peabody energy csr_report2007

2007 Report

Corporate & SocialReSponSibility

Our Results

n We operated the safest U.S. large surface mine, and the past three years have been the safest in our 125-year history

n We earned half of the U.S. Department of the Interior’s awards for reclamation excellence and good neighbor practices

n We earned global recognition for sustainable practices on Arizona’s Black Mesa

n We joined China’s centerpiece GreenGen near-zero emissions initiative as the only non-Chinese company

n We set records for sales volume, revenues and EBITDA and delivered 64% total shareholder return

n We ranked first among peers in Fortune’s Most Admired listing, with the number-one score in every category, including social responsibility

Our Mission:

Peabody’s mission is to be a leading worldwide producer and supplier of sustainable energy solutions, which power economic prosperity and result in a better quality of life.

Our Values

n Our culture is driven by strong corporate governance and a continuous focus on safety, stewardship, sustainability and best-in-class performance

n Safety is core to our mission, and our employees commit to a vision of an incident-free workplace

n We believe that greater use of clean coal drives energy security, economic growth and environmental solutions

n We are the global leader advancing clean coal initiatives to achieve near-zero emissions

n We believe clean, affordable electricity improves quality of life and longevity

On the Cover Employees at Peabody’s Farmersburg Mine in Indiana were honored by the U.S. Department of Labor this past year for operating the safest large mine in America.

Inside Peabody’s Caballo Mine in Wyoming won the U.S. Interior Bronze Good Neighbor Award for an innovative partnership with area ranchers to reclaim land that is twice as productive for grazing.

2 Peabody Energy

Summary | E c o n o m i c | E m p l o y e e | E n v i r o n m e n t a l | Pu b l i c | A p p e n d i x

Management believes that a suite of external communications vehicles including the annual report, Securities and Exchange Commission (SEC) filings, website, employee publications and Corporate & Social Responsibility Report represent a full portrayal of the company’s commitments and progress to stakeholders.

This report is intended to provide information regarding responsibilities that, by design, are not as thoroughly discussed in other communication vehicles.

In compiling this report, Peabody reviewed Global Reporting Initiative guidelines for sustainability and incorporated appropriate reporting data.

•Letter from the Chairman and CEO 4

•Sustainability Awards 6

•Economic and Corporate Responsibility 8

•Employee Responsibility 16

•Environmental Responsibility 27

•Public Responsibility 32

•Appendix 40

The use of the words “Peabody,” “the company,” and “our” relate to Peabody, our subsidiaries and our majority-owned affiliates.

Key Stakeholder Communications and Focus Areas

Celebrating 125 Years 3

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Corporate & Economic

Responsibility

EnvironmentalResponsibility

EmployeeResponsibility

PublicResponsibility

Annual Report

Environmental Regulatory Filings and Public Notices

SECFilings

Website

Employee Publications

Corporate & Social Responsibility Report


Peabody celebrates our 125th anniversary this year, an extraordinary milestone and a tribute to our 7,000 employees worldwide who transform our vision for corporate and social responsibility into actions and results.

Peabody is the world’s largest private-sector coal company. We are a Fortune 500 company and a member of the S&P 500 Index. We rank first in our sector among Fortune’s “Most Admired Companies” listing, with the number-one position in all categories, including social responsibility.

I am pleased that the past three years have been our safest, that we continue to earn the industry’s highest honors for environmental excellence and good neighbor practices, and that we are strengthening communities around the world, injecting $3.2 billion in direct benefits into economies in 2007.

Our 125th anniversary comes at a time when the world energy landscape is dramatically changing, global markets are strong, and we face enormous energy needs. As we settle into the 21st century, coal’s contribution to society is even more valuable than when

Dear Stakeholder:

4 Peabody Energy

Peabody is the Largest Private-Sector Coal Company

Source: Most recent company reports and websites, SEC filings and Peabody analysis. Values are on a short-ton basis. Peabody sales and reserves based on 2007 data.

Reserves (Tons in Billions)

Sal

es (T

ons

in M

illio

ns)

200

250

150

100

50

0

1 2 3 4 5 6 7 8 9 10

Shenhua Energy

BHP

China Coal Energy

Consol

Anglo-American

Xstrata

MasseyYanzhou

Alpha Natural Resources

International CoalPatriot

Foundation

Arch

Rio Tinto

Peabody is the world’s largest private-sector coal company, with world record sales of 238 million tons and a 9.3 billion-ton reserve base. The energy value of our reserves exceeds the oil or gas reserves in the Continental United States.

Peabody Energy Chairman and Chief Executive Officer Gregory H. Boyce

Peabody was founded in 1883. Coal is the rock that built America and the modern world, and coal will continue to build fast-growing population centers and improve quality of life for billions of people around the world.


Gregory H. BoyceChairman and Chief Executive Officer

In the next quarter century, global energy use is expected to increase by nearly 50 percent, and world electricity generation will nearly double. At a time when competing fuels are increasingly strained and coming from unstable regions, greater use of coal can advance the goals of clean energy solutions that build energy security, strengthen economies and solve our environmental challenges. I believe it is our responsibility to advance all of these three “Es” at all times.

We need all forms of energy to meet these heavy demands, though coal is the only sustainable fuel that can keep pace. Oil and natural gas supplies are increasingly strained. The U.S. petroleum industry predicts that the global supply of oil and natural gas from conventional sources will not meet the significant projected growth demand over the next 25 years. Coal has been the fastest-growing fuel for each of the past five years, and coal use is expected to grow nearly 75 percent over the next quarter century.

Peabody’s vision is to achieve near-zero emissions from coal, and we are the global leader advancing signature clean coal projects in the United States, China and Australia. Greater use of clean coal is important for solving the world’s energy needs and advancing climate solutions.

As a nation, we must commit to significant funding increases to commercialize carbon capture and storage technologies for clean electricity and Btu Conversion projects. The magnitude of this challenge is enormous, but within reach as our most powerful solution for an energy-short world.

You will read more about Peabody’s positions, priorities and successes in this 2007 report, which builds on five years of benchmarking by our management and board of directors.

Once again, I want to recognize our global team of employees for their hard work delivering best-in-class performance. I also thank our board for its wisdom and guidance. I am privileged to lead such a dedicated team that continues creating sustainable energy solutions for health, wealth and prosperity through robust use of clean coal.


We have an enormous opportunity to create sustainable energy solutions to solve our energy and environmental challenges, ease supply issues and improve health and longevity for people around the world.

In 2008, Peabody was named first among Mining and Crude Oil industries in Fortune Magazine’s “Most Admired Companies” ranking of U.S. companies. Peabody ranked first in the sector and held the number-one score in every category, including social responsibility.


6 Peabody Energy

SuStainability

Employees at the former Gibraltar Mine in Kentucky reclaim mined land to highly productive forest, pastureland and wildlife habitat.

Caballo MineBronze Good Neighbor AwardU.S. Department of the Interior

Caballo MineWyoming Department of Environmental Quality“Good Neighbor” Award

Caballo Mine Wyoming Engineering SocietyProject of the Year Award

Gibraltar MineExcellence in Reclamation AwardU.S. Department of the Interior

Miller Creek MineExcellence in Reclamation AwardIndiana Department of Natural Resources

Ken RogersReclamation Innovation AwardIndiana Society of Mining and Reclamation

Caballo Mine in Wyoming collaborates with local ranchers to double the productivity of area range for grazing and assists with conservation projects.

Somerville Central Mine in Indiana partners with area land-owners to revitalize productive farming and pastureland and support local recreational, civic and educational institutions.

peabody leads the industry in Reclamation excellence,

Year after year, Peabody scientists, engineers and reclamation specialists develop innovative programs that apply the principles of sustainable development to mining and reclamation. These industry-leading programs brought home five of 10 prestigious awards for community and environmental stewardship from the U.S. Department of the Interior in 2007.


The former Seneca Mine in Colorado has developed reclamation practices that restore native vegetation that is hardy enough to endure northwest Colorado’s harsh winters.

Twentymile Mine in Colorado is home to large populations of Columbian sharp-tailed grouse, who use the land for mating and breeding.

Miller Creek Mine in Indiana reclaims highly productive farmland and wildlife habitat for the community.

awaRdS2007

Somerville Central MineExcellence in Reclamation AwardU.S. Department of the Interior

Somerville Central MineExcellence in Reclamation AwardIndiana Department of Natural Resources

Vern PfannenstielReclamationist of the YearAmerican Society of Mining and Reclamation

Somerville Central MineSilver Good Neighbor AwardU.S. Department of the Interior

Seneca Coal CompanyExcellence in Reclamation AwardColorado Division of Reclamation, Mining and Safety; Colorado Mining Association

Twentymile Mine and Seneca MineExcellence in Reclamation AwardU.S. Department of the Interior

earning top Honors for environmental Stewardship


economic and Corporate Responsibility

Peabody has 125 years of leadership in corporate and social responsibility. Some would call that a great run. We believe it’s a great start for our next 125 years of world-class practices in sustainability. Decades before the

Peabody’s global operations injected nearly $3.2 billion in direct economic benefits in communities where we do business in 2007, with each dollar typically contributing a four-fold benefit.

concepts of corporate and social responsibility were defined, Peabody established its own tenets for best practice. Peabody’s 7,000 worldwide employees seek to operate under a mission statement to provide clean energy solutions that contribute to economic prosperity and a better quality of life for families and communities around the world.

Peabody believes that greater use of clean coal is the answer to improving energy security, fueling the world’s strongest economies and ensuring continuous emissions improvement: what we call the “3Es.” The company also believes that greater use of coal must be guided by the ultimate vision of near-zero emissions. Technology is the key to satisfying growing energy demand while addressing climate concerns. More on this topic is included in the Public Responsibility section of this report.

Peabody is the world’s largest coal company in reserves and sales, fueling approximately 10 percent of all U.S. electricity and 2 percent of the world’s power.

More coal is being used around the world, and Peabody is uniquely positioned to fuel this long-term global growth. Peabody is reshaping its global operations and business portfolio to serve the fastest-growing markets. This includes increasing operations in Australia, tripling our trading activities and focusing on growing Pacific Rim markets from China and Mongolia to Mozambique.

One of Peabody’s primary corporate responsibilities is to provide strong share-holder returns. The company delivered an 840 percent total shareholder return over the past five years. In 2007, Peabody achieved record financial results in sales volume, revenues and EBITDA.

The company continues organic growth, with three major mines completed in Australia this past year and a new greenfield mine in New Mexico under development that will begin operation in the second half of 2008. And Peabody is pursuing clean generation and Btu Conversion opportunities that convert coal’s energy into other fuels.

In 2007, Peabody completed the spin-off of certain operations in West Virginia and Kentucky, focusing its efforts on expanding globally and building on leading U.S. positions in the Powder River Basin, Colorado and the Midwest.

8 Peabody Energy

Peabody’s Global Operations Contribute Billions in Economic Benefits

Colorado$157 million

Southwestern U.S. $260 million

Powder River Basin$1.0 billion

Australia$1.0 billion

Midwestern U.S.$733 million

Peabody is the world’s largest coal company in reserves and sales, fueling approximately 10 percent of all U.S. electricity and 2 percent of the world’s power.

S u m m a r y | Economic | E m p l o y e e | E n v i r o n m e n t a l | Pu b l i c | A p p e n d i x

All told, Peabody operations infused nearly $3.2 billion in direct economic benefits into communities through wages, taxes, royalty payments, capital investments, vendor contracts and charitable contributions in 2007.

In 2007, Peabody received recognition for performance in safety, stewardship and investor activities. Peabody earned eight major awards for safety, operated the safest large surface mine and the most productive mine in the United States. Nearly two dozen awards were earned for sustainable practices in the past two years.

Peabody has ranked among Fortune’s Most Admired Companies for six successive years. And BTU was named to the Forbes Platinum List of America’s Best Big Companies and ranked among the top 10 companies in CFO Magazine’s “value creators” S&P 500 ranking.

This section highlights:

• The“3E’s”:EnergySecurity,EconomicGrowthandEnvironmentalSolutions

• CorporateGovernanceandEthics

• CodeofBusinessConductandEthics

• FinancialDisclosureandSarbanes-OxleyCompliance

• CorporateComplianceandTraining Programs


Economic and Corporate Responsibility

2007 sales volumes and reserves in millions of short tons. Reserves are 2007 proven and probable. Sales and reserves adjusted for October2007spin-offofPatriotCoaland2007Peabody reserve acquisitions. Venezuela sales volumeforPasoDiabloMine,ofwhichPeabodyowns a 25.5% interest.

