
amended) were no longer accounted for on a fair value basis effective January 1,
2003. The Company recorded a cumulative effect charge of $20.2 million, net of
income taxes, in the quarter ended March 31, 2003 to reverse the net unrealized
gains on non-derivative energy trading contracts recorded prior to December 31,
2002. Substantially all of these non-derivative energy trading contracts will
settle in 2003 and 2004.

     The fair value of coal trading derivatives as of March 31, 2003, are set
forth below (dollars in thousands):



                                          Fair Value
                                 ---------------------------
                                    Assets      Liabilities
                                 ------------   ------------
                                          
Forward contracts                $     39,265   $     29,608
Option contracts                        3,007          1,404
                                 ------------   ------------
   Total                         $     42,272   $     31,012
                                 ============   ============


     All of the contracts in the Company's trading portfolio as of March 31,
2003 were valued utilizing prices from over-the-counter market sources, adjusted
for contract duration and coal quality.

     As of March 31, 2003, the timing of the estimated future realization of the
value of the Company's trading portfolio was as follows:



 Year of             Percentage
Expiration          of Portfolio
----------          ------------
                 
2003                    34%
2004                    63%
2005                     2%
2006                     1%
                       ---
                       100%
                       ===


     At March 31, 2003, 44% of the Company's credit exposure related to coal and
emission allowance trading activities was with counterparties that are
investment grade. Where practical, the Company takes steps to reduce its credit
exposure to customers or counterparties whose credit has deteriorated and who
may pose a higher risk, as determined by the Company's credit management
function, 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 fund the payments required under existing contracts. To further
reduce credit exposure in its trading business, the Company also seeks to enter
into netting agreements with counterparties that permit the Company to offset
receivables and payables with such counterparties.

     The Company's coal trading operations traded 16.6 million tons and 28.2
million tons for the quarters ended March 31, 2003 and 2002, respectively.

(6)  EARNINGS PER SHARE

     A reconciliation of weighted average shares outstanding follows:



                                                                            Quarter Ended
                                                                              March 31,
                                                                      -------------------------
                                                                         2003           2002
                                                                      ----------     ----------
                                                                               
Weighted average shares outstanding - basic                           52,414,041     52,018,238
Dilutive impact of stock options                                               -      1,713,188
                                                                      ----------     ----------
Weighted average shares outstanding - diluted                         52,414,041     53,731,426
                                                                      ==========     ==========


                                       9



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Stock Compensation

     The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its equity incentive plans. The
Company recorded $0.1 million of compensation expense for granted stock options
during each of the quarters ended March 31, 2003 and 2002. The following table
reflects pro forma net income (loss) and basic and diluted earnings (loss) per
share had compensation cost been determined for the Company's non-qualified and
incentive stock options based on the fair value at the grant dates consistent
with the methodology set forth under SFAS No. 123, "Accounting for Stock-Based
Compensation"(dollars in thousands, except per share data):



                                                     Quarter Ended
                                                       March 31,
                                              ---------------------------
                                                  2003          2002
                                              ------------   ------------
                                                       
Net income (loss):
      As reported                             $    (11,081)  $     22,315
      Pro forma                                    (12,613)        21,104

Basic earnings (loss) per share:
      As reported                             $      (0.21)  $       0.43
      Pro forma                                      (0.24)          0.41

Diluted earnings (loss) per share:
      As reported                             $      (0.21)  $       0.42
      Pro forma                                      (0.24)          0.39


(7)  COMPREHENSIVE INCOME

     The following table sets forth the components of comprehensive income
(loss) for the quarters ended March 31, 2003 and 2002 (dollars in thousands):



                                                Quarter Ended March 31,
                                              ---------------------------
                                                  2003           2002
                                              ------------   ------------
                                                       
Net income (loss)                             $    (11,081)  $     22,315
Foreign currency translation adjustment                  4              -
                                              ------------   ------------
Comprehensive income (loss)                   $    (11,077)  $     22,315
                                              ============   ============


(8)  SEGMENT INFORMATION

     The Company reports its operations primarily through the following
reportable operating segments: "U.S. Mining," "Trading and Brokerage," and
"Australian Mining Operations." The principal business of the U.S. Mining
segment is mining, preparation and sale of its steam coal, sold primarily to
electric utilities, and metallurgical coal, sold to steel and coke producers.
The Trading and Brokerage segment's principal business is the marketing and
trading of coal and emission allowances. The Australian Mining Operations
segment consists of the operations of Allied Queensland Coalfields Party
Limited. This segment's principal business is the same as the U.S. Mining
Segment. "Corporate and Other" consists primarily of corporate overhead not
directly attributable to the U.S. Mining or Trading and Brokerage operating
segments, and resource management activities. In some cases, the Company's
brokerage operation acts as the sales agent for the U.S. and Australian Mining
Operations. For purposes of the presentation below, intercompany sales between
the mining operations and Trading and Brokerage Operations have been eliminated,
and the third party sales are reflected in the mining operations' revenues.

     The U.S. Mining segment results below also include costs related to past
mining activities and a portion of consolidated net gains on property disposals.
Past mining activities and net gains on property disposals are discussed
separately from U.S. Mining results in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations."

                                       10


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

     Operating segment results for the quarters ended March 31, 2003 and 2002
are as follows (dollars in thousands):



                                               Quarter Ended
                                                 March 31,
                                        ---------------------------
                                            2003          2002
                                        ------------   ------------
                                                 
Revenues:
   U.S. Mining                          $    570,489   $    614,491
   Trading and Brokerage                     100,777         54,551
   Australian Mining Operations                6,362              -
   Corporate and Other                         3,666          6,724
                                        ------------   ------------
      Total                             $    681,294   $    675,766
                                        ============   ============

Operating Profit:
   U.S. Mining                          $     30,802   $     68,120
   Trading and Brokerage                      16,966         11,247
   Australian Mining Operations                1,712              -
   Corporate and Other                       (14,949)       (24,417)
                                        ------------   ------------
      Total                             $     34,531   $     54,950
                                        ============   ============


     A reconciliation of segment operating profit to consolidated income (loss)
before income taxes follows (dollars in thousands):



                                                   Quarter Ended
                                                     March 31,
                                            ---------------------------
                                                2003           2002
                                            ------------   ------------
                                                     
Total segment operating profit              $     34,531   $     54,950
   Interest expense                               26,152         24,903
   Early debt extinguishment costs                21,184              -
   Interest income                                  (672)          (519)
   Minority interests                              1,050          3,666
                                            ------------   ------------
Income (loss) before income taxes           $    (13,183)  $     26,900
                                            ============   ============


(9)  COMMITMENTS AND CONTINGENCIES

Environmental

     Environmental claims have been asserted against a subsidiary of the Company
at 22 sites in the United States. Some of these claims are based on the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended, and on similar state statutes. The majority of these sites are related
to activities of former subsidiaries of the Company.

