March 31, 2006

Dear Shareholder:

      You are cordially invited to attend the 2006 Annual Meeting of Shareholders of Peabody Energy Corporation (the “Company”), which will be held on Friday, May 5, 2006, at 10:00 A.M., Central Time, at the Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri 63105.

      During this meeting, shareholders will vote on the following items:

      The accompanying Notice of Annual Meeting of Shareholders and Proxy Statement contain complete details on these proposals and other matters. We also will be reporting on the Company’s operations and responding to shareholder questions. If you have questions that you would like to raise at the meeting, we encourage you to submit written questions in advance (by mail or e-mail) to the Corporate Secretary. This will help us respond to your questions during the meeting. If you would like to e-mail your questions, please send them to stockholder.questions@peabodyenergy.com.

      Your understanding of and participation in Peabody Energy’s affairs is important, regardless of the number of shares you hold. To ensure your representation at the Annual Meeting, we encourage you to vote over the telephone or Internet or to complete and return the enclosed proxy card as soon as possible. If you attend the Annual Meeting, you may then revoke your proxy and vote in person if you so desire.

      Thank you for your continued support of Peabody Energy. We look forward to seeing you on May 5.

PEABODY ENERGY CORPORATION

701 Market Street

St. Louis, Missouri 63101-1826

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

       Peabody Energy Corporation (the “Company”) will hold its Annual Meeting of Shareholders at the Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri, 63105 on Friday, May 5, 2006, at 10:00 A.M., Central Time, to:

      The Board of Directors has fixed March 15, 2006 as the record date for determining shareholders who will be entitled to receive notice of and vote at the Annual Meeting or any adjournment. Each share of Common Stock is entitled to one vote. As of the record date, there were 264,634,854 shares of Common Stock outstanding.

      If you own shares of the Company’s Common Stock as of March 15, 2006, you can vote those shares by completing and mailing the enclosed proxy card or by attending the Annual Meeting and voting in person. Shareholders of record also may submit their proxies electronically or by telephone as follows:

      An admittance card or other proof of ownership is required to attend the Annual Meeting. Please retain the top portion of your proxy card for this purpose. Also, please indicate your intention to attend the Annual Meeting by checking the appropriate box on the proxy card, or, if voting by the Internet or by telephone, when prompted. If your shares are held by a bank or broker, you will need to ask them for an admission card in the form of a confirmation of beneficial ownership. If you do not receive a confirmation of beneficial ownership or other admittance card from your bank or broker, you must bring proof of share ownership (such as a copy of your brokerage statement) to the Annual Meeting.

      Your vote is important. Whether or not you plan to attend the Annual Meeting, please cast your vote by telephone or the Internet, or complete, date and sign the enclosed proxy card and return it in the envelope provided. If you attend the meeting, you may withdraw your proxy and vote in person, if you so choose.

March 31, 2006

TABLE OF CONTENTS

PEABODY ENERGY CORPORATION

PROXY STATEMENT

FOR THE

2006 ANNUAL MEETING OF SHAREHOLDERS

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

ELECTION OF DIRECTORS (ITEM 1)

      In accordance with the terms of the Company’s certificate of incorporation, the Board of Directors is divided into three classes, with each class serving a staggered three-year term. At this year’s Annual Meeting, the terms of current Class II Directors will expire. The terms of Class III Directors and Class I Directors will expire at the Annual Meetings to be held in 2007 and 2008, respectively.

      The Board of Directors has nominated the following individuals for election as Class II Directors with terms expiring in 2009: Gregory H. Boyce, William E. James, Robert B. Karn III, Henry E. Lentz and Blanche M. Touhill. Each of the nominees currently is serving as a director of the Company. All nominees have consented to serve for the new term. Should any one or more of the nominees become unavailable for election, your proxy authorizes us to vote for such other persons, if any, as the Board of Directors may recommend.

      The Board of Directors recommends that you vote “For” each of the Class II director nominees named below.

Class II Director Nominees — Terms Expiring in 2009

      GREGORY H. BOYCE, age 51, has been a director of the Company since March 2005. Mr. Boyce was named Chief Executive Officer Elect of the Company in March 2005, and assumed the position of Chief Executive Officer in January 2006. He also serves as President of the Company, a position he has held since October 2003. He was Chief Operating Officer of the Company from October 2003 to December 2005. He previously served as Chief Executive — Energy of Rio Tinto plc (an international natural resource company) from 2000 to 2003. Other prior positions include President and Chief Executive Officer of Kennecott Energy Company from 1994 to 1999 and President of Kennecott Minerals Company from 1993 to 1994. He has extensive engineering and operating experience with Kennecott and also served as Executive Assistant to the Vice Chairman of Standard Oil of Ohio from 1983 to 1984. Mr. Boyce is Co-Chairman of the Coal Based Generation Stakeholders Group, and a member of the Coal Industry Advisory Board of the International Energy Agency and the Advisory Council of the University of Arizona’s Department of Mining and Geological Engineering. He is a board member of the Center for Energy and Economic Development, the National Mining Association and the National Coal Council, and a past board member of the Western Regional Council, Mountain States Employers Council and Wyoming Business Council.

      WILLIAM E. JAMES, age 60, has been a director of the Company since 2001. Since July 2000, Mr. James has been Founding Partner of RockPort Capital Partners LLC, a venture fund specializing in energy and environmental technology and advanced materials. He is also Chairman of RockPort Group, a holding company engaged in international oil trading, banking and communications. Prior to joining RockPort, Mr. James co-founded and served as Chairman and Chief Executive Officer of Citizens Power LLC, a leading power marketer. He also co-founded the non-profit Citizens Energy Corporation and served as the Chairman and Chief Executive Officer of Citizens Corporation, its for-profit subsidiary, from 1987 to 1996. Mr. James periodically provides consulting services to Lehman Brothers Inc., an investment-banking firm (“Lehman Brothers”) on matters unrelated to the Company.

      ROBERT B. KARN III, age 64, has been a director of the Company since January 2003. Mr. Karn is a financial consultant and former managing partner in financial and economic consulting with Arthur Andersen LLP in St. Louis. Before retiring from Arthur Andersen in 1998,

Mr. Karn served in a variety of accounting, audit and financial roles over a 33-year career, including Managing Partner in charge of the global coal mining practice from 1981 through 1998. He is a Certified Public Accountant and has served as a Panel Arbitrator with the American Arbitration Association. Mr. Karn is also a director of Natural Resource Partners, a coal-oriented master limited partnership that is listed on the New York Stock Exchange, the Fiduciary/ Claymore MLP Opportunity Fund and the Fiduciary/ Claymore Dynamic Equity Fund.

      HENRY E. LENTZ, age 61, has been a director of the Company since 1998. Mr. Lentz is currently employed as an Advisory Director by Lehman Brothers. He joined Lehman Brothers in 1971 and became a Managing Director in 1976. He left the firm in 1988 to become Vice Chairman of Wasserstein Perella Group, Inc., an investment banking firm. In 1993, he returned to Lehman Brothers as a Managing Director and served as head of the firm’s worldwide energy practice. In 1996, he joined Lehman Brothers’ Merchant Banking Group as a Principal and in January 2003 became a consultant to the Merchant Banking Group. He assumed his current role with Lehman Brothers effective January 2004. Mr. Lentz is also a director of Rowan Companies, Inc. and CARBO Ceramics, Inc.