Peabody Serves the Highest-Growth Markets

Position Sales Reserves

Wyoming PRB #1 140 3,341Midwest #1 31 3,691Colorado #1 8 207Southwest #2 14 990Australia #5 21 1,073Venezuela #1 7 182Short tons in millions

Peabody is the world’s largest coal company based on our world record sales of 238 million tons and 9.3 billion-ton reserve base. We have a growing global presence and 31 operations in the United States and Australia.

Peabody Headquarters

Peabody Offices

COALTRADE Offices


Energy, Economic and Environmental Solutions

Energy Solutions

Global energy needs are soaring as emerging nations around the world drive enormous economic development and improvements in quality of life. China, India and the United States are leading this growth, representing nearly 90 percent of long-term coal demand over the next two decades.

Coal represents 40 percent of world electricity – nearly double the share of its nearest competitors – at a fraction of the cost of other fuels. Coal has been the fastest-growing fuel for each of the past five years, and global coal use is expected to increase nearly 75 percent over the next 25 years, according to the International Energy Agency.

In the next quarter century, the world’s population is expected to grow 25 percent to more than 8 billion people. World Gross Domestic Product (GDP), the primary driver of energy demand, will more than double. Global energy consumption will increase by more than half, and world electricity generation will nearly double, based on forecasts by the International Energy Agency’s World Energy Outlook. China and India are experiencing industrialization, urbanization and the digital revolution all at once, setting the pace for global energy markets with sustained annual double-digit economic growth.

In the past 20 years, more than 1 billion people have gained access to electricity in developing nations. Clean energy is one of life’s necessities, fundamental to human activities, economic and social development and longevity. Reducing energy poverty remains one of our most pervasive global issues.

“Energy leads people out of poverty, increases life expectancy, reduces infant mortality and facilitates education… It provides a window to the wider world,” says the World Coal Institute.

Today nearly one-third of the world’s population – more than 1.6 billion people around the world – lack access to affordable electricity. About 2.4 billion people rely on primitive biomass for electricity and 1 billion people live on less than $1 per day, according to the World Energy Institute.

Against this backdrop, Peabody is creating sustainable energy solutions for the world’s most pressing energy and environmental challenges, while improving health and wealth around the world.

According to the U.S. Energy Information Administration’s 2008 Energy Outlook, coal will remain the primary fuel for U.S. electricity, growing to 55 percent by 2030 as other energy forms face supply and cost constraints. Global competi-tion for natural gas supplies is pushing global liquefied natural prices above $10 per million Btu. The delivered cost for natural gas in the United States was

10 Peabody Energy


The 10 states that use the highest percentage of natural gas for electricity generation have electricity prices that are 120 percent greater than the states that use the most coal. Coal creates an advantage for citizens who are increasingly concerned about high energy costs.

¢ = average retail price per kilowatt hour for CY 2007% = percent of total generation from coal for CY 2007

7.5¢64%

13.3¢2%

15.3¢15%

9.1¢55%7.9¢

86%

8.6¢59%

8.4¢63%

8.6¢48%

6.5¢94%

5.8¢93%

5.3¢98% 7.1¢

45%7.8¢61%7.1¢

64% 7.2¢40%

7.8¢62%

7.5¢54%

7.4¢60%

6.8¢77%

6.5¢82%

6.9¢73%

6.2¢60%

6.8¢47%

6.4¢94%

5.3¢95%

5.1¢1%

6.4¢8%

7.0¢8%

10.0¢22% 6.4¢

85% 7.7¢68%

10.3¢36%

7.4¢77%

8.5¢37%

12.8¢1%

7.3¢47% 6.9¢

47%

8.4¢25%

8.8¢35%

10.3¢30%

13.1¢9%

21.3¢13%

<9.0¢>9.0¢Hydro

MA 15.2¢ 25% CT 16.2¢ 11% NH 14.0¢ 17% RI 13.2¢ 0% NJ 13.4¢ 16% VT 12.0¢ 0% MD 11.4¢ 59% DE 11.3¢ 66%

Low-Cost Electricity Correlates with States that Use Coal

Retail Cost per kWh & Percent of Coal Generation

Source: Energy Information Administration, March 2007.


four times the price for coal in 2007. Higher natural gas prices have cost America nearly $500 billion more than expected since the beginning of the decade. Nuclear is valuable, though hampered by safety and disposal concerns.

Economic Growth

Access to affordable energy is vital to economic prosperity. It frees up a family’s disposable income and allows them to make positive lifestyle choices. Consider that the 10 states that use the highest percentage of coal-fueled electricity enjoy electricity costs that average 40 percent lower than states relying on other fuels.

Affordable energy also drives business growth. Over the past 10 years, the states with the lowest business energy costs grew 25 percent faster and created 60 percent more new jobs than the states with higher energy costs.

The United States has more coal than any nation, with 27 percent of the world’s reserves. Numerous studies support the thesis for greater use of coal to improve energy security, drive down costs and build the economy. In the next decade, coal use is expected to add more than $1 trillion to U.S. economic output, along with up to 9 million jobs, according to a study by Pennsylvania State University researchers.

Several major studies call for greater use of coal for industrial growth and economic development. The National Coal Council’s “Coal: America’s Energy Future” calls for more than doubling U.S. coal production annually for clean electricity, natural gas, transportation fuels, hydrogen and ethanol.

The study, conducted at the request of U.S. Energy Secretary Samuel Bodman, calls for investing a present value of $350 billion to create a new energy infra-structure that would drive down energy costs 33 percent, create 1.4 million jobs and create $3 trillion in net-present-value economic benefits by 2025.

The Southern States Energy Board (SSEB), a consortium of governors and state legislators from 16 southern states and two territories, conducted the “American Energy Security” study, which concludes that greater use of coal will create a renewed industrial boom, create millions of jobs and reduce the


trade deficit. The SSEB study also calls for production of ultra-clean liquid transportation fuels, including 5.6 million barrels a day of coal-to-liquids fueled by about 1 billion tons of U.S. coal per year. The net result:

• ArenewedU.S.industrialboom,withdirectnewenergysectorinvestmentsof up to $200 billion by 2030;

• Morethan1.4millionnewjobscreatedovertwodecades;

• AprojectedreductionoftheU.S.tradedeficitby$600billionby2030;and

• Aconservationandefficiencysavingsequivalentto19millionbarrelsperday of current oil usage.


1.0

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

Electricity Use

0 5,000 10,000 15,000 20,000

United States

Malaysia

China

India

Argentina

Italy

Brazil

Indonesia

MoroccoSouth Africa

BangladeshZimbabwe

ZambiaMozambique

Ethiopia

UAE

Finland Sweden

Qatar

Canada

Source: International Energy Agency, World Energy Outlook 2005

U.N. Human Development Index Improves with Greater Electricity Use

There is a strong correlation between global electrification and improvement in the United Nations Human Development Index. Economies of nations that have access to low-cost electricity also enjoy improved health and longevity.


The Electric Power Research Institute reports that the cumulative benefit for improving coal technology and reducing exposure to high-priced natural gas-fired generation within the electricity sector from 2007 to 2050 could reach $1.3 trillion in 2000 dollars. Notably, the scenarios used natural gas price assumptions well below those represented by recent prices and the futures market through 2010.

Coal also helps drive improved lifestyles, which is demonstrated by the strong correlation between global electrification with improvement in the United Nations Human Development Index.

A 2007 study by a respected Johns Hopkins University epidemiologist, “The Health Benefits of Low-Cost Energy,” finds that improving human life expec-tancy is driven by access to affordable energy. It states that removing coal from the energy equation could cause 150,000 deaths each year. A report prepared by a Duke professor draws similar conclusions, showing the benefits of low-cost electricity, leveraged by coal’s continually improving environmental profile.

Environmental Solutions

Peabody believes that a world that enjoys improved quality of life and growing economies can do more to achieve the parallel and important goal of a cleaner environment. Coal has a strong and improving environmental track record thanks to tens of billions of dollars of investments in technologies that have enabled significant emissions reductions.

Peabody’s vision is to achieve near-zero emissions from coal, and the company is advancing voluntary initiatives to commercialize clean coal technologies and address concerns about climate.

Chief initiatives include Peabody’s participation in GreenGen in China, the COAL21FundinAustraliaandFutureGenandVision21intheUnitedStates,projects that seek to demonstrate near-zero emissions from coal while capturing and storing carbon. More about these projects and Peabody’s position on climate is included in the Public Responsibility section of this report.

Corporate Governance and Ethics

Good corporate governance is the foundation for Peabody Energy’s actions at every level, and the board of directors has adopted a robust corporate governance program it believes is in the best interests of the company and its shareholders.

12 Peabody Energy


Peabody continues expanding globally, completing three major new mines in Australia and expanding global coal trading offices in the United States, the United Kingdom, Australia and China. The Millennium Mine in Queensland is ramping up to produce 3 million tons of metallurgical coal annually.


The company’s Mission Statement reflects Peabody’s global leadership in providing energy solutions and is a reflection of managers’ commitment to use the principles for decision-making.

Peabody’s board of directors regularly reviews corporate governance policies and procedures to ensure continued compliance with best practices, applicable laws and Securities and Exchange Commission (SEC) requirements.

The board has carefully considered the company’s director election process and, in July 2007, amended the company’s bylaws to provide for majority voting in uncontested director elections.

In addition, the board has recommended to the shareholders that they approve an amendment to the company’s articles of incorporation to eliminate the company’s classified board structure in favor of the annual election of directors. This amendment was approved at Peabody’s 2008 Annual Meeting of Shareholders.

Peabody will continue its strong focus on best practices to ensure effective corporate governance for the benefit of the company’s shareholders.

Board of Directors

Peabody is governed by a board of directors consisting of 12 members elected by shareholders. Eleven members of the board are independent under New York Stock Exchange rules. The board of directors appoints and oversees the Chief Executive Officer and other officers who are charged with the conduct of the company’s business. Directors have full and free access to officers and employees of the company and its affiliates.

Board Committees

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 detail its purpose, organizational structure and responsibilities.



Corporate Governance Principles

The board of directors operates under a set of governance principles covering such issues as the roles and responsibilities of the board and management, board composition and director qualifications, director election procedures, meeting procedures, committee functions, director orientation and continuing education, and management evaluation and succession.

Some of the key corporate governance practices adopted by the company include the following:

• Atleastamajorityofthecompany’sdirectorsmustmeetthecriteria for independence established by the New York Stock Exchange. The independence of each director is reviewed at least annually and at other times when a change in circumstances could potentially impact the independence of one or more of the directors.

• Thecompany’sbylawsprovideformajorityvotinginuncontesteddirectorelections.

• TheAudit,CompensationandNominatingandCorporateGovernance Committees of the board are comprised entirely of independent directors.

• Non-managementdirectorsmeetatleastquarterlyinexecutivesessionwithout management.

• Theboardanditscommitteesconductannualperformancereviewstoevaluate whether they are functioning effectively and to determine what actions, if any, could improve their performance.

• Eachdirectorparticipatesinadirectororientationprogramshortlyafterhis or her election, and is encouraged to periodically attend, at company expense, appropriate continuing education programs.

• Theboardandeachcommitteehavetheauthoritytohireindependentlegal,financial and other advisors without consulting or obtaining the advance approval of any officer.

• EachmemberoftheAuditCommitteehasbeendeemedan“audit committee financial expert” for purposes of the SEC’s rules relating to audit committees.


• TheAuditCommitteemustpre-approveallauditandnon-auditservices performed by the company’s independent registered public accounting firm to ensure that such services do not impair that firm’s independence.

• Directorsmaynotserveonmorethanfourotherpubliccompanyboards.

• Directorsarerequiredtosubmittheirresignationtotheboardforconsider-ation following a job change.

• Directorsmaynotstandforelectionorbeappointedtofillvacantornewlycreated board positions after reaching age 75.

• Thecompanyhasadoptedanddisclosedstockownershipguidelinesforofficers and directors.

Code of Business Conduct and Ethics

Employees and directors must adhere to a rigorous Code of Business Conduct and Ethics, which is designed to avoid conflicts of interest, achieve compliance with laws and protect company assets.