     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
potentially responsible third parties in the estimation of liabilities recorded
on its consolidated balance sheets. The

                                       11



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

undiscounted liabilities for environmental cleanup-related costs recorded as
part of "Accrued reclamation and other environmental liabilities" were $40.3
million and $42.1 million at March 31, 2003 and December 31, 2002, respectively.
These amounts represent those costs that the Company believes are probable and
reasonably estimable.

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. Other defendants in the litigation
are one customer, one current employee and one former employee. The Navajo
Nation has alleged 16 claims, including Civil Racketeer Influenced and Corrupt
Organizations Act, or 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 February 21, 2002, the Company's subsidiaries commenced a lawsuit
against the Navajo Nation in the U.S. District Court for the District of Arizona
seeking enforcement of an arbitration award or, alternatively, to compel
arbitration pursuant to the April 1, 1998 Arbitration Agreement with the Navajo
Nation. On January 14, 2003, the Arizona District Court dismissed the lawsuit.
Our subsidiaries have filed an appeal of this decision with the Ninth Circuit
Court of Appeals.

     On February 22, 2002, the Company's subsidiaries filed in the U.S. District
Court for the District of Columbia a motion for leave to file an amended answer
and conditional counterclaim. The counterclaim is conditional because the
Company's subsidiaries contend that the lease provisions the Navajo Nation seeks
to invalidate have previously been upheld in an arbitration proceeding and are
not subject to further litigation. On March 4, 2002, the Company's subsidiaries
filed in the U.S. District Court for the District of Columbia a motion to
transfer that case to Arizona or, alternatively, to stay the District of
Columbia litigation. The District of Columbia District Court denied the
Company's subsidiaries' motion for a stay and the subsidiaries appealed that
ruling to the District of Columbia Court of Appeals. On April 23, 2003, the
appellate court denied the appeal.

     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 U.S. breached its trust responsibilities
to the Tribe in approving the coal lease amendments and was liable for money
damages. On May 2, 2003, the Company's subsidiaries filed a renewed motion to
dismiss the Navajo Nation's lawsuit against them based on the Supreme Court's
decision.

     While the outcome of litigation is subject to uncertainties, based on the
Company's preliminary evaluation of the issues and their potential impact on the
Company, the Company believes this matter will be resolved without a material
adverse effect on the Company's financial condition, results of operations or
cash flows.

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. There is a
dispute with the Hopi Tribe regarding the use of groundwater in the
transportation of the coal by pipeline to the Mohave plant. Also, Southern
California Edison (the majority owner and operator of the plant) is involved in
a California Public Utilities Commission proceeding related to recovery of
future capital expenditures for new pollution abatement equipment for the
station. The operator has stated that it expects to idle the plant for at least
12 to 18 months beginning in 2006. The Company is in active discussions to
resolve the complex issues 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. If these issues are
not resolved in a timely manner, the operation of the Mohave plant will cease or
be suspended on December 31, 2005. The Mohave plant is the sole customer of the
Black Mesa Mine, which sold 4.6 million tons of coal in 2002.

                                       12



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

Citizens Power

     In connection with the August 2000 sale of the Company's former subsidiary,
Citizens Power LLC, the Company has indemnified the buyer, Edison Mission
Energy, from certain losses resulting from specified power contracts and
guarantees. Should a party to one of these agreements fail to perform, the
Company would be required to reimburse the buyer for any losses incurred as a
result of any non-performance that meets the requirements set forth in the
indemnity.

     During the period that Citizens Power was owned by the Company, Citizens
Power guaranteed the obligations of two affiliates to make payments to third
parties for power delivered under fixed-priced power sales agreements with terms
that extend through 2008. Edison Mission Energy has stated and the Company
believes there will be sufficient cash flow to pay the power suppliers assuming
timely payment by the power purchasers. The power purchasers have made timely
payments to the Citizens Power affiliates and Edison Mission Energy has not made
a claim against the Company under the indemnity.

     Also during the ownership period, Citizens Power indemnified a utility
against decreases in the value of power deliveries as a result of the
implementation of a location-based pricing system in the New England Power Pool
in connection with a power supply agreement that runs through 2016. Citizens
Power's successor, an Edison Mission Energy subsidiary, is negotiating with the
utility a methodology to calculate decreases in value and the Company is in
agreement with the mitigation approach being negotiated by the successor. Edison
Mission Energy has not made a claim against the Company under the indemnity.

     Due to the length and specific requirements of the contracts covered by the
indemnity, the Company cannot reasonably estimate its future exposure, if any,
under the indemnity.

Other

     In addition, the Company at times becomes a party to claims, lawsuits,
arbitration proceedings and administrative procedures in the ordinary course of
business. Management believes that the ultimate resolution of pending or
threatened proceedings will not have a material effect on the financial
position, results of operations or liquidity of the Company.

     At March 31, 2003, purchase commitments for capital expenditures were
approximately $73.9 million.

(10) SUBSEQUENT EVENTS

     On April 7, 2003, the Company purchased the remaining 18.3% of Black Beauty
Coal Company and affiliated entities for $90.0 million and contingent
consideration. The additional consideration is contingent on Black Beauty's
achievement of certain levels of operating profit in 2003 and 2004, as set forth
in the purchase and sale agreement. As a result of the acquisition, the Company
now owns 100% of Black Beauty Coal Company. The acquisition will be accounted
for as a purchase.

     On May 7, 2003, certain shareholders of the Company, including the
Company's largest shareholder, Lehman Brothers Merchant Banking Partners II L.P.
and affiliates (collectively "Lehman Brothers") sold 5,750,000 shares of common
stock, including an over-allotment option of 750,000 shares. The selling
shareholders received all net proceeds. The Company did not sell any shares
through the offering. Lehman Brothers sold, in the aggregate, 5,617,825 shares
in the offering, and their beneficial ownership of the Company declined from 41%
to 30%.

