EXHIBIT 10.2
 
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT

This Amended and Restated Executive Employment Agreement (this “Agreement”)
dated as of the 5th day of October, 2007 is by and between United Fuel & Energy
Corporation, a Nevada corporation (“Employer”), and Charles McArthur (“Employee”
and, together with Employer, the “Parties” and each individually, a “Party”).
This Agreement will become effective as of January 1, 2008 (the “Commencement
Date”).

RECITALS:

A. Employer and Employee are each a party to that certain Executive Employment
Agreement dated September 2, 2005 (the “Original Agreement”).

B. This Agreement is intended to amend and restate the Original Agreement as of
the Commencement Date. Prior to the Commencement Date, this Agreement shall have
no force or effect and the terms of the Original Agreement shall continue to
apply to the employment relationship between the Employer and the Employee.

AGREEMENT:

NOW, THEREFORE, in consideration of the premises and the mutual promises herein
made, and in consideration of the representations, warranties, and covenants
contained herein, each Party agrees as follows:

1. Employment Term. This Agreement will remain in effect from the Commencement
Date and shall end on the date that is the third anniversary of the Commencement
Date unless this Agreement is earlier terminated in accordance with its express
terms (the “Initial Term”); provided, however, that upon the expiration of the
Initial Term, and on each anniversary of the Commencement Date thereafter, the
term of this Agreement shall automatically extend for an additional one-year
term (each a “Renewal Term,” and together with the Initial Term, the “Employment
Term”) unless (a) either Party gives the other Party four (4) months’ notice of
its desire not to extend this Agreement prior to the expiration of the Initial
Term or Renewal Term, as applicable, or (b) this Agreement is earlier terminated
in accordance with its express terms.

2. Responsibilities and Authority. Employer hereby employs Employee to serve as
its President and Chief Executive Officer. In such capacity, Employee will have
such duties and responsibilities as determined by Employer’s Board of Directors
(the “Board”) consistent with the Employer’s Bylaws. If requested by Employer,
Employee will serve as an officer or director of Employer or any subsidiary of
Employer without additional compensation.
 
3. Acceptance of Employment and Other Activities. Employee accepts employment,
and Employer acknowledges Employee’s other activities as follows:
 

--------------------------------------------------------------------------------

 
3.1 Acceptance of Employment. Employee accepts employment by Employer on the
terms and conditions herein provided and agrees, subject to the terms of this
Agreement, to devote all of Employee’s full business time to Employer’s affairs.
Employee shall not, during the term of this Agreement: engage, directly or
indirectly, in any other business activity (whether or not pursued for pecuniary
advantage) which might interfere with Employee’s duties and responsibilities
hereunder. The foregoing limitations shall not be construed to prohibit Employee
from (i) owning less than 5% of the equity interests of any person or company
having a class of equity interests actively traded on a national securities
exchange or over-the-counter market; (ii) making personal investments in such
form or manner as will neither require Employee’s services in the operation or
affairs of the companies or enterprises in which such investments are made nor
violate the terms of Section 7 hereof; or (iii) owning non-operating oil and gas
interests (including working interests) in properties where the operator of such
property may call upon Employer or its affiliates to provide goods and services;
provided, however, in such instances where the operator of such a property calls
upon Employer or its affiliates to provide goods and services, Employee will
notify the members of the Employer’s audit committee of the board of directors
and will refrain from negotiating the price or terms of such goods or services
to be provided by Employer and will delegate such responsibility, if any, to
other senior management. Employer acknowledges that Employee will from
time-to-time serve on the boards of philanthropic organizations or of public or
private companies that do not compete against the Employer or its affiliates;
provided that such service does not interfere with Employee’s duties and
responsibilities hereunder. Accordingly, the foregoing limitations shall not be
construed to prohibit Employee from serving on the boards of philanthropic
organizations or of public or private companies that do not compete against the
Employer or its affiliates, provided that such service does not violate Section
7 hereof or otherwise interfere with Employee’s duties and responsibilities
hereunder, and provided further that in instances where such philanthropic
organization or public or private companies call upon the Employer or its
affiliates to provide goods or services, Employee will notify the members of the
Employer’s audit committee of the board of directors and will refrain from
negotiating the price or terms of such goods or services to be provided by
Employer and will delegate such responsibility, if any, to other senior
management. The determination of whether a particular activity of the Employee
violates this provision rests solely with the discretion of the Board.