      BLANCHE M. TOUHILL, PhD, age 74, has been a director of the Company since 2001. Dr. Touhill is Chancellor Emeritus and Professor Emeritus at the University of Missouri — St. Louis. She previously served as Chancellor and Professor of History and Education at the University of Missouri — St. Louis from 1991 through 2002. Prior to her appointment as Chancellor, Dr. Touhill held the positions of Vice Chancellor for Academic Affairs and Interim Chancellor at the University of Missouri — St. Louis. Dr. Touhill also has served on the Boards of Directors of Trans World Airlines and Delta Dental. She holds bachelor’s and doctoral degrees in history and a master’s degree in geography from St. Louis University.

Class III Directors — Terms Expiring in 2007

      WILLIAM A. COLEY, age 62, has been a director of the Company since March 2004. Since March 2005, Mr. Coley has served as Chief Executive Officer and Director of British Energy Group plc, the U.K.’s largest electricity producer. He was previously a non-executive director of British Energy. Mr. Coley served as President of Duke Power, the U.S.-based global energy company, from 1997 until his retirement in February 2003. During his 37-year career at Duke Power, Mr. Coley held various officer level positions in the engineering, operations and senior management areas, including Vice President, Operations (1984-1986), Vice President, Central Division (1986-1988), Senior Vice President, Power Delivery (1988-1990), Senior Vice President, Customer Operations (1990-1991), Executive Vice President, Customer Group (1991-1994) and President, Associated Enterprises Group (1994-1997). Mr. Coley was elected to the board of Duke Power in 1990 and was named President following Duke Power’s acquisition of PanEnergy in 1997. Mr. Coley earned his B.S. in electrical engineering from Georgia Institute of Technology and is a registered professional engineer. He is also a director of CT Communications, Inc.

      IRL F. ENGELHARDT, age 59, has been a director of the Company and has served as Chairman since 1998. Mr. Engelhardt served as Chief Executive Officer of the Company from 1998 to 2005 and as Chief Executive Officer of a predecessor of the Company from 1990 to 1998. He also served as Chairman of a predecessor of the Company from 1993 to 1998 and as President from 1990 to 1995. After joining a predecessor of the Company in 1979, he held various officer level positions in the executive, sales, business development and administrative areas, including Chairman of Peabody Resources Ltd. (Australia) and Chairman of Citizens Power LLC. Mr. Engelhardt also served as Co-Chief Executive Officer and executive director of The Energy Group from February

1997 to May 1998, Chairman of Cornerstone Construction & Materials, Inc. from September 1994 to May 1995 and Chairman of Suburban Propane Company from May 1995 to February 1996. He also served as a director and Group Vice President of Hanson Industries from 1995 to 1996. He also previously served as Chairman of the National Mining Association, the Coal Industry Advisory Board of the International Energy Agency, the Center for Energy and Economic Development and the Coal Utilization Research Council, as well as Co-Chairman of the Coal Based Generation Stakeholders Group. He serves on the Boards of Directors of Valero Energy Corporation and The Williams Companies, Inc., and is Deputy Chairman of The Federal Reserve Bank of St. Louis.

      WILLIAM C. RUSNACK, age 61, has been a director of the Company since January 2002. Mr. Rusnack is the former President and Chief Executive Officer of Premcor Inc., one of the largest independent oil refiners in the United States prior to its acquisition by Valero Energy Corporation in 2005. He served as President, Chief Executive Officer and Director of Premcor from 1998 to February 2002. Prior to joining Premcor, Mr. Rusnack was President of ARCO Products Company, the refining and marketing division of Atlantic Richfield Company. During a 31-year career at ARCO, he was also President of ARCO Transportation Company and Vice President of Corporate Planning. He is also a director of Sempra Energy and Flowserve Corporation.

      JOHN F. TURNER, age 64, has been a director of the Company since July 2005. Mr. Turner served as Assistant Secretary of State for the Bureau of Oceans and International Environmental and Scientific Affairs from November 2001 to July 2005. Mr. Turner was previously President and Chief Executive Officer of The Conservation Fund, a national nonprofit organization dedicated to public-private partnerships to protect land and water resources. He was director of the U.S. Fish and Wildlife Service from 1989 and 1993. He also serves as a consultant to The Conservation Fund and the National Fish and Wildlife Foundation, and as a board member of the University of Wyoming, Ruckelshaus Institute of Environment and Natural Resources. Mr. Turner also served in the Wyoming state legislature for 19 years and is a past president of the Wyoming State Senate. He is also a director of International Paper Company.

      ALAN H. WASHKOWITZ, age 65, has been a director of the Company since 1998. Until July 2005, Mr. Washkowitz was a Managing Director of Lehman Brothers and part of the firm’s Merchant Banking Group, responsible for oversight of Lehman Brothers Merchant Banking Partners II L.P. Mr. Washkowitz joined Kuhn Loeb & Co. in 1968 and became a general partner of Lehman Brothers in 1978 when it acquired Kuhn Loeb & Co. Prior to joining the Merchant Banking Group, he headed Lehman Brothers’ Financial Restructuring Group. Mr. Washkowitz serves on the Board of Visitors of the Faculty of Law for Columbia University, and on the Advisory Board for the Columbia University Center on Corporate Governance. He is also a director of L-3 Communications Corporation.

Class I Directors — Terms Expiring in 2008

      B. R. BROWN, age 73, has been a director of the Company since December 2003. Mr. Brown is the retired Chairman, President and Chief Executive Officer of CONSOL Energy, Inc., a domestic coal and gas producer and energy services provider. He served as Chairman, President and Chief Executive Officer of CONSOL and predecessor companies from 1978 to 1998. He also served as a Senior Vice President of E. I. du Pont de Nemours & Co., CONSOL’s controlling shareholder, from 1981 to 1991. Before joining CONSOL, Mr. Brown was a Senior Vice President at Conoco. From 1990 to 1995, he also was President and Chief Executive Officer of Remington Arms Company, Inc. Mr. Brown has previously served as Director and Chairman of the Bituminous Coal Operators Association Negotiating Committee, Chairman of the National Mining Association, and

Chairman of the Coal Industry Advisory Board of the International Energy Agency. He is currently a director of Delta Trust & Bank and Remington Arms Company, Inc.

      HENRY GIVENS, JR., PhD, age 73, has been a director of the Company since March 2004. Dr. Givens is President of Harris-Stowe State University in St. Louis, Missouri, a position he has held since 1979. Dr. Givens is actively involved with several civic and charitable boards and has received over one hundred national, state and local awards and recognitions. He earned his baccalaureate degree at Lincoln University in Missouri, his master’s degree at the University of Illinois and his PhD at St. Louis University. Dr. Givens is also a director of The Laclede Group Inc. and serves on the advisory board of U.S. Bank, N.A. (St. Louis).

      JAMES R. SCHLESINGER, PhD, age 77, has been a director of the Company since 2001. Dr. Schlesinger is Chairman of the Board of Trustees of MITRE Corporation, a not-for-profit corporation that provides systems engineering, research and development and information technology support to the government, a position he has held since 1985. Dr. Schlesinger also serves as senior advisor to Lehman Brothers and as Trustee for the Center for Strategic and International Studies. Dr. Schlesinger served as U.S. Secretary of Energy from 1977 to 1979. He also held senior executive positions for three U.S. Presidents, serving as Chairman of the U.S. Atomic Energy Commission from 1971 to 1973, Director of the Central Intelligence Agency in 1973 and Secretary of Defense from 1973 to 1975. He also serves as a consultant to the Department of Defense, the Department of State and the Department of Homeland Security. Other past positions include Assistant Director of the Office of Management and Budget, Director of Strategic Studies at the Rand Corporation, Associate Professor of Economics at the University of Virginia and consultant to the Federal Reserve Board of Governors. Dr. Schlesinger is also a director of KFx, Inc. and Sandia Corporation.