(11) RELATED PARTY TRANSACTIONS

     As discussed in note 2 to the unaudited condensed consolidated financial
statements, the Company refinanced a substantial portion of its indebtedness by
entering into a new Senior Secured Credit Facility and issuing new Senior Notes.
Based upon a competitive bidding process conducted by members of management and
reviewed by members of the Company's Board of Directors not affiliated with
Lehman Brothers, the Company appointed Wachovia Securities, Inc., Fleet
Securities, Inc. and Lehman Brothers as lead arrangers for the Senior Secured
Credit Facility, and Lehman Brothers and Morgan Stanley as joint book running
managers for the Senior Notes. Lehman Brothers received total fees of $7.4
million for their services in connection with the refinancing; such fees were
consistent with the fees paid to other parties to the transaction for their
respective services.

                                       13



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

     In May 2003, Lehman Brothers served as the lead underwriter in connection
with the secondary offering discussed in Note 10 above, and Lehman Brothers'
fees for their services were paid by the selling shareholders and not by the
Company. The Company paid incidental expenses customarily incurred by a
registering company in connection with the secondary offering.

(12) SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION

     In accordance with the indentures governing the 6.875% Senior Notes, 8.875%
Senior Notes and 9.625% Senior Subordinated Notes, certain wholly-owned U.S.
subsidiaries of the Company have fully and unconditionally guaranteed the Senior
Notes and Senior Subordinated 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 Senior Notes and Senior Subordinated Notes. The
following unaudited condensed historical financial statement information is
provided for such Guarantor/Non-Guarantor Subsidiaries. Black Beauty is included
in these supplemental financial statements as a Non-Guarantor subsidiary. After
the Company's acquisition on April 7, 2003 of the remaining 18.3% of Black
Beauty, this subsidiary will become a Guarantor subsidiary of all of the
indebtedness listed above. Black Beauty represents a significant portion of the
Non-Guarantor results of operations, financial position and cash flows presented
below.

                           PEABODY ENERGY CORPORATION
     UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                          QUARTER ENDED MARCH 31, 2003
                                 (In thousands)



                                                Parent     Guarantor    Non-Guarantor
                                               Company    Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                              ---------   ------------  -------------   ------------   ------------
                                                                                        
Total revenues                                $       -    $ 499,727      $ 188,231      $  (6,664)     $ 681,294
Costs and expenses
   Operating costs and expenses                       -      420,553        152,731         (6,664)       566,620
   Depreciation, depletion and amortization           -       41,354         14,693              -         56,047
   Asset retirement obligation expense                -        5,896            594              -          6,490
   Selling and administrative expenses              165       21,900          3,259              -         25,324
   Net gain on property and equipment
    disposals                                         -       (7,606)          (112)             -         (7,718)
   Interest expense                              35,274       24,882          3,224        (37,228)        26,152
   Debt extinguishment costs                     13,835            -          7,349              -         21,184
   Interest income                              (17,220)     (17,410)        (3,270)        37,228           (672)
                                              ---------    ---------      ---------      ---------      ---------
Income (loss) before income taxes and
 minority interests                             (32,054)      10,158          9,763              -        (12,133)
   Income tax provision (benefit)               (13,158)      (2,009)         2,921              -        (12,246)
   Minority interests                                 -            -          1,050              -          1,050
   Cumulative effect of accounting changes,
    net of taxes                                  6,762      (13,831)        (3,075)             -        (10,144)
                                              ---------    ---------      ---------      ---------      ---------
Net income (loss)                             $ (12,134)   $  (1,664)     $   2,717      $       -      $ (11,081)
                                              =========    =========      =========      =========      =========


                                       14



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

                           PEABODY ENERGY CORPORATION
     UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                          QUARTER ENDED MARCH 31, 2002
                                 (In thousands)



                                                Parent     Guarantor     Non-Guarantor
                                               Company    Subsidiaries    Subsidiaries    Eliminations    Consolidated
                                              ---------   ------------   -------------    ------------    ------------
                                                                                           
Total revenues                                $       -    $ 523,671       $ 167,686       $ (15,591)      $ 675,766
Costs and expenses
   Operating costs and expenses                       -      418,235         133,517         (15,591)        536,161
   Depreciation, depletion and amortization           -       46,364          12,313               -          58,677
   Selling and administrative expenses              161       21,436           4,686               -          26,283
   Net gain on property and equipment
      disposals                                       -         (180)           (125)              -            (305)
   Interest expense                              33,862       24,525           3,821         (37,305)         24,903
   Interest income                              (17,158)     (16,870)         (3,796)         37,305            (519)
                                              ---------    ---------       ---------       ---------       ---------
Income (loss) before income taxes and
 minority interests                             (16,865)      30,161          17,270               -          30,566
   Income tax provision (benefit)                (2,530)       4,453           2,662               -           4,585
   Minority interests                                 -            -           3,666               -           3,666
                                              ---------    ---------       ---------       ---------       ---------
Net income (loss)                             $ (14,335)   $  25,708       $  10,942       $       -       $  22,315
                                              =========    =========       =========       =========       =========


                                       15



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

                           PEABODY ENERGY CORPORATION
          UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
                                 MARCH 31, 2003
                                 (In thousands)



                                                      Parent      Guarantor    Non-Guarantor
                                                     Company     Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                                   -----------   ------------  -------------   ------------   ------------
                                                                                               