The Code of Business Conduct and Ethics defines ethical standards to help all employees establish and maintain our reputation as a world-class company.

Employees are regularly reminded of their obligation to act in a responsible, ethical and constructive manner through workplace communications and training sessions. All salaried employees are required to take online training at least annually and to provide written certification of compliance with the Code of Business Conduct and Ethics.

Any exceptions or qualifications are investi-gated and reported to the board of directors. Any modification in or waiver of the Code for executive officers or directors must be approved in advance by the board of direc-tors and promptly disclosed as required by law or stock exchange regulations.

Communications

Our shareholders, customers, employees and the public can communicate directly with the board by submitting their written comments to the Chairman, Peabody Energy, 701 Market Street, St. Louis, MO 63101. These written communications are forwarded to each board member and reviewed by the full board, as appropriate.

If a concern arises about ethical conduct, it should be sent directly to Peabody’s Chief Legal Officer, who will promptly forward a copy of the communication to the Chairman of the Audit Committee, and if appropriate, the Chairman and Chief Executive Officer, for immediate action to address the matter.

The company also has established compliance procedures for the Code of Business Conduct and Ethics. Employees who have concerns about busi-ness practices are asked to raise their concerns to their supervisor or human resources representative or may use a third-party hotline called “Tell Peabody.”

Tell Peabody allows for confidential and anonymous communication of potential concerns, which are reported to the company’s corporate compli-ance officer, who determines the appropriate action, including investigation. Report summaries are distributed to senior management weekly and routinely discussed with the Nominating and Corporate Governance Committee.

Transparency

Peabody ensures that key corporate compliance and governance information and documents are accessible to shareholders and other stakeholders. The company’s Corporate Governance Guidelines, board committee charters, Code of Business Conduct and Ethics and other information about our governance practices are available online at PeabodyEnergy.com.

Our annual proxy statement also includes detailed governance information regarding director candidates and board independence, board meetings and attendance, director compensation and the director nominating process.

14 Peabody Energy




Corporate Governance Ratings

The board reviews the company’s corporate governance practices at least annually to ensure that they continue to reflect best practices and promote the best interests of shareholders. During this process, the board solicits input from leading governance advisors who are independent of management. The board also considers views expressed by third parties, including independent governance ratings agencies.

The company’s governance practices are rated by several independent organizations, including RiskMetrics (formerly Institutional Shareholder Services), Moody’s, Glass Lewis and Governance Metrics International. While individual ratings can vary widely, Peabody’s practices are generally rated better than average when compared to other companies in its industry group and in line with the average of S&P 500 companies.

Financial Disclosure and Sarbanes-Oxley Compliance

Peabody is committed to providing clear, complete, timely and accurate financial information for external reporting purposes. The primary goal of the financial reporting process is to provide stakeholders with financial information that is useful in making informed business and economic decisions. These objectives are consistent with the Sarbanes-Oxley Act of 2002, which also requires the company to maintain all necessary systems, policies and proce-dures and documentation of financial controls to ensure its periodic financial reports are complete and accurate.

Peabody believes the company’s written charters and governance guidelines, Code of Business Conduct and Ethics, robust internal policies and procedures and documentation of controls over financial reporting establish the proper “tone at the top” that facilitates compliance with Sarbanes-Oxley requirements.

Under Sarbanes-Oxley, the company’s Chief Executive Officer (CEO) and Chief FinancialOfficer(CFO)arerequiredtocertifythecompletenessandaccuracyof financial statements included in public filings, and to periodically assess the effectiveness of the company’s financial controls over financial reporting. To supporttheCEOandCFOcertificationresponsibility,thecompanymaintainsathorough sub-certification process and robust system of internal and disclosure controls that are regularly tested and monitored by management, Internal Audit

and the company’s registered independent public accountants. The results of the sub-certification process and the ongoing assessments of disclosure controls are reviewed among senior management and discussed in detail with the Audit Committee.

Furtherqualityassurancerelatedtothecompany’spublicreportingoffinancialinformation is provided by the Disclosure Committee. The company maintains a multi-discipline Disclosure Committee, which reviews financial statements andcertainSECfilings,andadvisestheCEOandCFOregardingpotential disclosure items. All earnings releases, quarterly reports and annual reports are reviewed with and approved by the Audit Committee prior to filing.

Corporate Compliance and Training Programs

To ensure legal and ethical compliance, the company conducts regular training sessions at appropriate levels on a variety of topics, including safety, environmental laws, antitrust laws, securities and insider trading laws, equal employment opportunity matters, discrimination and sexual harassment. Peabody also maintains robust corporate compliance policies and approval processes that are updated regularly and communicated throughout the organization.


Hundreds of safety observations are conducted daily across Peabody operations to recognize best practices and correct unsafe acts. These safety contacts are entered into a hand-held PDA and tracked through a mine management safety system.


16 Peabody Energy

Creating an accident-free workplace through best practices in safety is central to Peabody Energy’s mission and a major component of our position on employee responsibility. Our vision for safety is to achieve zero incidents of any kind. This means operating free of injuries, occupational illnesses, property damage and near misses. We continue to accelerate our emphasis on communications, training and prevention, and the past three years have been the safest in our 125-year history.

We believe that our responsibility to employees also includes providing an empowered, collaborative work environment. We reward performance in safety, continuous improvement, innovation and creativity, and provide opportunities for personal growth and career advancement.

employee Responsibility

The past three years have been the safest in Peabody’s 125-year history, and once again we operated the nation’s safest large surface mine.

Peabody’s North Antelope Rochelle Mine – the world’s largest coal mine – was also the most productive in 2007, based on the most recent industry data. North Antelope Rochelle earned dual honors from the governor and state as the safest mine in Wyoming this past year.

Throughout the organization, we seek to elevate performance excellence, embracing four key pillars of leadership: inspiration, innovation, collaboration and execution. We believe effective leadership must inspire employees to perform at their highest level… innovate through new technologies, new markets and new approaches… and collaborate to build and develop teams that enable Peabody to seize opportunities. These elements drive execution and ensure strong results.

By building on these leadership qualities, Peabody believes we can help employees achieve their highest potential, build employee satisfaction and create a high-performing organization. Employees also are encouraged to seek broader assignments to advance career goals and participate in continued development, education and training.

S u m m a r y | E c o n o m i c | Employee | E n v i r o n m e n t a l | Pu b l i c | A p p e n d i x

The following governing principles for safety and health apply to everyone at a Peabody workplace:

• The safety and health of our most important asset, our employees, is a core value that is integrated into all areas of our business;

• All workplace incidents can be eliminated, including injuries, occupational illnesses, property damage and near misses;

• Management has the overall accountability for employee safety and health;

• Each employee is responsible for their own safety and health, as well as promoting the safety of their co-workers;

• Each employee must be empowered with the skills and authority to perform their job in a safe manner;

• All employees must comply with established safety rules and regulations;

• Open, honest and effective safety communication is essential;

• All safety and health efforts must be sustainable and will be continuously reviewed and improved; and

• The workplace is anywhere a Peabody employee is on the job.

“Peabody’s safety vision is to operate safe workplaces that are incident free.”

The prestigious U.S. Department of Labor’s Sentinels of Safety Award has been presented to Peabody operations three of the past four years.




• Peabody’sSafetyResults

• EmergencyPreparedness

• Best-In-ClassTrainingCenters

• EmployeeDemographics

• NextGenerationWorkforce

• DiversityInitiatives

• EmployeeRelationsandBenefits

Peabody’s Safety Results

Management continues accelerating efforts to improve safety, focusing on strengthened communications, reinforcing safe behavior and eliminating hazards. Specialized training in incident investigation and root cause analysis is being conducted for all U.S. mine managers and supervisors this year, with a heightened focus placed on assessing and alleviating risk.

Forinstance,anewawarenessprogramempowersemployeesto“SLAM”hazards using a simple premise: “Stop, Look, Assess, Manage.” SLAM means considering all the safety controls available and mitigating potential risk before performing a job. Every U.S. employee will receive SLAM procedure training this year.

Actions that build on our successes and continually improve performance are guided by the Executive Safety Committee, Central Safety and Health Team and Mine Safety and Health Teams. These teams collaborate with employees at each operation to refine best practices, create standard processes and provide technical transfer for best-in-class performance at every level.

Excellence in safety also is driven through individual accountability. Every Peabody employee commits to our safety vision and governing principles, and managers, front-line supervisors and employees are held responsible for their own safety and the safety of each other.

All Peabody meetings start with a safety contact, and hundreds of safety observations are conducted daily across the company to monitor behavioral work practices and immediately correct unsafe acts. These observations are tracked and shared through a computer-based safety management system.

Peabody also has expanded its recruiting to attract graduates from the nation’s top universities offering occupational health and safety degrees to provide a fresh perspective on best practices and create a path for succession planning.


18 Peabody Energy


Safety Improvements

Peabody’s U.S. employees achieved a 2.59 safety rate per 200,000 hours worked in 2007, reflecting a 29 percent improvement in the past three years.

TheFarmersburgMineinIndianasetthepace,earningSentinelsofSafetyhonors by the U.S. Department of Labor as the safest large surface mine in America. Peabody operations have earned this honor three of the past four years.

Employees at the Viking Mine completed the year with zero reportable incidents, and employees at the Lee Ranch Mine achieved dual state honors as the safest mine in New Mexico. The North Antelope Rochelle Mine – the

largest in the world – was also honored as the safest mine in Wyoming, recognized by both the governor and the state mine inspector.

All told, employees earned nearly 20 awards for emergency preparedness and best practices in safety in 2007, including four U.S. Labor Sentinels of Safety certificates for low incident rates.

Peabody’s Australia operations improved their lost-time accident rate by more than half, which includes the contribution of new mines that became part of Peabody through the Excel acquisition.

Peabody is standardizing its Australian safety tracking system this year to create a consistent reporting mechanism for its U.S. and Australian operations based on the Mine Safety and Health Administration (MSHA) standard.

Emergency Preparedness

In June 2006, President Bush signed into law the Mine Improvement and New Emergency Response Act (MINER Act) creating 13 major provisions for emergency preparedness and technology research. The legislation called for additional compliance-related training, new reporting standards and more stringent PSI standards for mine seals. It also called for developing two-way underground communication systems, safe chambers and caches of self- contained self-rescuers.

Even before the MINER Act was created, Peabody operations already were complyingwithseveralofthenewmandatesasamatterofpractice.For instance, the act calls for developing mine emergency response plans, which are completed annually at Peabody operations.

Each of our underground U.S. mines have approved emergency plans that include the location of safety chambers. To comply with the act, safety chambers designed to provide oxygen, food and water for up to 32 workers for 96 hours have been ordered, and deliveries are expected to begin as early as this spring. Thousands of self-contained self-rescue units also are being delivered to build underground caches.

Beyond providing safety tools, the MINER Act has a number of practical requirements, such as ensuring that operations are supported by local mine rescueteams.Fourhoursofmonthlydrillingismandatory,andminerescue

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2007

U.S. Safety Performance Peabody Versus Other Industries

U.S. Accidents Per 200,000 Worker Hours

Source: 2007 data from Peabody and the U.S. Department of Labor; 2006 data from Occupational Safety & Health Administration

Peabody’s safety results are significantly better than the coal industry average and the average in other major industries, including transportation, manufacturing, agricultural and construction. We maintain an intense focus to continually improve.




response teams must be located within one hour of the mines they serve. Approximately 10 percent of Peabody’s sales come from underground operations.

Peabody has encouraged mine rescue training and drilling for decades to main-tain the highest level of preparedness, with teams typically training at twice the required level. The company has emergency response and mine rescue teams at every U.S. location, with resources significantly enhanced this past year.

Ten mine rescue and Surface Mine Emergency Teams (SMET) were established in the Midwest in 2007, which include new rescue teams at the Air Quality and Gateway mines, and two teams at Vermilion Grove. Every U.S. Peabody mine has a mine rescue or SMET team.

These teams continually hone their emergency response capabilities, through sophisticated annual mine emergency rescue drills (MERDs) involving multiple regulatory agencies and local emergency responders. Drilling is frequent throughout all regions. In 2007, employees earned eight awards for major national and regional mine emergency competitions.

Peabody installed redundant communication systems at its underground mines this past year and evaluated several two-way communication systems, which included testing at the Twentymile Mine in Colorado. The system awaits approval from MSHA.