      SANDRA VAN TREASE, age 45, has been a director of the Company since January 2003. Ms. Van Trease is Group President, BJC HealthCare, a position she has held since September 2004. BJC Healthcare is one of the largest nonprofit healthcare organizations, delivering services to residents in the greater St. Louis, southern Illinois and mid-Missouri regions. Prior to joining BJC Healthcare, Ms. Van Trease served as President and Chief Executive Officer of UNICARE, an operating affiliate of WellPoint Health Networks Inc., from 2002 to September 2004. Ms. Van Trease also served as President, Chief Financial Officer and Chief Operating Officer of RightCHOICE Managed Care, Inc. from 2000 to 2002, and as Executive Vice President, Chief Financial Officer and Chief Operating Officer from 1997 to 2000. Prior to joining RightCHOICE in 1994, she was a Senior Audit Manager with Price Waterhouse LLP. She is a Certified Public Accountant and Certified Management Accountant. Ms. Van Trease is also a director of Enterprise Financial Services Corporation.

INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES

Director Independence

      As required by the rules of the New York Stock Exchange (“NYSE”), the Board of Directors evaluates the independence of its members at least annually, and at other appropriate times (e.g., in connection with a change in employment status or other significant status changes) when a change in circumstances could potentially impact the independence or effectiveness of one or more directors. This process is administered by the Nominating and Corporate Governance Committee, which consists entirely of directors who are independent under applicable NYSE rules. After carefully considering all relevant relationships with the Company, the Nominating and Corporate

Governance Committee submits its recommendations regarding independence to the full Board, which then makes an affirmative determination with respect to each director.

      In making independence determinations, the Nominating and Corporate Governance Committee and the Board consider all relevant facts and circumstances, including (1) the nature of any relationships with the Company, (2) the significance of the relationship to the Company, the other organization and the individual director, (3) whether or not the relationship is solely a business relationship in the ordinary course of the Company’s and the other organization’s businesses and does not afford the director any special benefits, and (4) any commercial, banking, consulting, legal, accounting, charitable and familial relationships. For purposes of this determination, the Board deems any relationships that have expired for more than three years (e.g. industrial, banking, consulting, legal, accounting, charitable or familial relationships) to be immaterial.

      After considering the standards for independence adopted by the NYSE and various other factors as described herein, the Board of Directors has determined that all directors other than Messrs. Boyce and Engelhardt are independent. None of the directors other than Messrs. Boyce and Engelhardt receives any compensation from the Company other than customary director and committee fees.

      The Board has determined that Directors Brown, Coley, Karn, Turner and Van Trease are independent, based upon the fact that they have no relationships with the Company (other than serving as directors). The Board has also determined that the following directors are independent, after evaluating their relationships with the Company and concluding that such relationships are immaterial: Directors Givens, James, Lentz, Rusnack, Schlesinger, Touhill and Washkowitz. All such relationships are outlined below.

      Mr. Rusnack and Drs. Touhill and Givens serve as trustees of the St. Louis Science Center, a non-profit organization that receives annual contributions of approximately $25,000 from the Company. Dr. Givens also serves as President of Harris-Stowe State University, which receives annual contributions of $25,000 from the Company. The Board has concluded that these relationships are not material, since the Company’s contributions represent less than 1% of each institution’s total annual charitable contributions. In addition to the foregoing, Dr. Givens serves on the regional advisory board of U.S. Bank, N.A. (St. Louis), which is a participating lender under the Company’s revolving credit facility and provides various other commercial banking services to the Company. Mr. Engelhardt and Ms. Van Trease also served on the advisory board prior to December 2004. These banking services are offered to the Company on the same general terms and conditions as other large commercial customers. The Company’s directors did not solicit these commercial relationships and were not involved in any related discussions or deliberations.

      Certain of the Company’s directors, Messrs. James, Lentz, Schlesinger and Washkowitz, have been employed by or served as consultants to Lehman Brothers Inc. within the past three years. The Board has determined that these employment and consulting relationships involve matters unrelated to the Company, and that these relationships are not material to the Company. Their specific relationships with Lehman Brothers are described in more detail in the biographies set forth on pages 5 through 8 of this Proxy Statement. When evaluating the materiality of these relationships to the Company, the Board considered the fact that Lehman Brothers Merchant Banking Partners II L.P. and other affiliates of Lehman Brothers (collectively, the “Merchant Banking Fund”) owned a significant percentage of the Company’s stock prior to completely selling its

holdings in March 2004.(1) The Board also considered the fact that the Company has paid Lehman Brothers fees from time to time for investment banking and related services. These fees have not been significant to the Company or Lehman Brothers (i.e. $7.4 million in 2003, $1.4 million in 2004 and $2.1 million in 2005), and since March 2004 all such fees have been reviewed and approved in advance by the independent Audit Committee. Directors who are affiliated with Lehman Brothers do not participate in any decisions or discussions related to these services, and they do not receive any benefit from related fees. After careful consideration, the Board of Directors has determined that these relationships do not impair, or appear to impair, the directors’ independent judgment.

Director Compensation

      Directors who are employees of the Company receive no additional pay for serving as directors.

      Prior to January 2006, each director who was not an employee of the Company (a “non-employee director”) was paid an annual cash retainer of $45,000. Committee chairpersons other than the Audit Committee Chair also received an annual $3,500 cash retainer for committee service. The Audit Committee Chair received a $10,000 annual cash retainer, and other Audit Committee members received $5,000 annual cash retainers for committee service. Non-employee directors also received $1,500 for each day that they attended Board and/or committee meetings. The Company paid the travel and accommodation expenses of directors to attend meetings and other corporate functions.

      Non-employee directors also received options to purchase 1,000 shares of Company Common Stock and a grant of restricted stock valued at $50,000 when they were first elected to the Board of Directors. The shares subject to the restricted stock awards vest after three years if the recipient continues to serve on the Board of Directors. Non-employee directors also received annual stock option grants valued at $25,000 (based on Black-Scholes methodology). All non-employee director stock options were granted at an exercise price equal to the fair market value of the Company’s Common Stock on the date of grant. These options vest in one-third increments over three years and expire ten years after grant. In the event of a change of control of the Company, any previously unvested options will vest and all restrictions related to the restricted stock awards will lapse.

 

      (1)Prior to May 2001, the Merchant Banking Fund owned in excess of 90% of the Company’s outstanding common stock. Over the ensuing three-year period, the Merchant Banking Fund sold all of its Company holdings through a series of registered public offerings, falling below a 50% controlling interest level in April 2002 and completing its exit in March 2004.

      The following table summarizes the compensation paid to the non-employee directors of the Company during 2005.

Director Compensation Table

      In October 2005, the Company commissioned a compensation analysis conducted by an independent third party to determine whether the Company’s compensation for the Board of Directors was consistent with other publicly held companies of similar size. Based upon such analysis, the Board of Directors approved certain amendments to the director compensation program for non-employee directors. Effective January 1, 2006, non-employee directors will receive an annual cash retainer of $75,000 and annual equity compensation valued at $75,000, awarded one-half in restricted shares (based on the fair market value of the common stock on the date of grant) and one-half in stock options (based on Black-Scholes methodology). The restricted stock awards will vest upon the third anniversary of the date of grant or such other period designated by the Board of Directors pursuant to the Company’s Long-Term Equity Incentive Plan. The stock option awards will be granted at an exercise price equal to the fair market value of the common stock on the date of grant, will vest in equal annual installments over three years, and will expire ten years after grant. In the event of a change of control of the Company (as defined in the Company’s Long-Term Equity Incentive Plan), all restrictions related to the restricted stock awards will lapse and any

previously unvested options will vest. The restricted stock awards and options also provide for vesting in the event of death or disability or termination of service without cause with Board consent.