ASSETS
Current assets
   Cash and cash equivalents                       $    59,749   $       385    $    11,584    $         -    $    71,718
   Restricted cash                                     509,592             -              -              -        509,592
   Accounts receivable                                       -       109,738        139,874              -        249,612
   Inventories                                               -       225,676         22,298              -        247,974
   Assets from coal and emission allowance
    trading activities                                       -        39,815          2,457              -         42,272
   Deferred income taxes                                     -        10,101            279              -         10,380
   Other current assets                                     28        10,673          5,776              -         16,477
                                                   -----------   -----------    -----------    -----------    -----------
      Total current assets                             569,369       396,388        182,268              -      1,148,025
Property, plant, equipment and mine
 development - at cost                                       -     4,639,997        561,663              -      5,201,660
Less accumulated depreciation,
 depletion and amortization                                  -      (784,177)      (114,333)             -       (898,510)
                                                   -----------   -----------    -----------    -----------    -----------
Property, plant, equipment and
 mine development, net                                       -     3,855,820        447,330              -      4,303,150
Investments and other assets                         3,513,454       228,025         53,698     (3,462,488)       332,689
                                                   -----------   -----------    -----------    -----------    -----------
      Total assets                                 $ 4,082,823   $ 4,480,233    $   683,296    $(3,462,488)   $ 5,783,864
                                                   ===========   ===========    ===========    ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Short-term borrowings and current
    maturities of long-term debt                   $     4,500   $    10,303    $     6,719    $         -    $    21,522
   Notes called for redemption                         465,004             -              -              -        465,004
   Payables and notes payable to affiliates, net     1,353,360    (1,588,876)       235,516              -              -
   Liabilities from coal and emission allowance
    trading activities                                       -        31,012              -              -         31,012
   Accounts payable and accrued expenses                20,194       501,533         68,428              -        590,155
                                                   -----------   -----------    -----------    -----------    -----------
      Total current liabilities                      1,843,058    (1,046,028)       310,663              -      1,107,693
Long-term debt, less current maturities              1,095,500        67,098         10,459              -      1,173,057
Deferred income taxes                                        -       475,333          4,328              -        479,661
Other noncurrent liabilities                               662     1,899,212         20,778              -      1,920,652
                                                   -----------   -----------    -----------    -----------    -----------
      Total liabilities                              2,939,220     1,395,615        346,228              -      4,681,063
Minority interests                                           -             -         36,821              -         36,821
Stockholders' equity                                 1,143,603     3,084,618        300,247     (3,462,488)     1,065,980
                                                   -----------   -----------    -----------    -----------    -----------
      Total liabilities and stockholders'
       equity                                      $ 4,082,823   $ 4,480,233    $   683,296    $(3,462,488)   $ 5,783,864
                                                   ===========   ===========    ===========    ===========    ===========


                                       16



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

                           PEABODY ENERGY CORPORATION
               SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
                                DECEMBER 31, 2002
                                 (In thousands)



                                                      Parent      Guarantor    Non-Guarantor
                                                     Company     Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                                   -----------   ------------  -------------   ------------   ------------
                                                                                               
ASSETS
Current assets
   Cash and cash equivalents                       $    60,666   $       420    $    10,124    $         -    $    71,210
   Accounts receivable                                     836        62,214         90,162              -        153,212
   Inventories                                               -       211,291         18,397              -        229,688
   Assets from coal and emission
    allowance trading activities                             -        65,153          4,745              -         69,898
   Deferred income taxes                                     -        10,101            260              -         10,361
   Other current assets                                    260         8,381          6,913              -         15,554
                                                   -----------   -----------    -----------    -----------    -----------
      Total current assets                              61,762       357,560        130,601              -        549,923
Property, plant, equipment and mine
 development - at cost                                       -     4,591,811        539,418              -      5,131,229
Less accumulated depreciation, depletion
 and amortization                                            -      (751,627)      (106,560)             -       (858,187)
                                                   -----------   -----------    -----------    -----------    -----------
Property, plant, equipment and mine
 development, net                                            -     3,840,184        432,858              -      4,273,042
Investments and other assets                         3,448,319       248,778         48,273     (3,428,158)       317,212
                                                   -----------   -----------    -----------    -----------    -----------
      Total assets                                 $ 3,510,081   $ 4,446,522    $   611,732    $(3,428,158)   $ 5,140,177
                                                   ===========   ===========    ===========    ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Short-term borrowings and current
    maturities of long-term debt                   $         -   $    10,303    $    37,212    $         -    $    47,515
   Payables and notes payable to affiliates, net     1,626,695    (1,643,593)        16,898              -              -
   Liabilities from coal and emission
    allowance trading activities                             -        37,008              -              -         37,008
   Accounts payable and accrued expenses                 9,427       479,441         58,145              -        547,013
                                                   -----------   -----------    -----------    -----------    -----------
      Total current liabilities                      1,636,122    (1,116,841)       112,255              -        631,536
Long-term debt, less current maturities                714,571        75,975        191,150              -        981,696
Deferred income taxes                                        -       495,284          4,026              -        499,310
Other noncurrent liabilities                               623     1,898,581         10,172              -      1,909,376
                                                   -----------   -----------    -----------    -----------    -----------
      Total liabilities                              2,351,316     1,352,999        317,603              -      4,021,918
Minority interests                                           -             -         37,121              -         37,121
Stockholders' equity                                 1,158,765     3,093,523        257,008     (3,428,158)     1,081,138
                                                   -----------   -----------    -----------    -----------    -----------
      Total liabilities and stockholders'
       equity                                      $ 3,510,081   $ 4,446,522    $   611,732    $(3,428,158)   $ 5,140,177
                                                   ===========   ===========    ===========    ===========    ===========


                                       17



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

                           PEABODY ENERGY CORPORATION
     UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                          QUARTER ENDED MARCH 31, 2003
                                 (In thousands)



                                                                Parent       Guarantor    Non-Guarantor
                                                                Company     Subsidiaries   Subsidiaries   Consolidated
                                                             ------------   ------------  -------------   ------------
                                                                                              
Net cash provided by (used in) operating activities          $       (428)  $     71,584   $    (13,605)  $     57,551
                                                             ------------   ------------   ------------   ------------
Additions to property, plant, equipment and
   mine development                                                     -        (39,585)       (19,259)       (58,844)
Additions to advance mining royalties                                   -         (1,536)          (818)        (2,354)
Proceeds from property and equipment disposals                          -          7,762            377          8,139
                                                             ------------   ------------   ------------   ------------
Net cash used in investing activities                                   -        (33,359)       (19,700)       (53,059)
                                                             ------------   ------------   ------------   ------------
Net change in revolving lines of credit                                 -              -       (121,584)      (121,584)
Proceeds from long-term debt, net of restricted
   cash proceeds                                                  590,408              -            903        591,311
Payments of long-term debt                                       (255,094)       (10,356)       (96,465)      (361,915)
Reduction of securitized interests in accounts receivable               -        (83,900)             -        (83,900)
Payment of debt issuance costs                                    (22,687)             -              -        (22,687)
Distributions to minority interests                                     -              -         (1,350)        (1,350)
Dividends paid                                                     (5,242)             -              -         (5,242)
Transactions with affiliates, net                                (308,888)        55,996        252,892              -
Other                                                               1,014              -              -          1,014
                                                             ------------   ------------   ------------   ------------
Net cash provided by (used in) financing activities                  (489)       (38,260)        34,396         (4,353)
                                                             ------------   ------------   ------------   ------------
Effect of exchange rate changes on cash and equivalents                 -              -            369            369
Net increase (decrease) in cash and cash equivalents                 (917)           (35)         1,460            508
Cash and cash equivalents at beginning of period                   60,666            420         10,124         71,210
                                                             ------------   ------------   ------------   ------------
Cash and cash equivalents at end of period                   $     59,749   $        385   $     11,584   $     71,718
                                                             ============   ============   ============   ============