Best-in-Class Training Centers

Recognizing the need to attract and retain the industry’s best talent, Peabody has developed a premier training regime through high-tech training centers in the Midwest and West. These centers offer virtual technology, advanced curriculum and hands-on skills applications.

Peabody is training its Next Generation Workforce through facilities in Wyoming and Indiana. More than 2,600 employees received training at the Western facility located at the Rawhide Mine in 2007. The new miner program uses virtual technology for basic safety and skills training.

The safety and management team at Farmersburg Mine in Indiana celebrates best-in-class performance as America’s safest large surface mine. Continuous improvement in safety toward a vision of zero incidents is a core value.


20 Peabody Energy


Training center curriculum is geared to develop core competencies, including:

• Safety

• Newminerdevelopment

• Mobileandminingequipmentoperatorskills

• Maintenance,electricalandweldingskills

• Plant,mine,andequipmentmonitoringandcontrolsystems

• Continuousimprovementskills

• Supervisoryandleadershipskills

• Testingandevaluation

New miners participate in formal classroom training and hands-on skills development in both shop and on-the-job training environments.

Students use virtual technology to hone their skills to safely operate under-ground and surface equipment including continuous miners and longwalls, roof bolters, haul trucks and other surface equipment while supervisors benchmark student progress. Students are graded on every subject and must successfully complete the course to earn certification.

Peabody’s Wyoming and Midwest training centers opened in 2006. These centers trained 6,700 employees and vendors this past year, totaling more than 128,000 hours. Classes were primarily provided for new miners and experienced employees covering safety, maintenance, equipment operator skills, managing people skills for supervisors, and continuous improvement and change management.

Safety Awards & Recognition

Peabody employees continue demonstrating excellence in safety, earning 18 awards for safety and emergency preparedness in 2007, which includes top honors for mine rescue in every region.

2007

Safety Milestones Farmersburg MineSentinels of Safety AwardU.S. Department of Labor

Francisco Mine Sentinels of Safety Certificate U.S. Department of Labor

Lee Ranch MineOperator of the Year Award New Mexico Mine Inspector

Lee Ranch MineSafe Operator Award New Mexico Mine Inspector

Lee Ranch MineSentinels of Safety Certificate U.S. Department of Labor

North Antelope Rochelle Mine“Safe Sam” Award State Mine Inspector & Wyoming Mining Association

North Antelope Rochelle MineWyoming Governor’s Safety Award Governor’s Office

Somerville Central MineSentinels of Safety Certificate U.S. Department of Labor

Viking MineSentinels of Safety Certificate U.S. Department of Labor

Safety Competition Milestones Caballo Mine 1st Place and 2nd Place 11th Annual Red Desert Trauma Conference

Caballo Mine1stPlace“B”Flight 21st Annual Safety Olympiad

Lee Ranch Mine1stPlaceFive-PersonEvent 69thAnnualTri-StateFiremen’s Association Training and Competition

North Antelope Rochelle Mine1st Place Overall and 1stPlaceinAdvanced“A”Flight 21st Annual Safety Olympiad

North Wambo Mine1st Place Hunter Valley Mine Rescue Competition

Twentymile Mine1st Place: Chuck Harvey, Benchman National Mine Rescue Competition U.S. Department of Labor

Willow Lake Mine1st Place Illinois Department of Natural Resources Mine Rescue Competition


The Majority of Peabody Employees Work at Surface Mines



Employee Relations Peabody provides some of the best jobs in communities where it operates and seeks to be the employer of choice. Peabody strives to provide employees with an entrepreneurial work environment that offers career growth opportunities and financial rewards aligned with performance and dedication.

Employee Demographics

Global energy markets are strong, and coal demand is unprecedented. Peabody believes it has a bright future based on a long period of sustained growth. Multiple initiatives are under way to attract and manage talent and position the company for growth through international expansion, organic development and Btu Conversion opportunities.

Peabody employed nearly 7,000 highly skilled and talented employees in the United States, Australia, China and the United Kingdom at Dec. 31, 2007. Approximately 94 percent of employees – or more than 6,400 employees – work at mine operations and regional offices.

Peabody expects to recruit a significant amount of frontline employees over the next several years to help fuel international expansion, organic growth and Btu Conversion opportunities. Global energy markets are extremely robust.

The vast majority of Peabody’s U.S. sales volume – approximately 90 percent – is produced from large, efficient surface operations. Approximately 60 percent of our employees work at these locations, with nearly 80 percent of the company’s workforce represented by hourly workers.

The remaining workforce is based at corporate headquarters in St. Louis or regional offices serving multiple locations. The typical employee has about 11 years of tenure. The company maintains a 92 percent voluntary retention rate through excellence in safety, leadership development and good compensation.

Approximately 94 percent of Peabody’s U.S. sales volume is produced by union-free operations, which is consistent with national trends where more than 90 percent of private-sector workers choose to be union free. Peabody believes that its union-free operations offer a stronger team environment, greater flexibility, performance-based reward programs, opportunities for advancement and improved competitiveness.

Next Generation Workforce Campaign

Recognizing the need to attract and retain the industry’s best and brightest talent, Peabody has launched a broad recruiting effort that offers high-tech training and career development programs.

Major initiatives in the Next Generation Workforce campaign include:

• Schoolrecruitingprogramsfortwo-yearandfour-yeardegreegraduatesinmining engineering, skilled trades and other related disciplines;

• Scholasticcontributionstoencourageminingschoolenrollments;

Underground40% Surface

60%

Salaried21%

Hourly79%


22 Peabody Energy

Employee Responsibility

• Scholarshipprogramsforhighperforminginternsfromtwo-andfour-yeardegreeprograms;

• Partnershipswithjuniorcollegesandvocationalandtechnicalschoolstodevelopminingtechnologyprogramsandserveasasourceforwell-trainedminingtechnicians;

• Successionplanninganddevelopmentprogramstoprepareemployeesforfuturemanagementassignments;

• TrainingCenterprogramsfornewminersandemployeesinhigh-skillareasofelectricalandmechanicalmaintenanceandmachineoperations;

• Recruitmentofsupervisoryandmanagementtalentfromthecoalindustrywithopportunityforcareeradvancement;and

• Standardizationandupgradingofcandidatescreeningandselectionmethods.

In2007andthroughfirstquarter2008,Peabodyhirednearly30operationsmanagementtraineesandgraduatednearly350newsurfaceandundergroundminerswhoparticipatedinPeabody’snewminertrainingprogram.Thecompanyalsohadmorethan100operationsmanagementsummerinternsduringtheperiod.

Thecompanyprovidednearly$150,000inscholarshipsto45operationsmanagementtraineeinternsandcontributed$420,000to12ofthenation’stopminingschools.StudentchaptersoftheSocietyofMiningEngineersattheseschoolswereawardedanadditional$90,000.

Diversity Initiatives

Peabodypromotesacultureofdiversityandembracestheprinciplesandpracticesofequalemploymentopportunitythatareconsistentwiththecompany’smissionandCodeofBusinessConductandEthics.

Supporting,encouraging,andachievingdiversityamongouremployeesandsuppliersisfundamentaltoPeabody’scommitmenttoworkingethicallyandconstructivelywithstakeholders.Infulfillingthiscommitment,Peabodyseekstodoublethepercentageofminorityandfemaleemployeesatalljoblevelsintheorganizationinthenextfiveyearsandincreasecompanyspendingwithminorityandwomen-ownedbusinesses.

PeabodyhasmaintainedapartnershipwithINROADSforthepastthreeyears,increasinginternshipopportunitiesforminoritystudentsandbuildingthepipelineforqualifiedcandidates.Weexpandedourminority-focusedcollegerecruitingto10campusesandenhancedourminorityoutreachprogram,partneringwiththeAmericanAssociationofBlacksinEnergy,theNationalUrbanLeagueandtheCongressionalandHispanicBlackCaucuses.

WesponsoredtheNationalUrbanLeague’sAnnualConventioninSt.Louisandcontributedmorethan$25,000inscholarshipandempowermentinitiativesforhighschoolstudents.

PeabodyalsohasanInclusionCommitteethatguidescompanyinitiatives,withacharterandgoalsapprovedbyPeabody’sChairman.Ourcorporatediversitygoalsareadvancedthroughthefollowingcoreinitiatives:

• Employment Initiative

SeekstoincreasethepercentageofminorityandfemaleemployeesatalljoblevelsinthecorporateorganizationasdefinedinourCorporateAffirmativeActionPlan(AAP).

Peabody seeks to advance corporate diversity through education, outreach and advocacy initiatives. Minority-focused recruiting expanded to 10 campuses last year.




• Employee Development and Compensation Initiative

Ensures that minority and female employees are provided the full benefit of Peabody’s educational and developmental programs and are compensated fairly.

• Vendor Initiative

Commits to increase the percentage of goods and services purchased from minority vendors that can meet job requirements at a competitive price. The company will pursue additional ways to access information regarding the goods and services available through minority vendors.

• Employee Communication Initiative

Builds on education within the organization to promote a culture of inclusion, which includes a two- to three-hour training program for supervisors and managers.

• Outreach Initiatives

Provides financial support and employee participation in organizations that advance diversity through education, work and community programs. Forinstance,PeabodyemployeescharteredthefirstSt.LouisChapterofthe American Association of Blacks in Energy to create a voice for energy policy. Employees continue to provide leadership in the organization.

• Political Initiatives

Involves Peabody in political minority organizations that advocate U.S. energy policy and matters related to Peabody’s business interests. Peabody is a major annual sponsor and participant in the Congressional Black Caucus.

Communications and Team-Based Approach

Peabody believes that a team-based approach with open, honest, and candid communication is a driver of success at all levels and results in top performance. Peabody values nimble decision-making and strives toward a management structure that fosters open communication.

Employee communications are evolving as the company grows and becomes larger and more complex. Research shows that 90 percent of employees favor face-to-face communication and that supervisors are the most credible source of information. To that end:

• Executiveswhooverseeregionaloperations engage in frequent briefings with their manage-ment teams and semi-annual or quarterly “all employee meetings” at the mines.

• Minemanagementhostsdailybefore-shift communications meetings and weekly safety communication meetings to emphasize standard operating procedures and accident prevention.

• Peabodyhasabroademployeecommunicationsprogram with regular company news and information articulated through management, e-mail announcements, website informa-tion, a quarterly stakeholder newsletter, personal letters and brochures, information packets, internal “intranet” postings, videos, the annual report and corporate and social responsibility report. Regular podcasts are being initiated for salaried employees and will be posted on the intranet.

• Peabody’sConveyor is a quarterly stakeholder paper that serves as a regular information source on Peabody strategies, industry issues and public policy, supporting the company’s missions and principles. The company also has developed a new Powerline electronic communication that is being rolled out at U.S. mines this year through a series of kiosks.

• Peabody’sChairmanandChiefExecutiveOfficerprovidesfrequent employee “Safety Contact” and “Awards & Recognition” e-mail communica-tions for salaried employees. These announcements provide an immediate mechanism to feed the pipeline with positive information and recognize employees for exceptional results.

• Peabodyalsoconductsanannual“BestPracticesForum”toleveragethegood work of its employees and encourage the study of other world-class organizations.

Training and Development

Peabody believes that life-long learning and skills development are important to employee satisfaction, advancement and performance. The company focuses on employee and organizational development in four primary areas: feedback and coaching, training and education, work assignment opportunities and knowledge and best practice sharing.


24 Peabody Energy


Feedback and Coaching

Peabody believes every manager must provide employees with candid feedback on career path, personal strengths and developmental areas to help drive professional growth. This is a necessary and fundamental part of good management and is practiced through the Peabody Performance Appraisal Program and through ongoing guidance and coaching.

Peabody also uses a “360” feedback process to help managers understand how they are perceived by their supervisor, peers and subordinates based on the four leadership pillars, which forms the basis for developing and applying plans to improve their leadership effectiveness.

Training and Education

Formaltraininggivesemployeestheopportunitytoincreasecapacityfor learning, add new job skills and increase relevant job knowledge in a structured environment. Training provides the means for helping employees meet minimum education requirements for career advancement, for acquiring necessary knowledge and skills in their current job and for supplementing job experiences to improve performance.

Continuing education opportunities include:

• ThePeabodyTuitionReimbursementprogram,whichprovides100percenttuition reimbursement for achieving associate, undergraduate and graduate degrees for salaried employees. During 2007, more than 60 employees participated in the program resulting in nearly $325,000 in paid tuition, a nearly 20 percent increase in fund allocation over the prior year.