      Members of various committees of the Board of Directors will receive the following additional compensation:

      The Company will continue to pay the travel and accommodation expenses of directors to attend meetings and other corporate functions. Directors will no longer receive per diem meeting attendance fees.

Board Attendance and Executive Sessions

      The Board of Directors met eleven times in 2005. During that period, each incumbent director attended 85% or more of the aggregate number of meetings of the Board and the committees on which he or she served that were held during his or her tenure as director, and average attendance was 96%. Mr. Engelhardt serves as chairman at all meetings of the Board of Directors, including portions of meetings where all directors are present. Pursuant to the Company’s Corporate Governance Guidelines, the non-management directors meet in executive session at least quarterly. The chair of each executive session is selected in advance by non-management directors and is rotated at each meeting so that (i) the same non-management director does not lead two consecutive sessions, and (ii) to the extent practical, each non-management director has an opportunity to serve as chair before repeating the rotational cycle. During 2005, the Company’s non-management directors met in executive session ten times.

Committees of the Board of Directors

      The Board has appointed four standing committees from among its members to assist it in carrying out its obligations. These committees include an Audit Committee, Compensation Committee, Executive Committee and Nominating and Corporate Governance Committee. Each standing committee has adopted a formal charter that describes in more detail its purpose, organizational structure and responsibilities. A copy of each committee charter can be found on the Company’s website (www.peabodyenergy.com) by clicking on “Investors,” and then “Corporate Governance” and is available in print to any shareholder who requests it. A description of each committee and its current membership follows:

      The members of the Compensation Committee are Robert B. Karn III (Chair), B. R. Brown and William E. James. The Board of Directors has affirmatively determined that, in its judgment, all members of the Compensation Committee are independent under rules established by the New York Stock Exchange.

      The Compensation Committee met eleven times during 2005. Some of the primary responsibilities of the Compensation Committee include the following:

      A separate Report of the Compensation Committee on Executive Compensation is set forth on pages 32 through 40 of this Proxy Statement.

      The members of the Executive Committee are Gregory H. Boyce (Chair since March 2005), Irl F. Engelhardt (Chair prior to March 2005), William A. Coley, Henry E. Lentz and William C. Rusnack. The Executive Committee met nine times during 2005.

      When the Board of Directors is not in session, the Executive Committee will have all of the power and authority as delegated by the Board of Directors, except with respect to:

      The members of the Nominating and Corporate Governance Committee are Blanche M. Touhill (Chair), Henry Givens, Jr., James R. Schlesinger, John F. Turner and Alan H. Washkowitz. The Board of Directors has affirmatively determined that, in its judgment, all members of the Nominating and Corporate Governance Committee are independent under rules established by the New York Stock Exchange.

      The Nominating and Corporate Governance Committee met nine times during 2005. Some of the primary responsibilities of the Nominating and Corporate Governance Committee include the following:

      The members of the Audit Committee are William C. Rusnack (Chair), Robert B. Karn III and Sandra Van Trease. The Board of Directors has affirmatively determined that, in its judgment, each member of the Audit Committee meets all applicable independence standards established by the New York Stock Exchange. The Board of Directors also has determined that each of Messrs. Rusnack and Karn and Ms. Van Trease is an “audit committee financial expert” under rules and regulations adopted by the Securities and Exchange Commission.

      The Audit Committee met eight times during 2005. The Audit Committee’s primary purpose is to provide assistance to the Board of Directors in fulfilling its oversight responsibility with respect to:

      Some of the primary responsibilities of the Audit Committee include the following:

REPORT OF THE AUDIT COMMITTEE

      The Audit Committee has reviewed and discussed the Company’s audited financial statements and management’s report on internal control over financial reporting as of and for the fiscal year ended December 31, 2005 with management and Ernst & Young LLP, the Company’s independent registered public accounting firm. Management is responsible for the Company’s internal control over financial reporting and the financial statements, while Ernst & Young is responsible for conducting its audit in accordance with generally accepted auditing standards including Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, and expressing opinions on the Company’s financial statements in accordance with U.S. generally accepted accounting principles and management’s report on internal control over financial reporting.

      The Audit Committee reviewed with Ernst & Young the overall scope and plans for their audit of the Company’s financial statements and management’s report on internal control over financial reporting. The Audit Committee also discussed with Ernst & Young matters relating to the quality and acceptability of the Company’s accounting principles, as applied in its financial reporting processes, as required by Statement of Auditing Standards (SAS) No. 61 and SAS No. 90. In addition, the Audit Committee reviewed and discussed with Ernst & Young the auditor’s independence from management and the Company, as well as the matters included in written disclosures received from Ernst & Young as required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees. As part of its review, the Audit Committee reviewed fees paid to Ernst & Young and considered whether Ernst & Young’s performance of non-audit services for the Company was compatible with the auditor’s independence.

      Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements and management’s report on internal

control over financial reporting be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 for filing with the Securities and Exchange Commission.

APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FEES

      Ernst & Young LLP served as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2005 and has been appointed to serve in that capacity again for fiscal 2006, subject to ratification by the Company’s shareholders. See Ratification of Appointment of Independent Registered Public Accounting Firm (Item 2) on page 42 of this Proxy Statement.

      The following fees were paid to Ernst & Young for services rendered during the Company’s last two fiscal years:

      Under procedures established by the Board of Directors, the Audit Committee is required to pre-approve all audit and non-audit services performed by the Company’s independent registered public accounting firm to ensure that the provisions of such services do not impair such firm’s independence. The Audit Committee may delegate its pre-approval authority to one or more of its members, but not to management. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

      Each fiscal year, the Audit Committee reviews with management and the independent registered public accounting firm the types of services that are likely to be required throughout the year. Those services are comprised of four categories, including audit services, audit-related services, tax services and all other permissible services. At that time, the Audit Committee pre-approves a list of specific services that may be provided within each of these categories, and sets fee limits for each specific service or project. Management is then authorized to engage the independent registered public accounting firm to perform the pre-approved services as needed throughout the year, subject to providing the Audit Committee with regular updates. The Audit Committee reviews the amount

of all billings submitted by the independent registered public accounting firm on a regular basis to ensure that their services do not exceed pre-defined limits. The Audit Committee must review and approve in advance, on a case-by-case basis, all other projects, services and fees to be performed by or paid to the independent registered public accounting firm. The Audit Committee also must approve in advance any fees for pre-approved services that exceed the pre-established limits, as described above.

      Under Company policy and/or applicable rules and regulations, the independent registered public accounting firm is prohibited from providing the following types of services to the Company: (1) bookkeeping or other services related to the Company’s accounting records or financial statements, (2) financial information systems design and implementation, (3) appraisal or valuation services, fairness opinions or contribution-in-kind reports, (4) actuarial services, (5) internal audit outsourcing services, (6) management functions, (7) human resources, (8) broker-dealer, investment advisor or investment banking services, (9) legal services, and (10) expert services unrelated to audit.

      During the fiscal year ended December 31, 2005, all of the services described under the headings “Audit-Related Fees” and “Tax Fees” were approved by the Audit Committee pursuant to the procedures described above.

CORPORATE GOVERNANCE MATTERS

      Good corporate governance has been a priority at Peabody Energy for many years. The Company’s key governance practices are outlined in its Corporate Governance Guidelines, committee charters, and Code of Business Conduct and Ethics. These documents can be found on the Company’s Corporate Governance webpage (www.peabodyenergy.com on the Internet) by clicking on “Investors” and then “Corporate Governance,” and are available in print to any shareholder upon request. The Code of Business Conduct and Ethics applies to the Company’s directors, Chief Executive Officer, Chief Financial Officer, Controller and other Company personnel.