4. Compensation and Benefits. As compensation for Employee’s services hereunder,
Employee will be entitled to the following:

4.1 Base Salary. From and after the Commencement Date, Employee will receive a
base salary at the rate of $325,000 per annum (“Base Salary”). On each of
January 1, 2008, 2009 and 2010, Employee shall be eligible to receive up to a
$25,000 raise at the discretion of the compensation committee of the Board (the
“Compensation Committee”). The Base Salary will be paid in substantially equal
installments in accordance with Employer’s regular payroll practices, as in
effect from time to time, and subject to all appropriate withholdings.

4.2 Bonus. Employee shall be eligible to receive a cash bonus on an annual basis
equal to up to 100% of Employee’s Base Salary in the event that Employee meets
certain performance criteria established in advance in writing by the
Compensation Committee for such year (“Performance Criteria”). Additional
bonuses may be paid to Employee at such times and in such amounts as may be
determined in the sole discretion of the Compensation Committee. If awarded,
payment of all bonuses will be subject to all appropriate withholdings.
 
2

--------------------------------------------------------------------------------

 
4.4 Restricted Stock Grants. In addition to stock options previously granted to
Employee under Employer’s stock option plan, Employee shall be eligible to
receive annual restricted stock grants for up to 150,000 shares of common stock
of Employer each (at the discretion of the Compensation Committee). The
restrictions on each grant shall lapse in four equal installments on the 6, 12,
18 and 24-month anniversaries of each such grant. Any such restricted stock
grants made will occur following the completion of the audit of Employer’s
financial statements for the year which is the basis for the grant being issued.

4.5 Benefits. Employee will be entitled to receive the benefits specified on
Exhibit A (“Benefits”).

4.6 Expense Reimbursement. Employer will reimburse Employee for all expenses
reasonably incurred or paid by Employee in direct connection with the
performance of Employee’s services under this Agreement upon presentation of
expense statements or vouchers and such other supporting information as Employer
may from time to time reasonably require or request (“Reimbursable Expenses”),
subject to approval by the audit committee of the Board at the discretion of the
audit committee of the Board.

5. Termination; Payments upon Termination. This Agreement may be terminated upon
the following terms:

5.1 Termination Upon Death. If Employee should die during the Employment Term,
this Agreement will terminate on the date of death. All Base Salary through such
date and any amounts owed for Reimbursable Expenses that Employee incurs through
such date, as well as any previously awarded but unpaid bonuses, will be paid to
Employee’s designated beneficiary as promptly as practicable following the date
of death. All restrictions on any restricted stock grants issued to Employee
hereunder shall lapse. Employer shall provide, at its expense, health insurance
coverage to Employee’s spouse and dependent children until the first anniversary
of Employee’s death. All other Benefits will, unless otherwise expressly set
forth on Exhibit A, otherwise provided by Employer policy applicable to its
employees generally, or otherwise required by Law, terminate on the date of
death.

5.2 Termination Upon Disability. This Agreement shall automatically terminate
upon the Employee’s Disability. The Base Salary will continue to be paid to
Employee through the date of Disability, and any amounts owed for Reimbursable
Expenses that Employee incurs through such date and any previously awarded but
unpaid bonuses will be paid as promptly as practicable following such date. In
such event of Employee’s Disability, Employer will also continue to pay Employee
the Base Salary in effect at the time of such Disability for a period of 6
months following the date of Disability. All restrictions on any restricted
stock grants issued to Employee hereunder shall lapse. Employer shall provide,
at its expense, life and health insurance coverage to Employee for six months
following the date of Disability. All other Benefits will, unless otherwise
expressly set forth on Exhibit A, otherwise provided by Employer policy
applicable to its employees generally, or otherwise required by Law, terminate
on the date of termination. “Disability” means (i) Employee is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than 12 months; (ii)
Employee is, by reason of any medically determinable physical or mental
impairment that can be expected to result in death or can be expected to last
for a continuous period of not less than 12 months, receiving income replacement
benefits for a period of not less than three months under an accident and health
plan covering employee’s of Employer; (iii) Employee is determined to be totally
disabled by the Social Security Administration; or (iv) Employee is determined
to be disabled in accordance with a disability insurance program, provided that
the definition of disability applied under such disability insurance program
complies with the requirements of Treasury Regulation Section 1.409A-3(i)(4). If
a disagreement arises between Employee and Employer as to whether Employee is
suffering from Disability, such issue will be determined by a physician
designated by Employer. If Employee disagrees with the conclusion of such
physician, then such physician and Employee’s physician will choose a mutually
acceptable physician to make such determination.
 