• Peabody-requiredtraining,whichtargetsspecificjobgroupsandincludesskills and safety training for a variety of mining positions, orientation for new hires, people management training for supervisors, and leadership development programs for middle and senior managers.

• Specifictrainingandeducationprogramsarealsoincorporatedintoeachemployee’s development plan based on their current job needs and career interests.

Work Assignment Opportunities

One of the best means of employee development is to provide varied work assignment opportunities. Building skills through cross-training provides learning challenges, opportunities for career advancement and leads to a depth of management talent that strengthens the organization.

Peabody encourages all of its managers to provide employees with assign-ments that continue to build new skills, knowledge and capabilities commensurate with their performance and potential. Managers are also encouraged to recognize and include these assignments as an important part of each employee’s annual performance appraisal development plan.

A thorough succession planning process identifies employees who have potential to advance to key management positions.

Peabody provides some of the best jobs in communities where it operates and strives to provide employees with an entrepreneurial work environment that offers career growth.




Knowledge and Best Practice Sharing

Through Peabody’s Center of Excellence, Central Safety Committee and leader-ship and best practice forums, the company leverages the good work of its employees and encourages the study of other world-class organizations.

Health and Welfare Benefits

Peabody provides employees and retirees with comprehensive health care and prescription drug benefits that are competitive within the industry and with the majority of large employers.

Health Care Cost Challenges

Like most major employers, Peabody’s health care plans have experienced cost pressures in recent years. Peabody’s covered population is affected by many health risk factors such as coronary artery disease, diabetes and chronic obstructive pulmonary disease (COPD).

Peabody is responding to these challenges with aggressive cost-management strategies and healthy lifestyle initiatives. These programs have resulted in health care cost rates that are favorable to U.S. averages.

Wellness Program

Peabody provides quality health care benefits to employees and retirees and promotes wellness as a natural offshoot of the company’s safety initiatives.

Peabody hired a medical director in 2003 to design education programs that promote healthy diets, regular exercise and preventative care. Among the initiatives offered is “Invest in Yourself,” a program that incentivizes employees to improve their health based on measurable progress on key health risk factors. Third-party experts offer tips for lifestyle management and advice on managing nutrition, weight, fitness and stress.

Other wellness benefits include:

• Lifestylemodificationprograms

• Diseasemanagementprograms

• Flushots

• Mobilemammograms

• WeightWatchers® subsidy

• A“ToYourHealth”quarterlynewsletterthatincludespersonalstories and achievements to inspire others

• FirstAidtraining

Adoption Assistance Program

The Adoption Assistance Program provides employees with reimbursement to help offset expenses associated with the adoption of a child under the age of 18.

Reimbursement covers most types of adoption expenses, providing up to $5,000perchild.PeabodywasnamedtotheDaveThomasFoundation’stop100“AdoptionFriendlyWorkplaceList”for2007,basedonthecompany’sfinancial assistance policy.

Non-Health Care Benefits

In addition to health care benefits, additional welfare benefit programs include:

• Anemployeeassistanceprogramthatprovidescounselingtohelpwith family issues, substance abuse and legal or financial difficulties

• Short-andlong-termdisabilitycoverage

• Lifeinsurance

• Accidentaldeathanddismembermentcoverage

• Businesstravelaccidentcoverage

• Tax-freehealthcarereimbursementaccounts

• Sicknessandaccidentleave

• COBRA,HIPAAandFMLAbenefits

• Workers’compensationcoverage

• Wellnessprogram

• Vacationandholidays


26 Peabody Energy


Professional Compensation

Peabody offers a full package of competitive compensation and benefits to attract and retain talented employees. Level of pay is based on job responsi-bilities benchmarked with peer market data, and opportunities for pay growth are based on measured job performance. Peabody has designed compensation programs that:

• Haveaclearlinktoshareholdervalue;

• Aredesignedtosupportachievementofthecompany’sbusiness objectives;

• Incentivizethevastmajorityofemployees;and

• Establishtotalcompensationopportunitiesatlevelsthatarecompetitivewith marketplace practices and other pertinent criteria, taking into account such factors as executive performance, level of experience and retention value.

Variable incentive pay constitutes:

• Annualincentiveplan;

• Long-termincentiveopportunitiesthroughannualawardsofstockoptions,performance units and restricted stock;

• Incentivepayforsalariedandhourlyemployeesbasedonmetricstiedtocompanywide business unit and individual performance, and based on each individual’s position and level;

• Incentivepayincorporates“absolute”(internal)and“relative”(external)performance measures; and

• Programsarecommunicatedsothatparticipantsunderstandhowtheirdecisions affect business results and their compensation.

Retirement Savings

The company provides for many employees to save for the future through the 401(k) Plan, aligning employee and shareholder interests to enhance performance and value creation.

Both the 401(k) and Employee Stock Purchase Plan programs provide employees with avenues for ownership in Peabody. The Employee Stock Purchase Plan offers a 15 percent discount on BTU shares, based on the closing price of our stock at the beginning or end of the six-month offering period.

Annual Contributions

Performance Contribution to 401(k) Program

Annual Year Performance Base Total 2007 3% 6% 9% 2006 5% 6% 11% 2005 6% 6% 12% 2004 4% 6% 10%

2003 4% 6% 10%

The 401(k) program allows employees to contribute from 1 percent to 60 percent of their regular pay based on IRS guidelines. The company then matches 100 percent of an employee contribution up to 6 percent of base salary.

Employees also may be eligible for an additional annual performance contribu-tion equal to as much as 6 percent of regular salary, based on the company’s performance against financial targets set by the board of directors each year.


Peabody’s mission: “When the mining is complete, we will leave the land in a condition equal to or better than we found it.”

Peabody has a 125-year legacy of innovation, creating environmental solutions that return lands to a condition that is equal to or better than before mining occurred. Peabody believes in continuous environmental improvement in coal mining and coal use and is leading global initiatives to commercialize technology toward a vision of near-zero emissions from coal.

Excellence in stewardship is core to Peabody’s mission. Mined lands are returned for productive rangeland, farmland, forest, wildlife habitat, wetlands

and recreation areas, often to a condition that is better than before mining occurred. We use best practices and regularly seek community involvement in our activities.

Peabody is the most recognized company among its peers for sustainability and corporate responsibility, according to a study by Ceres and the Investor Responsibility Research Center.

Validating the company’s sustainable approach, Peabody earned international recognition at the Energy Globe Awards in Brussels, Belgium, for community and environmental practices on tribal lands in Arizona spanning nearly 40 years. Peabody’s business alliance with the Navajo Nation and the Hopi Tribe creates hundreds of local jobs, tens of millions of dollars in annual tribal revenue and a legacy of stewardship that preserves cultural and traditional values.

“I’m especially proud of the work we’ve done in reclaiming mined lands to hardy, productive range, implementing grazing management programs, and developing a first-of-its-kind program to restore plants and herbs for ceremonial and medicinal use,“ says Scott Williams, Peabody’s Operations Manager for the Arizona Business Unit.

In 2007, employees garnered a dozen awards for stewardship, notably earning half of the U.S. Department of the Interior’s 2007 awards for good neighbor practices and reclamation excellence in Colorado, Kentucky, Indiana and Wyoming. Two Peabody environmental managers, Vern Pfannenstiel and Ken Rogers, were honored by their peers for their environmental leadership.


• EnvironmentalPolicy

• Management’sEnvironmentalCommittee

• RegulatoryOversight

• ReclaimingLandsforHigherUse

• ReclamationBonding

• EnvironmentalCompliance

Restoration of cultural plants used by Navajo and Hopi for medicinal, ceremonial and cultural purposes is part of a broad collection of sustainable initiatives on Arizona’s Black Mesa. Peabody earned world recognition for its environmental, economic and community practices on tribal lands, among the best in nearly 100 nations.

environmental Responsibility


S u m m a r y | E c o n o m i c | E m p l o y e e | Env i ronmenta l | Pu b l i c | A p p e n d i x

28 Peabody Energy

A World-Class Approach to Reclamation Excellence

Peabody’s environmental policies and programs are designed to ensure that coal mining and coal use benefit current and future generations, enhance the company’s leadership in environmental excellence, and assure compliance with all legal and regulatory requirements.

Multiple federal, state, tribal and international environmental laws and regula-tions govern mining operations, and Peabody conducts regular monitoring of the air, soil, water and reclamation at its operations to ensure compliance. The company’s policy is to act within the spirit and letter of environmental laws while advancing environmental excellence.

Our reclamation philosophy is to restore mined land as quickly as possible so that lands can be returned for productive community use. We spent nearly $230 million on reclamation and environmental activities in 2007. Last year, the company continued to expand its conservation activities by recycling nearly 14,000 tons of metals, oil, fuel and other materials.

Management’s Environmental Committee

Peabody has an Environmental Committee comprised of operations and environmental managers, technical directors and executives. The committee guides continuous improvement of the company’s stewardship initiatives and environmental management program. Environmental performance measures are reported and regulatory issues are addressed on a monthly basis and individually at each operation.

The committee’s responsibilities include:

• Providingleadershipanddirectionforbestpracticesinreclamation initiatives and environmental compliance;

• EnsuringimplementationofPeabody’sEnvironmentalandReclamationPolicy and updating when required;

• Reviewingandrecommendingproperresourcesforenvironmentalandreclamation activities;

• Ensuringspecificgoalsandprogramsarebeingestablishedtosupport the Policy and that performance is continuously being measured and monitored; and

• ReviewingandimprovingPeabody’sEnvironmentalManagementProgramto improve overall environmental performance.

Regulatory Oversight

In the United States, the Office of Surface Mining (OSM) within the U.S. Depart-ment of the Interior administers the Surface Mining Control and Reclamation Act (SMCRA) and is the chief regulator for rigorous mining, environmental protection and reclamation standards, and for the surface effects associated with deep mining. U.S. mine operators must obtain SMCRA permits and permit renewals for mining operations from the OSM or the state authority that has primacy.

SMCRA permit provisions include detailed requirements for coal prospecting; mine plan development; soil removal, storage and replacement; selective handling of overburden materials; mine area backfilling and grading; protection of the hydrologic balance; subsidence control for underground mines; surface drainage control; mine drainage and mine discharge control and treatment; and revegetation.

Demonstrating the caliber of Peabody’s worldwide environmental team, Peabody’s Ken Rogers, a Midwest Region Reclamation Manager (right) was honored by the state of Indiana for innovative practices in stewardship. Rogers earned the prestigious Vance “Pat” Wiram Award from the Indiana Society of Mining and Reclamation.




Mine reclamation plans incorporate all SMCRA provisions in addition to state and federal requirements for complementary environmental programs that impact coal mining. Mine inspections are routine and frequent, and are often conducted with several regulatory authorities. Peabody’s environmental team continues to maintain an excellent record of compliance.

In addition to annually committing several hundred million dollars for best practices in reclamation, in 2007 Peabody paid $61.2 million in abandoned mine land (AML) taxes to a federally administered fund for reclamation projects and other pre-SMCRA reclamation projects that were left by mining companies that are no longer in business.

The AML tax has faced frequent expiration deadlines. In December 2006, the U.S. Congress extended the tax for an additional 14 years. The company supports the extension to provide reclamation funds for a number of mine sites that were abandoned by mining companies that are no longer in business.

Reclaiming Lands for Higher Use

Peabody has a long history of environmental stewardship programs. Through Operation Green Earth, we began restoration activities two decades before the 1977 Surface Mining Control and Reclamation Act (SMCRA) was put into place, resulting in the planting of tens of millions of trees on reclaimed lands. In 2007, Peabody reclaimed more than 7,900 acres of land and planted more than 525,000 trees.

Peabody believes sustainability is achieved by creating environmental solutions that return lands for higher community benefit through best practices and stakeholder collaboration.

We continue to accelerate community-based partnerships to promote environ-mental excellence. In 2007, our employees earned five major awards from the U.S. Department of the Interior for excellence in reclamation. Vern Pfannenstiel, Peabody’s Reclamation Manager for Environmental Services-West was recog-nized as Reclamationist of the Year by peers in the American Society of Mining and Reclamation, and Ken Rogers, Midwest Region Reclamation Manager, was

Peabody’s Caballo Mine in the Powder River Basin won the U.S. Interior Bronze Good Neighbor Award for an innovative partnership with area ranchers to reclaim land and repair water reservoirs and groundwater wells.