      The Nominating and Corporate Governance Committee of the Board of Directors is responsible for reviewing the Corporate Governance Guidelines from time to time and reporting and making recommendations to the Board concerning corporate governance matters. Each year, the Nominating and Corporate Governance Committee, with the assistance of outside experts, reviews the Company’s corporate governance practices, not only to ensure that they comply with applicable laws and NYSE listing requirements, but also to ensure that they continue to reflect best practices and promote the best interests of the Company and its shareholders.

      In 2005, the Board of Directors amended its Corporate Governance Guidelines to establish a new director election process to address situations where a director nominee receives more “withheld” than “for” votes. The Board took this action after consulting with independent governance experts and considering a variety of alternatives.

      Under the new process, the Company’s directors will continue to be elected by a plurality vote. However, in uncontested elections, if a director nominee receives more “withheld” than “for” votes, the director nominee will be required to promptly tender his or her resignation. The Board will then determine whether to accept or reject the resignation based on such factors as the nominee’s qualifications and contributions to the Company, and whether any special interest groups conducted a campaign involving the election to further their own interests rather than shareholders as a whole.

      The new director election process is set forth in the Corporate Governance Principle on Majority Voting appearing as Annex A to this Proxy Statement.

      The Board also approved several other important changes to the Corporate Governance Guidelines, which are accessible on the Company’s website as indicated above. Under the new Corporate Governance Guidelines:

Shareholder Communications with the Board of Directors

      The Board of Directors has adopted the following procedures for shareholders and other interested persons to send communications to the Board, individual directors and/or Committee Chairs (collectively, “Shareholder Communications”):

      Shareholders and other interested persons seeking to communicate with the Board should submit their written comments to the Chairman, Peabody Energy Corporation, 701 Market Street, St. Louis, Missouri 63101. The Chairman will forward such Shareholder Communications to each Board member (excluding routine advertisements and business solicitations, as instructed by the Board), and provide a report on the disposition of matters stated in such communications at the next regular meeting of the Board of Directors. If a Shareholder Communication (excluding routine advertisements and business solicitations) is addressed to a specific individual director or Committee Chair, the Chairman will forward that communication to the named director, and will discuss with that director whether the full Board and/or one of its committees should address the subject matter.

      If a Shareholder Communication raises concerns about the ethical conduct of management or the Company, it should be sent directly to the Company’s Vice President and General Counsel at 701 Market Street, St. Louis, Missouri 63101. The Vice President and General Counsel will promptly forward a copy of such Shareholder Communication to the Chairman of the Audit Committee and, if appropriate, the Chairman of the Board, and take such actions as they authorize to ensure that the subject matter is addressed by the appropriate Board committee, management and/or the full Board.

      If a shareholder or other interested person seeks to communicate exclusively with the Company’s non-management directors, such Shareholder Communications should be sent directly to the Corporate Secretary who will forward any such communications directly to the Chair of the Nominating and Corporate Governance Committee. The Corporate Secretary will first consult with and receive the approval of the Chair of the Nominating and Corporate Governance Committee before disclosing or otherwise discussing the communication with members of management or directors who are members of management.

      At the direction of the Board, the Company reserves the right to screen all materials sent to its directors for potential security risks and/or harassment purposes.

      Shareholders also have an opportunity to communicate with the Board of Directors at the Company’s Annual Meeting of Shareholders. Pursuant to Board policy, each director is expected to attend the Annual Meeting in person, subject to occasional excused absences due to illness or unavoidable conflicts. Each of the Company’s thirteen then-incumbent directors attended the last Annual Meeting of Shareholders in May 2005.

Overview of Director Nominating Process

      The Board of Directors believes that one of its primary goals is to advise management on strategy and to monitor the Company’s performance. The Board also believes that the best way to accomplish this goal is by choosing directors who possess a diversity of experience, knowledge and skills that are particularly relevant and helpful to the Company. As such, current Board members possess a wide array of skills and experience in the coal industry, related energy industries and other important areas, including finance and accounting, operations, environmental management, education, governmental affairs and administration, and healthcare. When evaluating potential members, the Board seeks to enlist the services of candidates who possess the highest ethical standards, and a combination of skills and experience which the Board determines are the most appropriate to meet its objectives. The Board believes all candidates should be committed to creating value over the long term and to serving the best interests of the Company and all of its shareholders.

      The Nominating and Corporate Governance Committee (“Committee”) is responsible for identifying, evaluating and recommending qualified candidates for election to the Board of Directors. The Committee will consider director candidates submitted by shareholders. Any shareholder wishing to submit a candidate for consideration should send the following information to the Corporate Secretary, Peabody Energy Corporation, 701 Market Street, St. Louis, Missouri 63101:

      The Corporate Secretary will promptly forward such materials to the Committee Chair and the Chairman of the Board. The Corporate Secretary also will maintain copies of such materials for future reference by the Committee when filling Board positions.

      Shareholders may submit potential director candidates at any time pursuant to these procedures. The Committee will consider such candidates if a vacancy arises or if the Board decides to expand its membership, and at such other times as the Committee deems necessary or appropriate. Separate procedures apply if a shareholder wishes to nominate a director candidate at the 2007 Annual Meeting. Those procedures are described on page 55 of this Proxy Statement under the heading “Information About Shareholder Proposals.”

      Pursuant to its charter, the Committee must review with the Board of Directors, at least annually, the requisite qualifications, independence, skills and characteristics of Board candidates, members and the Board as a whole. When assessing potential new directors, the Committee considers individuals from various and diverse backgrounds. While the selection of qualified

directors is a complex and subjective process that requires consideration of many intangible factors, the Committee believes that candidates should generally meet the following criteria:

      The Committee will consider candidates submitted by a variety of sources (including, without limit, incumbent directors, shareholders, Company management and third-party search firms) when filling vacancies and/or expanding the Board. If a vacancy arises or the Board decides to expand its membership, the Committee generally asks each director to submit a list of potential candidates for consideration. The Committee then evaluates each potential candidate’s educational background, employment history, outside commitments and other relevant factors to determine whether he/she is potentially qualified to serve on the Board. At that time, the Committee also will consider potential nominees submitted by shareholders in accordance with the procedures described above. The Committee seeks to identify and recruit the best available candidates, and it intends to evaluate qualified shareholder nominees on the same basis as those submitted by Board members or other sources.

      After completing this process, the Committee will determine whether one or more candidates are sufficiently qualified to warrant further investigation. If the process yields one or more desirable candidates, the Committee will rank them by order of preference, depending on their respective qualifications and the Company’s needs. The Committee Chair, or another director designated by the Committee Chair, will then contact the preferred candidate(s) to evaluate their potential interest and to set up interviews with members of the Committee. All such interviews are held in person, and include only the candidate and the independent Committee members. Based upon interview results and appropriate background checks, the Committee then decides whether it will recommend the candidate’s nomination to the full Board.

      The Committee believes this process has consistently produced highly qualified, independent Board members to date. However, the Committee may choose, from time to time, to use additional resources (including independent third-party search firms) after determining that such resources could enhance a particular director search. The Committee has not used third-party firms for prior searches.

OWNERSHIP OF COMPANY SECURITIES

      The following table sets forth information as of March 1, 2006 with respect to persons or entities who are known to beneficially own more than 5% of the Company’s outstanding Common Stock, each director, each executive officer named in the Summary Compensation Table below, and all directors and executive officers as a group.

Beneficial Owners of More Than Five Percent, Directors and Management

Section 16(a) Beneficial Ownership Reporting Compliance

      The Company’s executive officers and directors and persons beneficially holding more than ten percent of the Company’s Common Stock are required under the Securities Exchange Act of 1934 to file reports of ownership and changes in ownership of Company Common Stock with the Securities and Exchange Commission and the New York Stock Exchange. The Company files these reports of ownership and changes in ownership on behalf of its executive officers and directors. To the best of the Company’s knowledge, based solely on its review of the copies of such reports furnished to the Company during the fiscal year ended December 31, 2005, and written representations from certain reporting persons that no additional reports were required, all required reports were timely filed.