3

--------------------------------------------------------------------------------

 
5.3 Termination by Employer For Cause. Employer will be entitled to terminate
Employee’s employment at any time for Cause. The Base Salary will continue to be
paid to Employee through the date of termination, and any amounts owed for
Reimbursable Expenses that Employee incurs through such date and any previously
awarded but unpaid bonuses will be paid as promptly as practicable to Employee
following termination. All restricted stock grants issued to Employee hereunder
still subject to restrictions shall be forfeited. All Benefits will, unless
otherwise required by Law, terminate on the date of termination. “Cause” will
constitute any one of the following:

(a) Employee’s continued failure to substantially perform Employee’s duties and
responsibilities (other than a failure resulting from a Disability);

(b) Employee’s engaging in willful, reckless, or grossly negligent misconduct
that is materially injurious to Employer, monetarily or otherwise;

(c) Employee’s commission of a felony or a crime involving moral turpitude;

(d) Employee’s breach of this Agreement and failure to cure such breach within
thirty (30) days from the date that Employer gives notice thereof to Employee
identifying the provision of this Agreement that Employer determined has been
breached; or

(e) Employee’s commission of fraud, misappropriation, or personal dishonesty.

5.4 Termination by Employer Without Cause. Employer may at any time terminate
Employee’s employment without Cause. In such event, the Base Salary will
continue to be paid through such the date of termination, and any amounts owed
for Reimbursable Expenses that Employee incurs through such date and any
previously awarded but unpaid bonus will be paid to Employee promptly following
termination. In addition, Employer will also continue to pay Employee, as
severance, the Base Salary in effect at the time of such termination for the
remainder of the Employment Term in monthly installments; provided, however,
that if Employee is determined on the date of termination to be a “specified
employee” for purposes of Section 409A of the Internal Revenue Code, then such
monthly payments of Base Salary for the remainder of the Employment Term will
not commence until the earlier of: (i) the first day of the seventh month after
the month the Employee was terminated; or (ii) the Employee’s death; and such
monthly payments will then continue for an additional six months following the
end of the Employment Term. All restrictions on any restricted stock grants
issued to Employee hereunder shall lapse. Employer shall provide, at its
expense, life and health insurance coverage to Employee for the remainder of the
Employment Term; provided, however, that if Employee is determined on the date
of termination to be a “specified employee” for purposes of Section 409A of the
Internal Revenue Code, then such continuation of life and health insurance
coverage will be limited to the period during which the Employee would be
entitled, but for the terms of this Agreement, to continuation of coverage under
the federal law knows as COBRA. All other Benefits will, unless otherwise
expressly set forth on Exhibit A, otherwise provided by Employer policy
applicable to its employees generally or otherwise required by Law, terminate on
the date of termination.
 