Peabody planted more than a half million trees in 2007, creating natural carbon sinks that use photosynthesis to remove carbon dioxide from the atmosphere. Peabody has reduced its greenhouse gas intensity by 31 percent since 1990.


30 Peabody Energy


honored with a Reclamation Innovation Award from Indiana Society of Mining and Reclamation. Major stewardship milestones in 2007 include:

• Somerville Central Mine in Indiana was honored by U.S. Interior with both a Silver Good Neighbor Award and an Excellence in Mining and Reclamation National Award for its innovative, community-based approach to reclama-tion. U.S. Interior credited the mine for partnering with area landowners to revitalize productive farming and pastureland and for supporting local recreational, civic and educational institutions.

The mine also earned honors for its work restoring waterways, seasonal wetland and wildlife habitat and for partnering with the American Chestnut Foundationtoreintroduceahardychestnuthybridonreclaimedlands.Oncethe pride of Eastern U.S. forests, the chestnut tree was all but wiped out by a lethal fungus in the late 19th century. Peabody’s efforts will help restore a blight-resistant species, returning an important part of America’s heritage to the Eastern woodlands.

• The Caballo Mine in Wyoming received a Bronze Good Neighbor Award for its collaboration with local ranchers to preserve Wyoming’s traditional Western heritage. U.S. Interior recognized the mine for working with ranchers to double the productivity of area range for grazing and assisting with conservation projects adjacent to the mine.

Caballo’s efforts included working cooperatively with neighbors to help conserve water by building and repairing reservoirs, irrigation pipelines and groundwater wells. Caballo Mine is highly productive and has a long history of stewardship, winning five state and national reclamation awards during the past 10 years.

• Gibraltar Mine, formerly operated in Kentucky, was honored with a National Excellence in Mining and Reclamation Award for reclaiming highly productive farmland, pastureland and wildlife habitat. Employees also were recognized for working with the University of Kentucky to restore sustainable forests.

The mine collaborated with local farmers to develop prime farmland and pastureland and created a diverse landscape of native grasses, forests

andwaterways.ApartnershipwiththeAmericanChestnutFoundationtoreintroduce hybrid, blight-resistant American Chestnut trees to the Eastern United States also contributed to the honors.

• The Twentymile Mine and former Seneca Mine in Colorado were honored for reclaiming wildlife habitat that has become the home to large populations of Columbian sharp-tailed grouse. The restored wildlife habitat is so pristine, the grouse migrated onto reclaimed lands, a rare occurrence in the wild and a key reason the operations were honored. Mine reclamation and environ-mental staff has developed best practices that restore native range and wildlife habitat to endure harsh winters in Northwest Colorado.

Peabody has demonstrated the principles of sustainability throughout its 125-year history and will continue best practices in stewardship to achieve maximum benefits for future generations.

(Dollars in Millions) 2007 2006 2005 2004 2003

Reclamation Performance Bonds Approved $1,073.4 $1,018.3 $897.2 $845.5 $823.5 FederalCoalReclamationFees $61.2 $62.2 $59.9 $56.1 $52.6 Developed Land (acres) 7,570 6,565 5,520 4,733 4,733 Permanently Reclaimed Land (acres) 7,945 7,159 4,070 3,970 3,754 Cumulative Developed (acres) 107,511 111,712 100,764 93,278 91,952 Cumulative Permanently Reclaimed (acres) 72,271 71,693 62,705 56,273 56,337 Bond Release All Phases $36.3 $47.6 $38.9 $41.5 $50.1 Number of Trees Planted 527,048 385,287 568,424 728,727 533,934 ForestLandEstablished(acres) 711 286 123 731 410

Peabody Seeks Excellence in Environmental Performance

2003 data includes Peabody and contract mines. All data reflect continuing operations.




Reclamation Bonding

Peabody’s reclamation approach restores mined lands as quickly as possible for productive use. Peabody has approximately 114,000 surface acres permitted and secured by reclamation bonds throughout its U.S. mining operations and has posted nearly $1.1 billion in reclamation bonds.

During 2007, we increased our reclamation activities over the prior year. Development activities were initiated on more than 6,700 acres, more than 7,900 acres were reclaimed and 8,600 acres were released from bond. We released $36.3 million in bond liability in 2007 and $47.6 million in bond liability in 2006.

Environmental Compliance

The U.S. Surface Mining Control and Reclamation Act of 1977 establishes mining, environmental protection and reclamation standards for all aspects of surface mining, as well as the surface effects associated with deep mining. There are a number of regulations that must be adhered to, many of which may be considered administrative in nature.

Our mines comply with a host of state, federal and tribal laws and regulations and are subject to regular inspections, often with multiple regulatory agencies.

We also conduct periodic environmental assessments to strengthen compliance using both internal teams and third-party consultants with results benchmarked and evaluated.

Employees participate in extensive environmental training, and annual performance reviews are based upon their success in achieving environmental goals. Peabody holds contractors accountable for compliance by including mine environmental standards in contractor work agreements.

Peabody’s Vern Pfannenstiel, Reclamation Manager for Environmental Services – West, (right) was honored as “Reclamationist of the Year” by his peers in the American Society of Mining and Reclamation for developing sustainable programs on Black Mesa that include collaboration with tribal members on range management programs. Vern led efforts on Black Mesa that resulted in worldwide recognition for sustainable practices.


Society faces urgent energy needs and long-term environmental goals at a time when the world is energy short. As the world’s largest private-sector coal company – and 125 years strong – Peabody Energy is uniquely positioned to advance sustainable solutions to address both of these crucial concerns.

Clean coal benefits society both through its abundance and low cost, and is an increasingly diverse source of energy that can be transformed into electricity, transportation fuels, natural gas, steel and hydrogen.

Peabody is the global leader advancing near-zero emissions through centerpiece clean coal initiatives in China, Australia and the United States.

public Responsibility

Peabody joined GreenGen at a formal signing ceremony at the prestigious State Guest House in Beijing last year. The agreement was announced during the Sino-U.S. Joint Commission on Commerce and Trade meetings attended by U.S. and Chinese dignitaries, including U.S. Secretary of the Treasury Henry M. Paulson, Jr. and China’s Vice Premier Wu Yi.

32 Peabody Energy

Peabody advocates the long-term goal of achieving near-zero emissions. This position is central to our enduring mission and forms the foundation of our position on public responsibility.

Peabody is the global leader advancing clean coal solutions with signature projects in China, Australia and the United States. We are participating in broad industry and private partnerships to advance the science of carbon storage. And we continue progressing with carbon management initiatives: We have improved our U.S. greenhouse gas intensity by 31 percent since 1990.

Peabody will continue to advance development of clean coal technologies as the world increases its use of coal for energy security, economic growth and environmental solutions that help people everywhere live longer, healthier and with a better quality of life.


• Near-ZeroEmissions

• Coal’sRoleinCarbonDioxideSolutions

• TechnologyFirst,ThenControls

• BtuConversionTechnologies

• PoliticalActivities

The Goal of Near-Zero Emissions

Peabody believes that through clean coal, America can secure its energy supplies and achieve its climate goals. Our centerpiece near-zero initiatives includeGreenGeninChina,theCOAL21FundinAustraliaandtheVision21andFutureGenprojectsintheUnitedStates.

S u m m a r y | E c o n o m i c | E m p l o y e e | E n v i r o n m e n t a l | Pub l ic | A p p e n d i x

GreenGen: Peabody is the only non-Chinese equity partner in GreenGen, China’s most important carbon initiative advancing development of a multi-phase 650 megawatt prototype southeast of Beijing.

GreenGen is a planned integrated gasification combined cycle power plant that would create clean generation with hydrogen production, marketable byproducts through polygeneration, and eventual carbon dioxide capture for enhanced oil recovery. Construction for the first 250 megawatt unit is expected to begin this year, and the project could be on line as early as next year.


COAL21 Fund:PeabodyisafoundingmemberoftheCOAL21Fundin Australia, another near-zero emissions technology initiative funded by leading coal companies that are pursuing commercialization of multiple advanced technologies. The first project being funded is a 30 megawatt oxyfuel demonstration project with carbon storage in Central Queensland that would begin operating next year.

FutureGen:PeabodyisafoundingmemberoftheFutureGenAlliance,a consortium of the world’s largest energy and coal companies that have committed $400 million toward development of a 275 megawatt near-zero emissionscoal-fueledpowerplantprototypewithcarbonstorage.FutureGenwould be sited in Illinois.

Despite significant development progress, the U.S. Department of Energy isredirectingFutureGenfunding.PeabodyandtheAlliancebelievethis approach only serves to delay commercialization of a global model for clean coal that is less than a year away from groundbreaking.

The Alliance is working with the state of Illinois, the Congressional delegation andothermajorstakeholderstomaintainFutureGenfundingasthenation’stoppriority for near-zero emissions coal technology.

It is essential for the federal government and for the industry to support development of clean coal technology to improve efficiency and greenhouse intensity. Beyond its core initiatives, Peabody is advancing major coal and carbon partnerships in the United States and around the world. These include leadership in:

• TheMidwestGeologicalSequestrationConsortium,aregionalpartnershipthat advances the science of sequestration for evaluating the best geologic storage locations.

• ThePowerSystemsDevelopmentFacilityinAlabama,thenation’spremierlaboratory for testing coal gasification technology in partnership between the U.S. Department of Energy and Southern Company. Peabody is a major sponsor of the facility’s research.



• ThePowerTreeCarbonCompany,LLC,avoluntarycarbonsequestrationinitiative involving major energy companies partnering on six hardwood restoration projects in Arkansas, Mississippi and Louisiana. Peabody is a founding member of the initiative.

• TheAsia-PacificPartnershipforCleanDevelopmentandClimate,whichbrings together companies around the world to develop and transfer technology for energy security, emissions reductions and concerns about climate. Companies from the United States, Australia, Canada, India, Japan, China and South Korea are participating, with initiatives that include oxyfuel and mobile post-combustion pilots to capture carbon dioxide.

34 Peabody Energy

Coal’s Role in Carbon Dioxide Solutions

Abundant coal is increasingly important for nations seeking energy security at a time when oil and natural gas are coming from volatile regions and a number of countries are nationalizing their energy resources and using them for political gain.

In the next quarter century, global energy use will increase by more than half and world electricity generation will nearly double, based on forecasts by the International Energy Agency’s World Energy Outlook. Around the world, coal is driving enormous economic development in the largest and fastest-growing population centers.

In the United States, greater use of coal-fueled generation will build up capacity reserve margins and improve reliability. The North American Electricity Reliability Corporation (NERC), a government watchdog agency, forecasts that U.S. electricity demand will outpace new baseload generation by an 18 percent to 8 percent margin over the next 10 years.

There are about 40 units planned or in development around the United States that would generate 20-plus gigawatts of coal-fueled electricity, representing an extra 85 million tons of coal per year.

These projects are highly efficient, creating more electricity using less fuel than traditional plants, and resulting in emissions that are significantly less than the existing U.S. fleet. While this represents good progress, the nation needs six times that amount to satisfy NERC’s long-term demand projections.

To build reliability and achieve continued environmental improvement toward near-zero emissions, Peabody advocates multiple steps.

First, which Peabody believes is essential: build advanced supercritical combustion plants with improved efficiencies to help the environment and stabilize our baseload electric reliability for the next 15 years.

Second, which is equally important: demonstrate carbon capture and storage and move it toward commercialization.

Third, commercialize coal-to-gas and coal-to-liquids technology that can remove the carbon in a concentrated stream.


Peabody is a regular contributor to the U.S. Department of Energy’s voluntary reporting system and has reduced its U.S. greenhouse gas emissions 31 percent since 1990 based on each ton of coal produced. Peabody also is a member of Australia’s Greenhouse Challenge Plus, which seeks to improve emissions.

Peabody Seeks to Continually Improve Its Greenhouse Gas Intensity Levels

Pounds of GHG Emitted (CO2 & CH4) Per Ton of Coal Produced

Source: Center for the Study of Carbon Dioxide and Global Change, 2006. Data represent continuing operations.

70

60

50

40

30

20

10

0

1990 1993 1996 1999 2002 2005



Fourth, commercialize Integrated Gasification Combined Cycle (IGCC) technology with carbon capture and storage. GreenGen, COAL21 and FutureGenallsharethisgoal.