EXECUTIVE COMPENSATION

      The Company continuously strives to provide detailed and clear information related to executive compensation. While the Securities and Exchange Commission has not yet implemented its new proposed executive compensation rules, the Company has decided to provide additional information about executive compensation in this section of the Proxy Statement. The Company has included where practicable additional tables and narrative incorporating many of the proposed new disclosures in an effort to make as transparent as possible its compensation practices for our shareholders. The Company’s executive compensation disclosures may differ in future years depending upon the rules ultimately adopted by the SEC.

      The following table summarizes the annual and long-term compensation paid to the Chief Executive Officer and the four other most highly compensated executive officers of the Company for their service to the Company during the periods indicated.

Summary Compensation Table

      Because elements of the Summary Compensation Table do not lend themselves to being totaled due to different presentation requirements and to provide additional transparency on the total compensation for our named executive officers, we are providing the following “supplemental” Estimated Fair Value of 2005 Total Annual Compensation table. The components of executive compensation included in this table are as follows:

Estimated Fair Value of 2005 Total Annual Compensation

      To provide additional transparency about the total cash compensation earned by our named executive officers for 2005, we are providing the following “supplemental” 2005 Total Compensation Received in Cash table. A significant portion of each named executive officer’s cash compensation shown for 2005 was paid pursuant to performance units granted in 2003. These amounts were earned over a three-year period and reflect the Company’s performance and stock price appreciation over that three-year period.

      The components of executive compensation included in this table are as follows:

      The numbers reported in this table are reported in the Summary Compensation Table and several elements of this table are also reported in various other tables, including the Estimated Fair Value of 2005 Total Annual Compensation table.

2005 Total Compensation Received in Cash

      The following table sets forth detail of the amounts reported in the All Other Compensation column of the Summary Compensation Table and in the Estimated Fair Value of 2005 Total Annual Compensation table and the 2005 Total Compensation Received in Cash table.

All Other Compensation Table

      The following table sets forth information concerning the grant of stock options to each of the Company’s executive officers listed on the Summary Compensation Table on page 22 during the fiscal year ended December 31, 2005. Each named executive officer received stock option awards at the beginning of the fiscal year and certain named executive officers received supplemental stock option awards in connection with the implementation of the Company’s succession plan in March 2005. The exercise price for all options granted is equal to the fair market value of the Company’s Common Stock on the date of grant. The number and exercise price of all options have been adjusted to reflect the 2-for-1 stock splits effected by the Company in March 2005 and February 2006.

Option Grants in Last Fiscal Year

      The following tables set forth detail from stock option exercises by named executive officers in the last fiscal year, and the number and value of unexercised stock options held by these individuals as of December 31, 2005. The options in these tables were granted between May 1998 and April 2005.

      In May 1998, Peabody Energy entered into a leveraged buyout transaction or “LBO”, and acquired Peabody Holding Company. On May 21, 2001, Peabody Energy became a public company. All of the named executive officers, except Mr. Boyce, were employed by the Company prior to May 21, 2001, and received stock options both prior to the initial public offering (“IPO”) and after. The size and terms of the pre-IPO stock options or “LBO grants” were determined according to standard practices at that time for private companies. The LBO grants, many of which remain unexercised, were designed to be competitive in the industry marketplace for top executives, to compensate the management group on a basis commensurate with the risks associated with a highly leveraged transaction, to reward performance and to align their interests with the Company’s owners.

      The options granted after the IPO have been made in accordance with the executive compensation philosophy stated in this proxy, which calls for total compensation in line with marketplace practices for similarly-sized public companies, to reward performance and to provide a clear link between executive pay and shareholder value.

Aggregated Option Exercises in Last Fiscal Year

Fiscal Year-End Option Values

      When the Company was acquired by its prior owners in 1998, it had an estimated market capitalization of $480 million. Today, less than 8 years later, the market capitalization is approximately $12 billion, a compound annual growth rate of 55%, compared to the S&P 500, which grew less than 10% per year in the same period.

      This market-leading growth over time has resulted in substantial stock option gains to executives, especially those options held for the longest period of time (all Company stock options, granted either pre- or post-IPO, have a 10-year term from the date of grant). This growth in market capitalization has also enabled executives to obtain ownership in the Company and further align their interest with other shareholders.

      The following table sets forth information concerning the grant of performance units to each of the Company’s executive officers listed on the Summary Compensation Table above during the fiscal year ended December 31, 2005. Except as otherwise shown in the table, the performance period with respect to such awards is January 3, 2005 through December 31, 2007.

Long-Term Incentive Plans —

Awards in Last Fiscal Year

Equity Compensation Plan Information

      The table below provides information regarding the Company’s equity compensation plans as of December 31, 2005. Share totals and exercise prices have been adjusted to reflect the Company’s 2-for-1 stock splits in March 2005 and February 2006.

Pension Benefits

      The Company’s Salaried Employees Retirement Plan, or pension plan, is a “defined benefit” plan. The pension plan provides a monthly annuity to salaried employees when they retire. A salaried employee must have at least five years of service to be vested in the pension plan. A full benefit is available to a retiree at age 62. A retiree can begin receiving a benefit as early as age 55; however, a 4% reduction factor applies for each year a retiree receives a benefit prior to age 62.

      An individual’s retirement benefit under the pension plan is equal to the sum of (1) 1.112% of the highest average monthly earnings over 60 consecutive months up to the “covered compensation limit” multiplied by the employee’s years of service, not to exceed 35 years, and (2) 1.5% of the average monthly earnings over 60 consecutive months over the “covered compensation limit” multiplied by the employee’s years of service, not to exceed 35 years.

      The Company announced in February 1999 that the pension plan would be phased out beginning January 1, 2001. Certain transition benefits were introduced based on the age and service of the employee at December 31, 2000: (1) employees age 50 or older will continue to accrue service at 100%; (2) employees between the ages of 45 and 49 or under age 45 with 20 years or more of service will accrue service at the rate of 50% for each year of service worked after December 31, 2000; and (3) employees under age 45 with less than 20 years of service will have their pension benefits frozen. In all cases, final average earnings for retirement purposes will be capped at December 31, 2000 levels.

      The estimated annual pension benefits payable upon retirement at normal retirement age and early retirement age for the Chief Executive Officer and the other named executive officers are as follows:

Retirement Plan Potential Annual Payments and Benefits⁽¹⁾

      The Company has one supplemental defined benefit retirement plan that provides retirement benefits to executives whose pay exceeds legislative limits for qualified defined benefit plans.

Employment Agreements

      The Company has entered into employment agreements with each of the named executive officers and with certain other key executives.