                                       18



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued

                           PEABODY ENERGY CORPORATION
     UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                          QUARTER ENDED MARCH 31, 2002
                                 (In thousands)



                                                                 Parent       Guarantor   Non-Guarantor
                                                                Company     Subsidiaries   Subsidiaries   Consolidated
                                                             ------------   ------------  -------------   ------------
                                                                                              
Net cash provided by (used in) operating activities          $       (317)  $    (12,954)  $     34,686   $     21,415
                                                             ------------   ------------   ------------   ------------
Additions to property, plant, equipment and
   mine development                                                     -        (24,622)       (22,442)       (47,064)
Additions to advance mining royalties                                   -         (1,268)          (836)        (2,104)
Investment in joint venture                                             -           (475)             -           (475)
Proceeds from property and equipment disposals                          -            182            651            833
                                                             ------------   ------------   ------------   ------------
Net cash used in investing activities                                   -        (26,183)       (22,627)       (48,810)
                                                             ------------   ------------   ------------   ------------
Net change in revolving line of credit                             25,000              -              -         25,000
Proceeds from long-term debt                                            -          1,153          1,222          2,375
Payments of long-term debt                                              -        (11,177)        (3,510)       (14,687)
Distributions to minority interests                                     -              -         (2,825)        (2,825)
Dividends paid                                                     (5,202)             -              -         (5,202)
Transactions with affiliates, net                                 (36,381)        48,871        (12,490)             -
Other                                                                 227              -              -            227
                                                             ------------   ------------   ------------   ------------
Net cash provided by (used in) financing activities               (16,356)        38,847        (17,603)         4,888
                                                             ------------   ------------   ------------   ------------
Net decrease in cash and cash equivalents                         (16,673)          (290)        (5,544)       (22,507)
Cash and cash equivalents at beginning of period                   28,121          1,018          9,483         38,622
                                                             ------------   ------------   ------------   ------------
Cash and cash equivalents at end of period                   $     11,448   $        728   $      3,939   $     16,115
                                                             ============   ============   ============   ============


                                       19



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     This quarterly 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. 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
they 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 in coal and power markets;

         -    coal's market share of electricity generation;

         -    the pace and extent of the economic recovery;

         -    lower than normal heating and cooling degree days;

         -    railroad and other transportation performance and costs;

         -    the ability to renew sales contracts upon expiration or
              renegotiation;

         -    the ability to successfully implement operating strategies;

         -    the effectiveness of our cost-cutting measures;

         -    regulatory and court decisions;

         -    future legislation;

         -    changes in postretirement benefit and pension obligations;

         -    credit, market and performance risk associated with our customers;

         -    modification or termination of our long-term coal supply
              agreements;

         -    reductions of purchases by major customers;

         -    risks inherent to mining, including geologic conditions or
              unforeseen equipment problems;

         -    terrorist attacks or threats affecting our or our customers'
              operations;

         -    replacement of recoverable reserves;

         -    implementation of new accounting standards;

         -    inflationary trends and interest rates;

         -    the effects of acquisitions or divestitures; and

         -    other factors, including those discussed in "Legal Proceedings."

                                       20



     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 2002 Annual Report on Form 10-K filed with the
Securities and Exchange Commission and all documents incorporated in this
quarterly report by reference. We will not update these statements unless the
securities laws require us to do so.

QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002

     Sales. Sales for the quarter ended March 31, 2003 of $657.8 million were
$5.5 million above the prior year quarter, as higher pricing and higher broker
sales volume overcame reduced production related to the continued soft economy
and customer outages. Heavy snowfall in Appalachia and the Powder River Basin
also reduced shipments and disrupted production.

     U.S. mining and broker operations' sales volume of 46.3 million tons for
the current quarter was comparable to the 46.5 million tons for the prior year
quarter. Lower volume at our U.S. mining operations was offset by higher
brokerage volume. Our average sales price increased 1.2% over the prior year
quarter. The pricing increase was partially mitigated by sales mix, as higher
priced tons in the Appalachia and Midwest regions represented a lower percentage
of overall sales in the current year compared to prior year.

     U.S. mining operations sales were $45.6 million below prior year quarter,
primarily as a result of lower sales volumes in the Appalachian and Midwest
regions. Sales in the Appalachian region were $32.5 million lower than the prior
year quarter, primarily due to lower production from geologic difficulties at
our Harris mine and lower shipments as a result of heavy snowfall. Midwest sales
decreased $8.6 million, primarily due to lower volume as the Highland mine's
production has not yet reached levels comparable with production in the prior
year quarter at the predecessor Camp No. 11 mine, which ceased operations during
the fourth quarter of 2002.

     Sales in the Southwest region decreased $2.7 million primarily due to an
outage at a customer plant in the current year quarter. Sales in the Powder
River Basin operations decreased $1.8 million as lower volume from decreased
production as a result of heavy snowfall was mostly offset by improved pricing
in the region during the current year quarter.

     Sales from broker operations increased $44.8 million over the prior year
quarter due to higher U.S. and Australian export sales levels. Our Australian
Mining Operations, which were acquired in the third quarter of 2002, had sales
of $6.4 million for the current year quarter.

     Asset Retirement Obligation Expense. The Company recognized asset
retirement obligation expense, discussed in Note 3 to the unaudited condensed
consolidated financial statements, of $6.5 million during the current year
quarter, comprised of the accretion of the asset retirement obligation liability
and the amortization of the asset retirement obligation asset recognized in
accordance with SFAS No. 143. Expense in the prior year related to reclamation
activities was $4.6 million and was included in "operating costs and expenses"
in the statement of operations for the quarter ended March 31, 2002.

     Net Gain on Property and Equipment Disposals. Net gain on property and
equipment disposals related to our resource management business increased $7.4
million as a result of the sale of oil and gas rights in Appalachia in the
quarter ended March 31, 2003.

     Operating Profit. Operating profit decreased $20.4 million to $34.5 million
for the quarter ended March 31, 2003. U.S. mining operations' (excluding
operating costs related to past mining activities and net gains on property
disposals) operating profit decreased $20.8 million. The decrease was driven by
the effects of lower production levels, heavy snowfall and geologic
difficulties, discussed in more detail below.