Fifth, pursue technologies to capture carbon dioxide from existing pulverized coal plants. This is the only way to break through on the many coal plants being developed, particularly in the Pacific Rim.


could lead to another 2 million to 3 million barrels of oil per day produced in the United States alone, according to a major study by the National Coal Council.

Researchers are even examining the potential for using carbon-consuming algae that absorb carbon dioxide and other power plant emissions, oxygenating the air during photosynthesis. Other technology paths include coal gasification processes that can create separate hydrogen and carbon streams, reducing carbon dioxide in an oxygen-rich environment during combustion or using scrubbing agents for removal.

Once the carbon dioxide stream is separated, it is compressed into a fluid-like state for transport via pipeline. Ultimately the carbon dioxide is injected deep underground into the same impermeable caverns that have safely stored methane, coal and oil through the millennia, eventually dissolving and mineralizing. The United States has centuries of storage available for carbon.

Advancements in clean coal technologies have enabled U.S. coal-based electricity generation to triple since 1970 while regulated emissions have been reduced 42 percent. New emission standards are leading to continued environmental improvement, toward the ultimate goal of near-zero emissions.

70 9080

0%

-50%

50%

100%

150%

200%

95 96 97 98 99 00 01 02 03 04 05 06

203%

47%

47%

-42%

182%

Source: Energy Information Administration, Annual Energy Review, June 2007; U.S. EPA Air Emissions Trends Data, July 2007.

Coal Use Triples as Emissions Rapidly Decline

Gross Domestic Product

Electricity from Coal

Energy Consumption

Population

Total Emissions

The Technology Path to Near-Zero Emissions from Coal

New Supercritical Plants & CCS Demonstration Essential

2007

Advanced Supercritical Combustion Plants

Demonstrating Carbon Capture/Storage (CCS)

Commercial CTG/CTL with CCS

Commercial IGCC with CCS

Retrofitting PC Plants with CCS

2010 2020 2030

Carbon Dioxide Technology Advancements

Carbon dioxide is necessary for life and is exhaled with every breath. It also is the result of most of our activities, from walking and driving to heating our homes and using our computers. Peabody believes that commercializing carbon capture and storage technology will ensure that our most abundant energy resource is developed in a climate-friendly way.

A number of promising technologies are being advanced around the world to manage carbon. Using carbon dioxide for enhanced oil recovery (EOR), for instance, is a process employed by the petroleum industry for 30 years. EOR brings the benefit of improved oil production and improved energy security and


36 Peabody Energy


Technology First, Then Carbon Management Programs

When America put the Clean Air Act into place, it set a benchmark for the world’s toughest environmental standards. Technology has allowed coal used for electricity generation to more than triple since 1970 while primary emissions have been reduced by 42 percent. “Criteria emissions,” including sulfur dioxide, nitrogen oxides, particulates and mercury, will continue to be reduced by employing these advanced technologies.

To achieve similar success with carbon management, Peabody believes technology must be available to capture and store carbon and that regulatory certainty must be created. Both elements must be in place before setting artificial caps.

While a cap and trade regime worked well for sulfur dioxide, the challenges for carbon dioxide are much greater: reducing carbon dioxide is a global rather than regional issue. There is no low-carbon coal and no known costs for scrubbers or carbon-reducing technologies. Initiating a cap before technology is ripe will pave the way for industry and emissions to flow to nations who simply choose to opt out.

The magnitude of the carbon capture challenge is enormous, and Peabody believes that increased public-private partnerships are needed to advance carbon capture and storage. We believe that an economy-wide fee and a National Institute of Energy – like Health – is essential to devote the proper objective resources to an aggressive carbon capture and storage program.

Peabody’s approach of commercializing technologies to capture and store carbon and avoiding premature caps that would hurt the economy is also an approach supported by the American people. In a recent survey by RT Strategies based in Washington, D.C., Americans overwhelmingly supported greater use of coal for electricity (60% versus 34%), and 60 percent of Americans agreed that technology is the solution for reducing greenhouse gas emissions.

Peabody is Advancing Clean Coal Projects with Carbon Capture and Storage

1. Clean Coal Fuel Supply2. Carbon Capture3. Electricity Production4. Carbon Dioxide Injection

5. Enhanced Oil Recovery6. Carbon Dioxide Injection7. Saline Aquifer Storage

4

1

2

6

7

5

3

Advancements in carbon capture and sequestration are being made on a number of fronts and include scrubbing and storing carbon in oil fields, saline aquifers and beneath the ocean floor in geology that offers both ample space and permanence.


Btu Conversion Technologies

Transforming the Btus stored in coal into other high demand forms of energy, what Peabody calls Btu Conversion, is expanding markets for clean coal to natural gas, diesel and aircraft fuels.

There are nearly 150 commercial gasification plants operating in 27 nations, and the U.S. Department of Energy forecasts that this capacity will climb 30 percent in the next two years as new gasification plants, primarily fueled by coal, become operational.

Global coal-to-liquids production tells a similar story, expected to annually top more than 800 million barrels of synthetic fuels by 2030, according to the U.S. Energy Information Administration.

China alone is investing tens of billions of dollars to replace more than 10 percent of its petroleum consumption with coal-to-liquids and is developing about 20 projects that would annually produce more than 100 million barrels of oil by 2030, according to estimates by the International Energy Agency’s World Energy Outlook. Other reports suggest China will pursue even more robust development of these facilities.

Coal gasification technology has been in commercial use for more than 50 years for the refining, chemical, and power industries. Gasification is the first step in Btu Conversion, a process where carbon-containing material is converted into a synthetic gas composed primarily of carbon monoxide and hydrogen, which can be used as a fuel to generate electricity and steam or used as a basic chemical building block in the petrochemical and refining industries.

Through methanation, the gas from coal is transformed into pipeline quality synthetic natural gas that could become a practical alternative to create natural gas for power plants. Synthetic natural gas from coal with carbon capture and storage also has a better carbon footprint than liquefied natural gas.

Coal liquefaction also offers promise for nations that are rich in coal, yet scarce in oil, such as the United States and China. A plant using more than 6 million



Solids

Coal

Gasification

Geological Storage

Sulfur

Methanation

CO + H2

H2

H2O Vapor

Electric Power

H2O Vapor

Fuel Cell H2 Car

Natural Gas

Clean Up

CO2

Gas

Fischer-Tropsch Process

Jet FuelDiesel Fuel

Btu Conversion Transforms Coal to Clean Fuels

Btu Conversion starts with coal gasification, a chemical conversion process where oxygen, heat, pressure and coal are converted into synthesis gas composed primarily of two streams… hydrogen and carbon monoxide. Clean-up processes remove sulfur and particulates, and the back-end technology creates gas, diesel or jet fuel.

tons of coal annually could produce more than 3.6 million barrels of diesel and naphtha annually. Coal-to-liquids with carbon capture and storage can produce cleaner fuels with ultra low sulfur at the same rate of carbon dioxide emissions as imported oil.


Peabody Seeks to Capitalize on New Markets for Coal

Peabody is evaluating Btu Conversion projects to capitalize on these new markets and is investing in emerging technologies for coal gasification.

Through a partnership with ConocoPhillips (NYSE: COP), Peabody is advancing development of a coal-to-gas facility that would produce 1.6 trillion cubic feet of gas over its first 30 years of operation, annually fueled by 2.5 million tons of coal.

A feasibility study is under way for selection of a final site and Peabody is working with the Kentucky Geological Survey to examine the best carbon capture and storage options.

Another project involves an equity investment in GreatPoint Energy, a Massachussets-based start-up company that has proprietary bluegasTM technology that converts coal into clean substitute natural gas while enabling carbon storage.

GreatPoint has successfully tested a pilot and is engineering its first commercial project. Peabody and GreatPoint also are evaluating the potential for development of a joint coal gasification project in Wyoming using Peabody reserves. Peabody has multiple large contiguous blocks of coal that can be devoted to generation or conversion projects.

Political Activities

Peabody engages in political and policy arenas in ways that advance the company’s mission and balanced energy policy. This engagement includes direct contact through meetings and discussions with state and federal legislators to discuss specific issues or indirect political contributions.

Peabody works with trade associations to perform lobbying on most major issues affecting the industry and frequently provides leadership in support of these efforts.

Government Relations Priorities

The company funds government affairs and external relations for lobbying, political action committees, consulting services and resources in Washington, D.C., and at the state level.

Political contributions by Peabody and the Peabody Political Action Committee (PAC) are designed to further the interests of our shareholders. Contributions go to both Republicans and Democrats when it can be demonstrated that recipients support Peabody’s mission and vision to provide clean energy solutions from coal. Our political contributions are subjected to careful legal scrutiny and are made in accordance with all federal, state and local laws.

GreatPoint Energy is developing a bluegas™ demonstration facility near Boston that will transform coal to gas. Construction is beginning this year and the plant is expected on line in late 2008.

38 Peabody Energy



Peabody Advances Education, Arts and Communities



Environmental, Corporate Communications and an at-large position. The committee structures Peabody’s charitable giving program to support corporatewide initiatives as well as region-specific opportunities.

Clean Coal is the Solution for an Energy-Short World

The world needs all forms of energy to meet enormous demands. That includes greater use of clean coal and renewables, along with energy efficiency and conservation.

Peabody believes that it is essential for America to commit significant funding increases for carbon storage and other clean coal technologies to achieve major priorities of energy security, economic growth and environmental solutions. That is the most powerful energy solution for an energy-short world.

Memberships

To advance our clean energy vision and the public policy framework that supports it, Peabody engages in a variety of organized policy initiatives using industry coalitions and associations. The company also takes on leadership in a number of organizations that include the American Coalition for Clean Coal Electricity, the National Mining Association, the Coal Utilization Resource Council, and state chambers of commerce and coal associations.

Charitable Contributions

Peabody has a formal charitable giving program that provides support based on an informal analysis of the social need, our ability to make a meaningful difference, the connection of the opportunity with our core business and shareholders, and the ability of the company to contribute. Peabody’s charitable giving committee includes representatives from Human Resources,

At a time when competing fuels are increasingly strained, greater use of coal can advance the complementary goals of clean energy solutions that build energy security, strengthen economies and solve our environmental challenges. Peabody provided $2.3 million in charitable contributions in 2007, with more than

$1 million targeted for higher education, mining and engineering universities and trade schools, along with student scholarships.

2007 Contributions

Arts & Culture $ 180,255 Civic 252,550 Community Development 133,350 Diversity 71,400 Environmental 60,076 Health Care 97,908 Higher Education 447,140 Human Services 128,674 Mining/Coal Education Initiatives 25,070 Youth Services/Education K-12 111,903 United Way of Greater St. Louis 220,000 Scholarships 508,400 Charitable Matching Program 78,300

Grand Total $ 2,315,026


Following are a series of documents including Peabody’s mission statement and safety vision in addition to key policies supporting the company’s goals of social responsibility and sustainable development.

Peabody’s Mission StatementPeabody Energy’s mission is to be a leading worldwide producer and supplier of sustainable energy solutions, which power economic prosperity and result in a better quality of life.

We will be Best in Class in six fundamental areas:

• Wewilldevelopandmanagesafe,efficient,technology-driven,low-cost,coal mining operations;

• Wewillprovidecustomerswithqualityproducts,reliablesupply,innovativesolutions and superior service;

• Wewillprovideouremployeeswithanempowered,collaborativework environment based on mutual trust and respect that emphasizes safe working conditions, rewards continuous improvement, innovation and creativity, and provides opportunities for job satisfaction and career advancement;

• Wewillrewardshareholderswithsuperiorearningsperformanceand sustained earnings growth;

• Wewillatalltimesoperateinaresponsible,ethicalandconstructive manner; and

• Whentheminingiscomplete,wewillleavethelandinaconditionequaltoor better than we found it.