      The Chief Executive Officer’s employment agreement provides for a three-year term that extends day-to-day so that there is at all times remaining a term of three years. Following a termination without cause or resignation for good reason, the Chief Executive Officer would be entitled to a payment in substantially equal installments equal to three years’ base salary and three times the higher of (1) the target annual bonus for the year of termination or (2) the average of the actual annual bonuses paid in the three prior years. He would also be entitled to a one-time prorated bonus for the year of termination (based on the Company’s actual performance multiplied by a fraction, the numerator of which is the number of business days he was employed during the year of termination, and the denominator of which is the total number of business days during that year), payable when bonuses, if any, are paid to other executives. He would also be entitled to receive qualified and nonqualified retirement, life insurance, medical and other benefits for three years. In addition to the aforementioned, following a termination without cause or resignation for good reason (as defined in the employment agreement), he would be paid a lump sum of $800,000 if the termination occurred on or after age 52. If the Chief Executive Officer were to terminate for any reason on or after age 55 or die or became disabled, the lump sum of $800,000 would also be paid. Upon termination without cause, resignation for good reason, death, disability, or termination for any reason after reaching age 55, he would be entitled to deferred compensation payable in cash in one of the following amounts: if termination occurred (a) prior to age 55, the greater of (i) the cash

equivalent of the fair market value of 80,000 shares of Company common stock on October 1, 2003 plus interest or (ii) an amount equal to the fair market value of 80,000 shares on the date of termination; (b) on or after age 55 but prior to age 62, the greater of (i) the amount referenced in (a) on the date of termination, (ii) $1.6 million, reduced by .333% for each month that termination occurs before reaching age 62, or (iii) the fair market value of 80,000 shares on the date of termination; (c) on or after age 62, the greater of the amount referenced in (b) on the date of termination or $1.6 million. If he were to terminate for any other reason prior to reaching age 55, the deferred compensation amount would be forfeited.

      The Company entered into amended employment agreement with Mr. Engelhardt effective January 1, 2006 at a reduced salary and bonus level as described on page 36. Mr. Engelhardt’s amended agreement is for a term of two years, which may be extended by mutual agreement. The Company may only terminate employment for cause, disability or death. Mr. Engelhardt may terminate his employment at any time; however, if he terminates employment for good reason, he would be entitled to his base salary through December 31, 2007, a one-time prorated bonus for the year of termination (based on the Company’s actual performance multiplied by a fraction, the numerator of which is the number of business days he was employed during the year of termination, and the denominator of which is the total number of business days during that year), payable when bonuses, if any, are paid to other executives. He will also receive qualified and nonqualified retirement, life insurance, medical and other benefits through December 31, 2007.

      Other executives’ employment agreements have either one-year or two-year terms which extend day-to-day so that there is at all times a remaining term of one or two years, respectively. The other key executives are entitled to the following benefits, payable in equal installments over one or two years: (1) one or two times base salary and (2) one or two times the higher of (A) the target annual bonus or (B) the average of the actual annual bonuses paid in the three prior years. In addition, the other executives are entitled to (1) a one-time prorated bonus for the year of termination (based on the Company’s actual performance multiplied by a fraction, the numerator of which is the number of business days the executive officer was employed during the year of termination, and the denominator of which is the total number of business days during that year), payable when bonuses, if any, are paid to the Company’s other executives, and (2) qualified and nonqualified pension, life insurance, medical and other benefits for the one or two-year period, as applicable, following termination.

      Under all executives’ employment agreements, the Company is not obligated to provide any benefits under tax qualified plans that are not permitted by the terms of each plan or by applicable law or that could jeopardize the plan’s tax status. Continuing benefit coverage will terminate to the extent an executive is offered or obtains comparable coverage from any other employer. The employment agreements provide for confidentiality during and following employment, and include a noncompetition and nonsolicitation agreement that is effective during and for one year following employment. If an executive breaches any of his or her confidentiality, noncompetition or nonsolicitation agreements, the executive will forfeit any unpaid amounts or benefits. To the extent that excise taxes are incurred by an executive as a result of “excess parachute payments,” as defined by IRS regulations, the Company will pay additional amounts so that executives would be in the same financial position as if the excise taxes were not incurred.

Report of the Compensation Committee

      The Compensation Committee is comprised entirely of independent directors and has the responsibility for the evaluations and compensation of the Company’s executives. The Committee has overall responsibility for monitoring the performance of the Company’s executives and evaluating and approving the Company’s executive compensation plans, policies and programs. The Committee will also review and approve any benefit plans that directly impact the Company’s executives. In addition, the Compensation Committee administers the Company’s annual and long-term incentive plans and programs and periodically assesses the Company’s director compensation program.

      On March 1, 2005, following a thorough succession planning process, the Board of Directors selected Gregory H. Boyce to succeed Irl F. Engelhardt as Chief Executive Officer effective January 1, 2006. The Compensation Committee and Board, in conjunction with Messrs. Boyce and Engelhardt, also developed an orderly transition plan which took place in 2005. To facilitate a successful transition, Mr. Engelhardt continued his CEO duties through 2005 and will remain as Chairman of the Board and a senior officer of the Company after January 1, 2006. One of the Committee’s primary objectives during 2005 was to work closely with Messrs. Boyce and Engelhardt to ensure a seamless transfer, and to develop appropriate compensation packages commensurate with their new roles and responsibilities.

      The fundamental objective of the Company’s executive compensation program is to attract, retain and motivate key executives to enhance long-term profitability and shareholder value.

      The Company’s compensation program is based on the following policies and objectives:

      With these policies and objectives in mind, the Compensation Committee has designed a pay structure for the named executive officers that incorporates three key components: base salary, annual incentive payments, and long-term incentive compensation consisting of stock options and performance units.

      The Compensation Committee commissioned a compensation analysis conducted by an independent third party in June 2005 to determine whether the Company’s executive compensation programs were consistent with those of other publicly held companies of similar size and in a similar industry. The results of this study confirmed that the Company’s executive compensation programs are consistent with those of other publicly held companies of similar size and in a similar industry, including, those companies that comprise the “Custom Composite Index” component of the “Stock Performance Graph” (see page 41 of this Proxy Statement) and several other public companies in the coal and energy sectors. The Compensation Committee will continue to periodically review the Company’s executive compensation programs to ensure that such programs remain competitive and continue to meet their objectives.

      Based upon the above-referenced study, the Compensation Committee reviewed the base salaries of the Company’s executive officers to ensure competitiveness in the marketplace. The Compensation Committee will continue to review the base salaries of the named executive officers to ensure salaries continue to reflect marketplace practices and take into account performance, experience and retention value.

      The Company does not believe that perquisites are necessary at this time to attract and retain highly qualified management personnel. The Company’s named executive officers did not receive perquisites in 2005.

      The Company’s annual incentive compensation plan provides opportunities for key executives to earn annual cash incentive payments tied to the successful achievement of pre-established objectives.

      All annual incentive plan participants are assigned threshold, target and maximum incentive percentages. If performance does not meet the threshold level, no incentive is earned. At threshold levels, the incentive that can be earned generally equals 50% of the target incentive. The target incentive represents the level of compensation that is considered to be required to stay competitive with the desired pay position in the market. Target incentive payments generally are received for achieving budgeted financial goals and meeting individual performance goals. Maximum incentive payments generally are received when financial goals and individual performance goals are significantly exceeded. A participant’s annual incentive opportunity is based upon his or her level of participation in the incentive plan. The incentive opportunity increases based upon an executive’s potential to affect operations or profitability.

      Awards for corporate employees, including the Chief Executive Officer, are based on achievement of corporate and individual performance goals. Awards to operating employees are based on achievement of a combination of corporate, business unit and individual performance goals. Achievement of corporate performance is determined by comparing the Company’s actual performance against objective goals, and achievement of individual goals is determined by evaluating a combination of both objective and subjective performance measures. All goals are established by the Company, and goals for the named executive officers are reviewed and approved by the Compensation Committee at the beginning of each calendar year. In 2005, the performance measures for the

named executive officers included Adjusted EBITDA (50%), Value Creation (20%) and individual performance (30%). In 2006, these measures will include Adjusted EBITDA (40%), Return on Invested Capital (20%), safety (10%) and individual performance (30%).

      All award payments to the named executive officers are subject to the review and approval of the Compensation Committee. In addition, annual incentive payments for 2005 for both the Chief Executive Officer and the Chairman were reviewed and approved by the independent members of the Board of Directors.