4

--------------------------------------------------------------------------------

 
5.5 Termination by Employee For Good Reason. Employee will be entitled to
terminate Employee’s employment at any time for Good Reason. In such event, the
Base Salary will continue to be paid through the date of termination, and any
amounts owed for Reimbursable Expenses that Employee incurs through such date
and any previously awarded but unpaid bonus will be paid to Employee promptly
following termination. In addition, Employer will also continue to pay Employee,
as severance, the Base Salary in effect at the time of such termination for the
remainder of the Employment Term in monthly installments; provided, however,
that if Employee is determined on the date of termination to be a “specified
employee” for purposes of Section 409A of the Internal Revenue Code, then such
monthly payments of Base Salary for the remainder of the Employment Term will
not commence until the earlier of: (i) the first day of the seventh month after
the month the Employee was terminated; or (ii) the Employee’s death; and such
monthly payments will then continue for an additional six months following the
end of the Employment Term. All restrictions on any restricted stock grants
issued to Employee hereunder shall lapse. Employer shall provide, at its
expense, life and health insurance coverage to Employee for the remainder of the
Employment Term; provided, however, that if Employee is determined on the date
of termination to be a “specified employee” for purposes of Section 409A of the
Internal Revenue Code, then such continuation of life and health insurance
coverage will be limited to the period during which the Employee would be
entitled, but for the terms of this Agreement, to continuation of coverage under
the federal law knows as COBRA. All other Benefits will, unless otherwise
expressly set forth on Exhibit A, otherwise provided by Employer policy
applicable to its employees generally or otherwise required by applicable law,
terminate on the date of termination. For purposes of this Agreement, “Good
Reason” shall exist upon the occurrence of any of the following events or
matters, in each case without Employer first being in receipt of Employee’s
written consent thereto, and the period of time within which Employee shall be
required to exercise a Good Reason termination of service shall be 90 days,
measured from the date upon which he is notified by Employer of such occurrence,
or, with respect to the matter identified in clause (b) below, from the date
upon which Employee notifies Employer in writing of his belief that a material
breach has occurred:

(a) a material adverse change in, or a substantial elimination of the duties and
responsibilities of Employee;
 
5

--------------------------------------------------------------------------------

 
(b) a material breach by Employer of its obligations hereunder;

(c) the relocation of the Employer’s principal executive offices or Employee’s
own office location to a location outside of Midland, Texas; or

(d) a reduction in Employee’s Base Salary.

5.6 Termination by Employee Without Good Reason. Employee may at any time
terminate Employee’s employment without Good Reason. In such event, the Base
Salary will continue to be paid to Employee through the date of termination, and
any amounts owed for Reimbursable Expenses that Employee incurs through such
date and any previously awarded but unpaid bonuses will be paid to Employee
following termination. All restricted stock grants issued to Employee hereunder
still subject to restrictions shall be forfeited. All Benefits will, unless
otherwise expressly set forth on Exhibit A, otherwise provided by Employer
policy applicable to its employees generally or otherwise required by applicable
law, terminate on the date of termination.

5.7 Effect of Termination. Except as expressly provided in this Section 5 and
except for the obligations set forth in Section 6 and Section 7, all further
obligations of the Parties under this Agreement will terminate upon termination
of Employee’s employment with Employer.

6. Restrictive Covenants. Employee hereby acknowledges that, as a result of
Employee’s employment by Employer hereunder, Employee will receive special
insight into the operations of Employer’s and/or Employer’s Affiliates’
businesses and other related matters, and will obtain access to such Persons’
Confidential Information and business and professional contacts. In
consideration of such special and unique opportunities afforded by Employer and
its Affiliates to Employee as a result of Employee’s employment, the Employee
hereby agrees that Employee will not:

6.1 From the Commencement Date until two (2) years after Employer or any of its
Affiliates no longer employs Employee (the date on which such Person no longer
employs Employee is hereinafter referred to as the “Employment Termination
Date”), directly or indirectly, alone or as a partner, joint venturer, officer,
director, member, employee, consultant, agent, independent contractor, or Equity
Interest holder of, or lender to, any Person or business, engage in any business
that is in competition with any business in which Employer or any of its
Affiliates is engaged as of the Employment Termination Date (a “Competitive
Business”), and that is within a 150-mile radius of Midland, Texas or a 100-mile
radius of any other location at which Employer or any of its Affiliates engages
in such business at the time Employee commences to engage in such competitive
activity.