Safety Vision StatementPeabody’s vision is to operate safe workplaces that are incident free. The following governing principles for safety and health apply to everyone at a Peabody workplace:

• Thesafetyandhealthofourmostimportantasset,ouremployees,isacorevalue that is integrated into all areas of our business;

• Allworkplaceincidentscanbeeliminated,includinginjuries,occupationalillnesses, property damage and near misses;

• Managementhastheoverallaccountabilityforemployeesafetyandhealth;

• Eachemployeeisresponsiblefortheirownsafetyandhealth,aswellaspromoting the safety of their co-workers;

• Eachemployeemustbeempoweredwiththeskillsandauthorityto perform their job in a safe manner;

• Allemployeesmustcomplywithestablishedsafetyrulesandregulations;

• Open,honestandeffectivesafetycommunicationisessential;

• Allsafetyandhealtheffortsmustbesustainableandwillbecontinuouslyreviewed and improved; and

• TheworkplaceisanywhereaPeabodyemployeeisonthejob.

Environmental MissionPEABODY ENERGY POLICY No. 400.00

PURPOSE:

Peabody Energy embraces the concept of sustainable development and pledges to conduct its activities in a manner that recognizes the needs of society and the needs for economic prosperity, national security, and a healthy environment.

Coal mining and coal use are essential to economic prosperity and a better quality of life. Peabody Energy recognizes these benefits while pledging to manage our business in a manner that minimizes any adverse impacts our activities may have on communities and the environment.

Within coal mining, our goal is to restore mined land to a productive condition that provides lasting benefits to future generations. Within coal use, Peabody supports continuous improvements in emissions by developing advanced coal technologies.

Our environmental policies and programs are designed to ensure that coal mining and coal use provide maximum benefit to current and future generations, enhance Peabody’s leadership in environmental excellence, and assure compli-ance with all legal and regulatory requirements.

40 Peabody Energy

appendix

S u m m a r y | E c o n o m i c | E m p l o y e e | E n v i r o n m e n t a l | Pu b l i c | Append ix

appendix

STATEMENT OF POLICY:

Peabody’s policy is to act within the spirit and letter of environmental laws while promoting excellence and best practices regarding coal mining and coal use. This includes:

• Developingapproachestomineplanninganddevelopmentthatare responsive to possible environmental impacts through every stage of the mining cycle.

• Developing,submitting,andobtainingallrequiredpermitsforminingandenergy production in a timely manner.

• Complyingfullywithpermitrequirementsandallotherfederal,state,andlocal environmental rules and regulations.

• Exploring,developingandutilizingenvironmentalpracticesandtechnologiesthat continue to improve efficiencies and environmental performance in our mining and processing operations and in the use of our products.

• Promotingpollutionpreventionandwasteminimizationthroughthesafeand efficient use, recycling, and disposal of products through an under-standing of their life cycle.

• Promotingtheefficientuseofminingequipmentandinfrastructuretoreduce energy and the net carbon emissions intensity of our operations and reclamation.

• Employingthemostsuitablereclamationpracticestotimelyreturnaffectedlands to a condition that is equal to or better than before mining. (See Reclamation Policy 400.02)

• Supportingcoaluse,continuousimprovementinpowergeneration emissions, and additional research to improve scientific understanding of the existence, causes and effects of climate change. (See Coal Use Policy 400.04)

• Adheringtothehighestethicalbusinesspracticesinallouroperationsandto interact responsibly with employees, industry, customers, the govern-ment and the public to constructively address environmental issues.

• Encouragingandrecognizingmeaningfulinitiativesofthoseinvolvedinourefforts to achieve environmental excellence.

Employees are expected to be familiar with and adhere to appropriate environmental requirements and to report to their supervisor any situations that may be contrary to this policy.

The responsibility for providing environmental leadership and policy guidance resides with the Peabody Energy Environmental Committee.

The responsibility for environmental compliance resides with the President and Chief Operating Officer, V.P. Engineering and Environmental Services, the Group Executives – Operations, and each Operations Manager within their respective areas of responsibility.

REFERRALS:

Reclamation Policy 400.02Coal Use Policy 400.04

Reclamation MissionPEABODY ENERGY POLICY No. 400.02

PURPOSE:

Peabody Energy’s reclamation activities are driven by our mission statement, which says that when the mining is complete, we will leave the land in a condition equal to or better than we found it.

In 1954, Peabody launched “Operation Green Earth,” an ambitious program to plant trees and other vegetation and reintroduce fish and wildlife onto mined lands. Nearly half a century later, this vision continues as the company creates valuable resources to benefit future generations. Our ongoing reclamation efforts continue to result in the planting of more than half a million trees per year.

FormerPeabodyminedlandsarebeingenjoyedtodayashigh-yieldfarmingandgrazing lands, productive industrial and commercial sites, forests, golf and recreation areas, wetlands, and rich wildlife habitat. It is our commitment that Peabody mining operations and reclamation activities will be managed consis-tent with our tradition of environmental excellence and our mission statement.




The goal of reclamation is to restore the mined land to a productive condition that provides lasting benefits to future generations, supporting a wide variety of uses. It is our policy that:

• Planningwillbeconductedinadvanceforcontemporaneousreclamationof mining sites in accordance with site-specific criteria. We will work with employees, federal and state agencies, and local communities to identify the appropriate use of a post-mined site.

• Wewillexercisecreativityandinnovationtoreclaimsitesinacost-effectivemanner. Reclamation planning will promote the development of terrestrial carbon sequestration sites.

• OperationswillbeinfullcompliancewiththerequirementsoftheSurfaceMining Control and Reclamation Act, the state and tribal laws and regulations governing mine reclamation.

• Reclamationactivitieswillbeconductedinasafemannerandinfull compliance with health and safety laws and Peabody’s Safety Program (see Commitment to Safety Policy 300.00).

• Specialattentionwillbegiventogoodhousekeepingatallactiveandclosed mine sites.

• Finalreclamationandbondreleasewillbeundertakenassoonasis practical.

The responsibility for land reclamation resides with the President and Chief Executive Officer, V.P. Engineering and Environmental Services, the Group Executives – Operations, and each Operations Manager within their respective areasofresponsibility.Finalreclamationanddisposalofreclaimedminedlandis delegated to the Operations Manager Conservancy and the V.P. Resource Management, respectively.

REFERRALS:

Commitment to Safety Policy 300.00

Coal Use MissionPEABODY ENERGY POLICY No. 400.04

PURPOSE:

Peabody believes that sound energy and environmental policies must balance the needs of America’s citizens with the need for a strong economy, a clean environment, and a secure nation. Peabody pledges to be a responsible leader in advocating a balanced and sustainable energy policy.

Coal is the reason the United States has affordable electricity, providing more than 50 percent of the fuel for electric generation. Nationally, coal use has more than tripled since 1970 even as SO2 and NOx emissions from coal-fueled gen-eration have decreased. Peabody advocates and supports continued reductions of emissions while balancing the need to maintain affordable electricity for all consumersintheUnitedStates.Forthenearandintermediateterm,Peabodyrecognizes the need to upgrade the existing base of coal-fueled generation with emissions technologies as well as the need to install state-of-the-art emis-sionstechnologiesonallnewcoalgenerationunits.Forthelongterm,Peabodysupports the development of technologies for a coal-fueled plant of the future that would be ultra-efficient, produce electricity and hydrogen, emit nearly no emissions and sequester carbon dioxide.


Peabody believes that coal use benefits Americans through affordable electricity, resulting in enhanced lifestyles and longer life spans. Coal use benefits the economy by providing inexpensive electricity that lowers the cost of goods and services, and serves as a catalyst for the Information Age. Coal use benefits homeland security because coal is by far the most abundant domestic energy resource.

Peabody supports:

• ImprovedemissionsstandardsintheUnitedStates,onreasonabletime-tables, which will create greater certainty in investments and continue to provide affordable energy for all energy users.

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• Peabodysupportsinvestmentinresearch,development,anddeploymentofnew coal generation that utilizes the best available emissions technologies and provides continuous improvements in the emissions intensity of the existing coal base.

• Carefulactionregardingclimatechange.

– Improving the scientific understanding of the existence and cause of climate change;

– Developing a better understanding of the ability of plant life and oceans to serve as carbon-absorbing sinks;

– Advancing technologies that would chemically or physically capture and sequester carbon dioxide;

– Promoting increases in efficiencies to reduce energy input needed to create electricity;

– Expanding the measurement of carbon emissions and uptakes; and

– Increasing voluntary measures to reduce carbon intensity.

• Aggressiveresearchanddevelopmenteffortstobetterunderstandtheimpacts of a hydrogen based energy economy in the United States.

Peabody executives will play a leadership role in promoting this policy and will commit prudent levels of investment in clean coal technologies.

The responsibility for coal use strategies resides with the Senior Vice President of Government Relations and the Executive Vice President of Operations.

Sustainable Development MissionPeabody’s vision for sustainable development is to balance the needs of individuals with the need for a strong economy, a clean environment and a secure future.

• Wewilldevelopprojectsthatprovideareliable,low-costsupplyofenergythat contribute to economic prosperity, a better quality of life and improved energy security.

• Wewillpromotebalancedenergypoliciesandprovideindustryleadershipin developing clean coal technologies that provide for continuous environ-mental improvements in emissions from coal-based generation with the ultimate goal of near-zero emissions.

• Wewillresponsiblydevelopourcoalresourcesbyevaluatingallaspects of projects through a balanced and scientific approach, addressing the concerns of stakeholders and maximizing overall project value.

• Wewilluseourassetsandexpertisetodevelopandprotectthenatural, human and societal resources in the communities where we operate. We will create skilled, high paying jobs and a safe work environment, encourage a cycle of prosperity, and work collaboratively to strengthen communities now and in the future.

• Wewillembracetheconceptsofstewardshipinallaspectsofplanning,mining and reclamation, which include improved efficiency, conservation, productivity and excellence in reclamation. We will leave the land in a superior condition, returning it to beneficial use for communities.

Charitable Giving PolicyPEABODY ENERGY POLICY No. 700.06

PURPOSE:

The company’s mission is to be a worldwide supplier of low-cost energy, which contributes to economic prosperity and a better quality of life. The company’s charitable giving will be consistent with its mission and also aligned with the objectives of sustainable development. Generally the primary focus in charitable giving will be to protect and enhance the environment, support the education and training of the company’s current and future workforce, and provide economic assistance to the communities in which the company’s operations are located. The guiding principles for charitable giving include programs that:

• Protectandenhancetheenvironmentandwildlife;

• Supporttheadvancementofeducationforthecompany’scurrent workforce and the next generation of employees;

• Improvethequalityoflifeincommunitieswheretheoperationsarelocated;

• Provideassistancetotheunderprivilegedincommunitieswherethe operations are located.


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To facilitate its commitment to the above stated principles, the company and its subsidiaries actively participate in charitable giving endeavors.

Requests will be considered only from bona fide 501(c)3 charitable organizations. Contributions must be requested in writing, be accompanied with suitable supporting documentation and, if approved, will be disbursed by company check. In some circumstances, assistance may be provided in kind through the utilization of the skills of our workforce and the use of the equip-ment and materials and supplies available through the company.

Grants will not be made to:

• Privateindividuals;

• Politicalcandidatesororganizations;

• Religiousorganizations;

• Organizationssuchasboosterclubs,fraternalorsocialgroupsorwhosechief purpose is to influence legislation; or

• Organizationsthatdiscriminateinanywaywithnationalequalopportunitypolicies.

CHARITABLE GIVING COMMITTEES

Contributions made on behalf of the company’s St. Louis subsidiaries will be approved by a Charitable Giving Committee whose members are appointed by the company’s Chairman and CEO. The Charitable Giving Committee will meet, review and approve requests on a quarterly basis.

All non-St. Louis based subsidiaries will follow the guidelines stated in this policy but will limit charitable giving to the communities in which they operate and where their employees and families live. Each subsidiary head will appoint the members of their own Charitable Giving Committee to review and approve contributions for their group.

EMPLOYEE GIFT MATCHING PROGRAM

Community involvement is an important value of our company. Through the Employee Gift Matching Program, full-time employees with at least one year of service are encouraged to contribute personally to nonprofit organizations with a matching contribution made to the organization from the company.

The guidelines for eligible organizations that will be considered under the Employee Gift Matching Program are as outlined in this policy. Contributions not eligible under this program include:

All dinner tickets, sporting events, raffle tickets or other donations where a benefit is received as a result of the donation; dues and subscription fees; tuition fees, loan repayments and payments in lieu of tuition; bequests and insurance premiums which name an organization as beneficiary; United Way, which receives support through the company’s annual drive.

The company will match employee contributions up to a total of $1,000 per year. A minimum gift eligible for matching under this program is $50; maximum annual matching contributions to any one organization are $1,000.

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