     In the west, the Southwest region's operating profit decreased $3.7
million, as lower repair costs partially offset lower production due to an
outage at a customer plant in the current year quarter. The Powder River Basin
region's operating profit increased $3.4 million as improved prices and quality
premiums offset lower sales and production due to heavy snowfall.

     In the east, the Appalachia region's operating profit decreased $16.5
million due to geologic difficulties and mechanical problems at the Harris Mine,
reduced shipments due to heavy snowfall and lower production levels associated
with the suspension of operations at the Big Mountain mine for most of the
quarter ended March 31, 2003. The Big Mountain mine was reopened late in the
quarter. Operating profit in the Midwest region decreased $4.0 million compared
to

                                       21



the prior year quarter due to higher fuel costs at our Black Beauty operations
and lower volume due to the ramp-up of the Highland No. 9 Mine, which has not
reached its full production capacity.

     Operating profit from trading and brokerage operations increased $5.7
million over the prior year quarter, primarily due to higher profit from
brokerage activities, combined with favorable pricing movements on the trading
portfolio in the current year quarter and the impact of adopting EITF Issue 02-3
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities."

     Operating profit for the current year quarter was also effected by higher
net gains on property and equipment disposals of $7.4 million discussed above,
asset retirement obligation expense of $6.5 million discussed above and lower
selling and administrative expenses of $1.0 million.

     Operating costs related to past mining activities were $7.2 million higher
in the current quarter, primarily due to $5.6 million of higher, non-cash
retiree healthcare costs, driven by lower discount rate and higher trend rate
assumptions in the current year quarter.

     Interest Expense. Interest expense increased $1.2 million over the prior
year quarter, to $26.2 million. The increase in interest expense was primarily
due to higher costs in the quarter ended March 31, 2003 related to surety bonds
and letters of credit used to secure our obligations for reclamation, workers'
compensation and lease commitments.

     Early Debt Extinguishment Costs. Pursuant to our debt refinancing
transactions discussed in Note 2 to the unaudited condensed consolidated
financial statements, the Company incurred early debt extinguishment costs of
$21.2 million during the quarter, comprised of $18.9 million of bond premiums
paid to retire debt, $8.1 million of debt issuance costs that were written off
in conjunction with early extinguishment of existing debt, partially offset by a
gain on the termination of related interest rate swaps of approximately $5.8
million.

     Income Taxes. For the quarter ended March 31, 2003, there was an income tax
benefit of $12.2 million on a loss before income taxes and minority interests of
$12.1 million, compared to income tax expense of $4.6 million on income before
income taxes and minority interests of $30.6 million in the prior year quarter.
The tax benefit recorded in the first quarter of 2003 as a percentage of pre-tax
income is greater than the tax expense recorded in the same quarter for the
prior year primarily as a result of the magnitude of the percentage depletion
deduction (which is a permanent difference) relative to pre-tax income. We are
currently projecting pretax income but also an income tax benefit for the full
year. The income tax benefit for the current year quarter results primarily from
the magnitude of the percentage depletion deduction and is calculated on a
discrete quarterly basis.

     Minority Interests. For the quarter ended March 31, 2003, minority
interests expense decreased $2.6 million to $1.1 million. The reduction was due
to the purchase of the remaining 25% of Arclar Coal Company in the third quarter
of 2002 and the impact of $7.3 million of early debt extinguishment charges
incurred at Black Beauty during the quarter.

     Cumulative Effect of Accounting Changes, Net of Taxes. For the quarter
ended March 31, 2003, we recognized expense relating to the cumulative effect of
accounting changes, net of income taxes, of $10.1 million. This amount
represents the aggregate amount of the recognition of accounting changes
pursuant to the adoption of SFAS No. 143, the change in method of amortization
of actuarial gains and losses related to net periodic postretirement benefit
costs and the effect of the rescission of EITF No. 98-10, as discussed in Note 3
to the unaudited condensed consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

     Cash provided by operating activities was $57.6 million for the quarter
ended March 31, 2003, an increase of $36.2 million from the prior year quarter.
The improvement was primarily due to improved working capital cash flows in the
current year quarter. The current year quarter included a net working capital
usage of $0.3 million, compared to a usage of $69.3 million in the prior year
quarter. The working capital change was primarily due to an increase in accounts
payable and accrued expenses of $43.1 million in the current year quarter,
compared to a $17.9 million decrease in the prior year quarter. The remainder of
the year-over-year operating cash flow variance primarily related to lower
current year income results, after excluding the effects of accounting changes,
early debt extinguishment costs and deferred income taxes.

     Net cash used in investing activities was $53.1 million for the quarter
ended March 31, 2003, $4.3 million higher than the prior year quarter. Capital
expenditures increased $11.7 million, to $58.8 million, in the current year
quarter. Higher than normal quarterly capital expenditures were incurred in the
quarter ended March 31, 2003 related to the startup of the

                                       22



Highland No. 9 Mine and the development of a new reserve area at our Federal
Mine. Other capital expenditures were primarily for the replacement of mining
equipment, the expansion of capacity at certain mines and projects to improve
the efficiency of mining operations. Finally, the current year quarter included
$7.3 million higher proceeds from property and equipment disposals as a result
of the sale of oil and gas rights during the quarter, partially offsetting
higher capital spending.

     Net cash used by financing activities was $4.4 million for the quarter
ended March 31, 2003, compared with cash provided by financing activities of
$4.9 million in the prior year quarter. The current year includes proceeds from
long-term debt (net of restricted cash proceeds of $509.6 million) of $591.3
million. These proceeds related to the issuance of $1.1 billion of new debt in
connection with the refinancing discussed in Note 2 to the unaudited condensed
consolidated financial statements. The $591.3 million of net proceeds were used
to repay line of credit borrowings of $121.6 million, to repay long-term debt of
$361.9 million, to repurchase interests in accounts receivable previously sold
under our accounts receivable securitization program of $83.9 million and to pay
$22.7 million in debt issuance costs in connection with the new debt issued.
Financing cash flows in both quarters reflect dividends paid of $5.2 million.
The prior year also includes net borrowings of $12.7 million.