6.2 From the Commencement Date until two (2) years after the Employment
Termination Date, directly or indirectly (a) induce any Person that is a
customer of Employer, any Acquired Entity, or any of their Affiliates to enter
into any Contract with or otherwise patronize any business directly or
indirectly in competition with the Competitive Business conducted by Employer or
any of its Affiliates; (b) canvass, solicit, or accept from any Person who is a
customer of Employer or any of its Affiliates any such Competitive Business; or
(c) request or advise any Person who is a customer, vendor, or lessor of
Employer or any of its Affiliates, to withdraw, curtail, or cancel any such
customer’s, vendor’s, or lessor’s business with Employer or any of its
Affiliates; provided, however, that a general solicitation or advertisement
originating outside of, and not specifically targeted to or reasonably expected
to target, the territory as to which Employee is restricted from engaging in
such competitive business as provided above under this Agreement at such time,
will not be deemed in and of itself to violate the prohibitions of (a) or (b) of
this Section 6.2.
 
6

--------------------------------------------------------------------------------

 
6.3 From the Commencement Date until two (2) years after the Employment
Termination Date, directly or indirectly (i) solicit for employment or other
similar relationship with Employee, any of Employee’s Affiliates or any other
Person, any employee of Employer or any of its Affiliates, or any person who was
an employee of Employer or any of its Affiliates, within the six-month period
immediately preceding such solicitation of employment, other than such person
(a) whose employment was terminated by the applicable Person, or (b) who
independently responded to a general solicitation for employment by Employee or
Employee’s Affiliate; or (ii) induce, or attempt to induce, any employee of
Employer or any of its Affiliates, to terminate such employee’s employment
relationship with such Person.

6.4 Employee will not use for Employee’s personal benefit, disclose,
communicate, divulge to, or use for the direct or indirect benefit of any Person
other than Employer or any of its Affiliates any of such Persons’ Confidential
Information. This Section 6.4 will apply during and after the period when
Employee is an employee of Employer or any of its Affiliates and will be in
addition to (and not a limitation of) any legally applicable protections of
Employer’s interest in Confidential Information, trade secrets and the like.

6.5 Notwithstanding the foregoing, the beneficial ownership of less than 5% of
the equity interests of any person having a class of equity interests actively
traded on a national securities exchange or over-the-counter market will not be
deemed, in and of itself, to breach the prohibitions of this Section 6. Employee
agrees and acknowledges that the restrictions in this Section 6 are reasonable
in scope and duration and are necessary to protect Employer and its Affiliates
after the Commencement Date. If any provision of this Section 6, as applied to
either Party or to any circumstance, is adjudged by a court of competent
jurisdiction or arbitrator not to be enforceable in accordance with its terms,
the same will in no way affect any other circumstance or the enforceability of
the remainder of this Agreement. If any such provision, or any part thereof, is
held not to be enforceable in accordance with its terms because of the duration
of such provision, the area covered thereby, or the scope of the activities
covered, the Parties agree that the court of competent jurisdiction or
arbitrator making such determination will have the power to reduce the duration,
area, and/or scope of activities of such provision, and/or to delete specific
words or phrases, and in its reduced form such provision will then be
enforceable in accordance with its terms and will be enforced. The Parties agree
and acknowledge that the Breach of any provision of this Section 6 will cause
irreparable Damage to Employer and its Affiliates and upon Breach of any
provision of this Section 6, Employer and its Affiliates will be entitled to
injunctive relief, specific performance, or other equitable relief without bond
or other security; provided, however, that the foregoing remedies will in no way
limit any other remedies that Employer or its Affiliates may have. Further,
Employee agrees to the jurisdiction of any state or federal court sitting in
Midland, Texas for the enforcement of this Section 6. Employer may, without
notifying Employee, notify any subsequent employer of Employee of Employee’s
rights and obligations under this Section 6.
 
7

--------------------------------------------------------------------------------

 
7. Conflicts of Interest.

7.1 Employee represents to Employer as follows: (a) there are no restrictions,
agreements, or understandings, oral or written, to which Employee is a party or
by which Employee is bound that prevent or make unlawful Employee’s execution or
performance of this Agreement, and (b) Employee does not have any business or
other relationship that create a conflict between the interests of Employee and
Employer.