      For the fiscal year ended December 31, 2005, the Company awarded annual incentive payments to the Chief Executive Officer, the Chairman and the other named executive officers, as reflected in the bonus column of the Summary Compensation Table. Other eligible executives were paid under the same annual incentive plan. Annual incentive payouts for 2005 were based on the Company’s achievement of goals for Adjusted EBITDA, Value Creation and individual performance.

      The Compensation Committee has determined that a long-term incentive opportunity will be made available to each of the Company’s named executive officers through annual awards of stock options and performance units. The targeted value of these awards generally is split evenly between stock options and performance units and equals 225% of base salary for the Chief Executive Officer and 100% of base salary for other named executive officers. The Compensation Committee intends that these long-term incentive opportunities be competitive and based on actual Company performance. When evaluating awards to be granted, the Compensation Committee considers competitive market data and retention value of the individual executives.

      The Company’s stock option program is a long-term plan designed to create a direct link between executive compensation and increased shareholder value. The targeted value of annual option awards to the named executive officers equals 112.5% of base salary for the Chief Executive Officer and 50% of base salary for other named executive officers as described above. However, awards can deviate from these guidelines at the discretion of the Compensation Committee. The Company uses a Black-Scholes valuation model to establish the value of its stock option grants. The grants are currently made in the form of nonqualified stock options and are awarded on the first business day of each year.

      All stock options are granted at an exercise price equal to the closing price of the Company’s Common Stock on the date of grant. Stock options generally vest in one-third increments over a period of three years; however, options will immediately vest upon a change of control of the Company or upon an employee’s death, disability or a recapitalization event. Options expire ten years from the date of grant.

      Certain key executives are eligible to receive long-term incentive awards in the form of performance units. The targeted value of performance unit awards to the named executive officers equals 112.5% of base salary for the Chief Executive Officer and 50% of base salary for other named executive officers as described above. However, awards can deviate from these guidelines at the

discretion of the Compensation Committee. Performance units granted in 2005 will be payable in shares of the Company’s common stock, if earned. For units granted in January 2005, the value of the performance units is tied to the relative performance of the Company’s Common Stock and a three-year Adjusted EBITDA Return on Invested Capital measure. The percentage of the performance units earned is based on the Company’s total shareholder return (TSR) over a period beginning January 3, 2005 and ending December 31, 2007 relative to an industry comparator group (the Industry Peer Group) and the S&P MidCap 400 Index (together weighted 50% of the total award) and Adjusted EBITDA Return on Invested Capital (weighted 50%). TSR measures cumulative stock price appreciation plus dividends. The Industry Peer Group generally is perceived to be subject to similar market conditions and investor reactions as the Company. For this reason, the Industry Peer Group is weighted at 60% while the S&P MidCap 400 Index is weighted at 40%.

      Performance payout formulas are as follows:

      Performance units are issued at a price that equals the average closing price of the Company’s Common Stock during the four weeks of trading immediately following the date of grant. TSR for the Company at the end of the cycle is based on the average closing price during the last four weeks of trading in the performance cycle. Units vest over, and are payable subject to the achievement of performance goals at the conclusion of, the measurement period. Upon a change of control of the Company, a recapitalization event or the executive’s death, disability, retirement or termination without cause, payments by the Company will be paid in proportion to the number of vested performance units based upon the TSR performance as of the date the event occurs.

      The Company maintains a Deferred Compensation Plan pursuant to which certain executives can defer base, annual incentive and any cash-based long-term incentive compensation. Effective December 8, 2004, the Company amended the Deferred Compensation Plan to no longer allow new contributions.

      The Company also maintains a defined contribution retirement plan, a defined benefit retirement plan (which plan is being phased out as discussed on page 29 of the Proxy Statement) and other health and welfare benefit plans for its employees. Executives participate in these plans on the same terms as other eligible employees, subject to any legal limits on the amount that may be contributed by or paid to executives under the plans. In addition, the Company maintains one excess defined benefit retirement plan and one excess defined contribution plan that provides retirement benefits to executives whose pay exceeds legislative limits for qualified benefit plans.

      Upon his election as Chief Executive Officer Elect in March 2005, Mr. Boyce’s base salary was increased to $825,000. During 2005, Mr. Engelhardt’s base salary was $1,000,000. Effective January 1, 2006, Mr. Engelhardt’s base salary was adjusted to $350,000 to reflect his continuing roles as Chairman of the Board and senior officer of the Company. A review of competitive market data conducted in June 2005 by an independent compensation consultant (selected by and reporting to the Compensation Committee) supports the competitiveness of these salaries.

      For the fiscal year ended December 31, 2005, Mr. Boyce’s maximum incentive opportunity under the Company’s annual incentive compensation plan for 2005 was 175% of his base salary, or $1,443,750. Mr. Engelhardt’s maximum incentive opportunity under the Company’s annual incentive compensation plan was also 175% of his base salary, or $1,750,000. The maximum incentive opportunity for the other named executive officers was 150% of their base salary. Based on Company and individual performance for the fiscal year ended December 31, 2005, Mr. Boyce was awarded a bonus payout equal to 154.2% of his 2005 base salary, or $1,272,370. Mr. Engelhardt was awarded a bonus payout equal to 165.5% of his 2005 annual base salary, or $1,654,935. The full Board of Directors evaluated Mr. Boyce’s and Mr. Engelhardt’s performance during 2005, and this evaluation of their individual performance combined with the Company’s performance versus pre-established targets were the major considerations in setting the amount of annual incentive compensation plan awards. The Compensation Committee and the independent members of the Board of Directors approved the salary and bonus amounts for Messrs. Boyce and Engelhardt.

      During the fiscal year ended December 31, 2005, Messrs. Boyce and Engelhardt also received long-term incentive awards consisting of stock options and performance units. The specific terms of such awards are outlined in this report under the captions “Long Term Incentives,” “Stock Options” and “Performance Units,” and in the compensation tables above.

      In February 2006, Messrs. Boyce and Engelhardt received performance payouts of $1,473,103 and $14,505,315, respectively, pursuant to terms of performance units granted in 2003 (described above under “Performance Units”). These payouts were consistent with the Company’s stated executive compensation philosophy to create a clear link to shareholder value and to base payments, in part, on relative external performance. Specifically, the percentage of these performance units earned was based on the Company’s total shareholder return over the three-year performance period beginning January 2, 2003 and ending December 31, 2005, relative to the total shareholder return (“TSR”) of an industry comparator group and an S&P Industrial Index.

      During this three-year performance period, the Company created approximately $9 billion in additional shareholder value, while setting records for safety. The Company’s TSR was the highest in the industry comparator group and at the 99th percentile of the relevant S&P Industrial Index. It was also the highest three-year total shareholder return since the Company’s initial public offering. Messrs. Boyce and Engelhardt were instrumental in leading the Company through this unprecedented period of growth and improvements in safety that resulted in a 70.9% increase in revenues, a

524% increase in stock price and a 48% improvement in safety ratings. Future performance unit payouts, if any, will require continued above-median relative TSR.

      The following table sets forth additional details regarding performance unit payments earned by each of the named executive officers in 2005. The payments relate to performance units granted in 2003 and reflect the Company’s performance and stock price appreciation during the ensuing three-year performance period.

      The table compares the Company’s total shareholder return for the three-year period ended December 31, 2005 to the performance of a peer group comprising seven publicly-traded mining companies and to the performance of an index comprising 375 publicly-traded industrial companies. Based on the Company’s relative performance, the named executive officers earned the following awards under the program:

Peabody Relative Performance for Performance Period Ending December 31, 2005 and

Resulting Performance Unit Awards⁽¹⁾