     As of March 31, 2003 and December 31, 2002, our total indebtedness
consisted of the following (dollars in thousands):



                                                                March 31, 2003   December 31, 2002
                                                                --------------   -----------------
                                                                           
Term Loan under Senior Secured Credit Facility                    $  450,000         $        -
6.875% Senior Notes due 2013                                         650,000                  -
9.625% Senior Subordinated Notes to be redeemed May 15, 2003         257,553            391,490
8.875% Senior Notes to be redeemed May 15, 2003                      207,451            316,498
5.0% Subordinated Note                                                76,207             85,055
Senior unsecured notes under various agreements                            -             58,214
Unsecured revolving credit agreement                                       -            116,584
Other                                                                 18,372             61,370
                                                                  ----------         ----------
                                                                  $1,659,583         $1,029,211
                                                                  ==========         ==========


     During the quarter, we completed a comprehensive debt refinancing to lower
our borrowing costs, expand our borrowing capacity, extend our debt maturities
and simplify our capital structure. A discussion of transactions entered into
related to the refinancing and descriptions of the new debt instruments are
included in Note 2 to the unaudited condensed consolidated financial statements.
Our Senior Secured Credit Facility and 6.875% Senior Notes have been rated
Ba1 and BB-, respectively, by Moody's Investors Service, BB+ and BB- by Standard
& Poor's and BB+ and BB by Fitch.

     These security ratings reflect the views of the rating agencies only. An
explanation of the significance of these ratings may be obtained from each
rating agency. Such ratings are not a recommendation to buy, sell or hold
securities, but rather an indication of creditworthiness. Any rating can be
revised upward or downward or withdrawn at any time by a rating agency if it
decides that the circumstances warrant the change. Each rating should be
evaluated independently of any other rating.

     As of March 31, 2003, there were no outstanding borrowings under the new
Revolving Credit Facility. We had letters of credit outstanding under the
facility of $231.2 million, leaving $368.8 million available for borrowing. We
were in compliance with all of the covenants of the Senior Secured Credit
Facility as of March 31, 2003.

     We had $73.9 million of commitments for capital expenditures at March 31,
2003, that are primarily related to acquiring additional coal reserves and
mining equipment. The majority of these commitments relate to spending targeted
for 2003. Total capital expenditures for calendar year 2003 are expected to
range from $175 million to $200 million, and have been and will be primarily
used to develop existing reserves, replace or add equipment and fund cost
reduction initiatives. We anticipate funding capital expenditures primarily
through operating cash flow. We believe the risk of generating lower than
anticipated operating cash flow in 2003 is reduced by our high level of sales
commitments (approximately 98% of 2003 planned production is committed) and
lower future borrowing costs as a result of our recent debt refinancing.

Off-Balance Sheet Arrangements

     In March 2000, we established an accounts receivable securitization
program. Under the program, undivided interests in a pool of eligible trade
receivables that have been contributed to our wholly-owned, bankruptcy-remote
subsidiary are sold, without recourse, to a multi-seller, asset-backed
commercial paper conduit ("Conduit"). Purchases by the Conduit are financed

                                       23



with the sale of highly rated commercial paper. We used proceeds from the sale
of the accounts receivable to repay long-term debt, effectively reducing our
overall borrowing costs. The securitization program is currently scheduled to
expire in 2007. Under the provisions of SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," the
securitization transactions have been recorded as sales, with those accounts
receivable sold to the Conduit removed from the consolidated balance sheet. The
amount of undivided interests in accounts receivable sold to the Conduit was
$52.5 million and $136.4 million as of March 31, 2003 and December 31, 2002,
respectively. As discussed in Note 2 to the unaudited condensed consolidated
financial statements, utilizing excess proceeds from the refinancing
transactions, we significantly reduced outstanding securitized interests in
accounts receivable as of March 31, 2003. On April 7, 2003, the securitization
returned to near its total capacity of $140.0 million as we used securitization
proceeds to fund the acquisition of the remaining 18.3% of Black Beauty. This
acquisition is discussed in Note 10 to the unaudited condensed consolidated
financial statements.

     There were no other material changes to our off-balance sheet arrangements
during the quarter ended March 31, 2003. All off-balance sheet arrangements are
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Form 10-K for the year ended December 31, 2002.

Recent Accounting Pronouncements

     In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure
- an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation" and provides alternative methods for
accounting for a change by registrants to the fair value method of accounting
for stock-based compensation. Additionally, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of the
statement became effective as of December 31, 2002 and interim disclosure
provisions are effective for interim financial reports starting in 2003 and are
included in the Note 6 to the unaudited condensed consolidated financial
statements included in this report.

OTHER

Mohave Generating Station

     See Note 9 to the unaudited condensed consolidated financial statements
included in this report relating to the potential cessation or suspension of the
operations of the Mohave Generating Station on December 31, 2005. The Mohave
Generating Station is the sole customer of our Black Mesa Mine, which sold 4.6
million tons of coal in 2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Trading Activities

     We market and trade coal and emission allowances. These activities give
rise to commodity price risk, which represents the potential loss that can be
caused by a change in the market value of a particular commitment. We actively
measure, monitor and adjust traded position levels to remain within risk limits
prescribed by management. For example, we have policies in place that limit the
amount of total exposure we may assume at any point in time.

     We account for coal trading derivatives under SFAS No. 133, which requires
us to reflect derivatives, such as forwards, futures, options and swaps, at
market value in the consolidated financial statements.

     We perform a value at risk analysis on our trading portfolio, which
includes over-the-counter and brokerage trading of coal and emission allowances.
The use of value at risk allows us to quantify in dollars, on a daily basis, the
price risk inherent in our trading portfolio. Our value at risk model is based
on the industry standard risk-metrics variance/co-variance approach. This
captures our exposure related to both option and forward positions. Our value at
risk model assumes a 15-day holding period and a 95% one-tailed confidence
interval.

     The use of value at risk allows management to aggregate pricing risks
across products in the portfolio, compare risk on a consistent basis and
identify the drivers of risk. Due to the subjectivity in the choice of the
liquidation period, reliance on historical data to calibrate the models and the
inherent limitations in the value at risk methodology, including the use of
delta/gamma adjustments related to options, we perform regular stress, back
testing and scenario analysis to estimate the impacts of market changes on the
value of the portfolio. The results of these analyses are used to supplement the
value at risk methodology and identify additional market-related risks.

                                       24



     During the quarter ended March 31, 2003, the low, high and average values
at risk for our coal trading portfolio were $0.7 million, $1.2 million and $1.0
million, respectively. As of March 31, 2003, 34% of the value of our trading
portfolio was scheduled to be realized by the end of calendar year 2003, and 97%
of the value of our trading portfolio was scheduled to be realized by the end of
calendar year 2004.

     We also monitor other types of risk associated with our coal and emission
allowance trading activities, including credit, market liquidity and
counterparty nonperformance.

Non-trading Activities

     We manage our commodity price risk for non-trading purposes through the use
of long-term coal supply agreements, rather than through the use of derivative
instruments. As of March 31, 2003, we had sales commitments for 98% of our
planned calendar 2003 production.

     Some of the products used in our mining activities, such as diesel fuel,
are subject to price volatility. We, through our suppliers, utilize forward
contracts to manage the exposure related to this volatility.

     We have exposure to changes in interest rates due to our existing level of
indebtedness. As of March 31, 2003, we had $1,204.8 million of fixed-rate
borrowings and $454.8 million of variable-rate borrowings outstanding. A one
percentage point increase in interest rates would result in an annualized
increase to interest expense of $4.5 million on our variable-rate borrowings.
With respect to our fixed-rate borrowings, a one percentage point increase in
interest rates would result in a $47.9 million decrease in the fair value of
these borrowings. The fixed rate borrowings of $1,204.8 million include $465.0
million of notes that will be redeemed on May 15, 2003.

ITEM 4. CONTROLS AND PROCEDURES.

     The Chief Executive Officer and Executive Vice President and Chief
Financial Officer have evaluated our disclosure controls and procedures within
90 days of the filing of this report and have concluded that there are no
significant deficiencies or material weaknesses. There have been no significant
changes in our internal controls or in other factors subsequent to the date of
our most recent evaluation that could significantly affect these controls.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Navajo Nation

     See Note 9 to the unaudited condensed consolidated financial statements
included in Part I, Item 1 of this report relating to certain legal proceedings
brought against us by the Navajo Nation and Hopi Tribe.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits

     See Exhibit Index at page 30 of this report.

(b)  Reports on Form 8-K

         On January 17, 2003, we filed a Form 8-K, under Item 5, Other Events
     and Regulation FD Disclosure, announcing our issuance of a press release
     regarding two events, an adverse U.S. Supreme Court Ruling and the
     recognition of certain income tax benefits, that impacted earnings for the
     fourth quarter of 2002.

         On January 31, 2003, we filed a Form 8-K, under Item 9, Regulation FD
     Disclosure, announcing our issuance of a press release setting forth our
     calendar year and fourth quarter 2002 earnings and our 2003 forecast.

                                       25



         On February 27, 2003, we filed a Form 8-K, under Item 5, Other Events
     and Regulation FD Disclosure, announcing our issuance of a press release
     stating the we had commenced an offer to purchase for cash any and all of
     our $317.1 million outstanding principal amount of 8 7/8% Senior Notes due
     2008 and any and all of our $392.2 million outstanding principal amount of
     9 5/8% Senior Subordinated Notes due 2008.

         On March 10, 2003, we filed a Form 8-K, under Item 5, Other Events and
     Regulation FD Disclosure, announcing our issuance of a press release
     concerning our plan to offer $500 million of Senior Notes due 2013 to
     certain institutional investors in a transaction that is exempt from the
     registration requirements of the Securities Act of 1933.

         On March 17, 2003, we filed a Form 8-K, under Item 5, Other Events and
     Regulation FD Disclosure, announcing our issuance of a press release
     announcing the pricing of our Senior Notes due 2013 to be sold to certain
     institutional investors in a transaction that is exempt from the
     registration requirements of the Securities Act of 1933.

                                       26



                                    SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                        PEABODY ENERGY CORPORATION

Date: May 9, 2003                   By:        /s/ RICHARD A. NAVARRE
                                        ----------------------------------------
                                                 Richard A. Navarre
                                    Executive Vice President and Chief Financial
                                                     Officer
                                           (Principal Financial Officer)

                                       27



                                  CERTIFICATION

I, Irl F. Engelhardt, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Peabody Energy
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     (a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this quarterly report is being
     prepared;

     (b) evaluated the effectiveness of the registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
     quarterly report (the "Evaluation Date"); and

     (c) presented in this quarterly report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

     (a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

     (b) any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal
     controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

                                                   /s/ IRL F. ENGELHARDT
                                                   -----------------------------
                                                   Irl F. Engelhardt,
                                                   Chief Executive Officer

                                       28



                                  CERTIFICATION

I, Richard A. Navarre, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Peabody Energy
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     (a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this quarterly report is being
     prepared;

     (b) evaluated the effectiveness of the registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
     quarterly report (the "Evaluation Date"); and

     (c) presented in this quarterly report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

     (a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

     (b) any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal
     controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

                                                   /s/RICHARD A. NAVARRE
                                                   -----------------------------
                                                   Richard A. Navarre
                                                   Executive Vice President and
                                                   Chief Financial Officer

                                       29



                                  EXHIBIT INDEX

The exhibits below are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.



Exhibit
  No.                                                       Description of Exhibit
  ---                                                       ----------------------
             
3.1             Third Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1
                of the Company's Form S-1 Registration Statement No. 333-55412).

3.2             Amended and Restated By-Laws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly
                Report on Form 10-Q for the quarter ended September 30, 2002 filed on November 14, 2002.

4.26*           Exchange and Registration Rights Agreement as of March 21, 2003, among the Registrant, the Subsidiaries Guarantors
                from time to time party hereto, and Lehman Brothers Inc. on behalf of the Initial Purchasers.

4.27*           6 7/8% Senior Notes Due 2013 Indenture dated as of March 21, 2003 among the Registrant and U.S. Bank National
                Association (Trustee).

10.43*          Second Amended and Restated Credit Agreement, dated as of March 21, 2003, among the Registrant and Wachovia Bank,
                National Association and Lehman Commercial Paper, Inc. (as Syndication Agents), Fleet Securities, Inc., Wachovia
                Securities, Inc. and Lehman Brothers Inc., (as Arrangers), Fleet National Bank (as Administrative Agent) and Morgan
                Stanley Senior Funding, Inc. and U.S. Bank National Association (as Documentation Agents).

10.44*          Employment Agreement between the Registrant and Fredrick D. Palmer dated as of February 12, 2001.

10.45*          First Amendment to Peabody Energy Corporation Employment Agreement between the Registrant and Fredrick D. Palmer
                dated as of May 10, 2001.

18.1*           Letter regarding change in accounting principle from Ernst & Young LLP.

99.1*           Certification of the March 31, 2003 Quarterly Report on Form 10-Q, pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002, by Peabody Energy Corporation's Chief Executive Officer.

99.2*           Certification of the March 31, 2003 Quarterly Report on Form 10-Q, pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002, by Peabody Energy Corporation's Executive Vice President and Chief Financial Officer.


*   Filed herewith.

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