7.2 Employee recognizes and agrees that Employee owes Employer and its
Affiliates a fiduciary duty of loyalty, fidelity, and allegiance to act at all
times in the best interests of Employer and its Affiliates and to do no act
which might injure the business, interests, or reputation of Employer or any of
its Affiliates. Employee’s duty of loyalty will extend throughout the Employment
Term and will continue following termination of this Agreement to the extent
recognized by Law. Employee will not knowingly become involved in a conflict
between his personal interests and those of Employer or any of its Affiliates,
and, upon discovery thereof, will not willfully allow such conflict of interest
to continue. Employee agrees to disclose in writing to Employer any facts that
could reasonably be expected to involve a material conflict of interest upon
Employee’s conscious awareness that such a material conflict could exist.
Employee recognizes that it is impossible to provide an exhaustive list of
actions or activities that constitute or might constitute a conflict of
interest, but recognizes that these actions or activities may include the
following:

(a) ownership of more than a 1% interest in any supplier, contractor, customer,
or other person that does business with Employer or any of its affiliates;

(b) acting in any capacity, including as a director, officer, employee, partner,
consultant, or agent, for any supplier, contractor, customer, or other person
that does business with Employer or any of its affiliates;

(c) acceptance, directly or indirectly, of payments, services, or loans (other
than entertainment, gifts, or other sales incentives that may be furnished in
the ordinary course of business) from a supplier, contractor, customer, or other
person that does business with Employer or any of its affiliates;

(d) misuse or disclosure of information of any kind obtained through Employee’s
relationship with Employer; and

(e) appropriation by Employee or diversion to any other person, directly or
indirectly, of any business opportunity in which it is known or could reasonably
be anticipated that Employer or its affiliates would be interested.

In further recognition of the fiduciary duties Employee owes to Employer and its
Affiliates, Employee agrees that all documentation that Employee provides to
Employer will be accurate in all material respects, when taken as a whole and in
light of the circumstances in which it was made.
 
8

--------------------------------------------------------------------------------

 
8. Indemnification; Insurance.

8.1 Insurance Provided by Employer. Employer shall maintain a directors and
officers liability insurance policy covering all directors and officers of
Employer, including Employee, which insurance policy shall provide adequate
insurance coverage (including defense costs) for each of such persons, as shall
be approved by the Board; in no event, however, shall such coverage amount be
less than $15,000,000 in the aggregate.

8.2 Indemnification of Employee. To the extent not covered by directors and
officers liability insurance coverage as required in Section 8.1 hereof, in the
event Employee is made a party to any threatened, pending, or contemplated
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative (other than an action by Employer against Employee), by reason of
the fact that Employee is or was performing services under this Agreement, or is
alleged to have been performing services under this Agreement, then Employer
shall indemnify, defend and hold harmless Employee against all expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement,
as actually and reasonably incurred by Employee in connection therewith. In the
event that both Employee and Employer are made a party to the same third party
action, complaint, suit, or proceeding, the Employer will engage competent legal
representation, and Employee will use the same representation, provided that if
counsel selected by the Employer shall have a conflict of interest that prevents
such counsel from representing Employee, then the Employer may engage separate
counsel on Employee's behalf, and subject to the provisions of this Section 8,
the Employer will pay all attorneys' fees of such separate counsel.

9. Miscellaneous.

9.1 Entire Agreement. This Agreement and the certificates, documents,
instruments and writings that are delivered pursuant hereto constitutes the
entire agreement and understanding of the Parties in respect of its subject
matters and supersedes all prior understandings, agreements, or representations
by or among the Parties, written or oral, to the extent they relate in any way
to the subject matter hereof or the Transactions. Except as expressly
contemplated hereby and except for Employer’s Affiliates, each of which will be
deemed a third party beneficiary of all obligations of Employee under this
Agreement, there are no third party beneficiaries having rights under or with
respect to this Agreement.

9.2 Successors. All of the terms, agreements, covenants, representations,
warranties, and conditions of this Agreement are binding upon, and inure to the
benefit of and are enforceable by, the Parties and their respective successors.

9.3 Assignment. No Party may assign either this Agreement or any of its rights,
interests, or obligations hereunder without the prior written approval of
Employer and Employee; provided, however, that Employer may (a) assign any or
all of its rights and interests hereunder to one or more of its Affiliates and
(b) designate one or more of its Affiliates to perform its obligations hereunder
(in any or all of which cases Employer nonetheless will remain responsible for
the performance of all of its obligations hereunder).
 
9

--------------------------------------------------------------------------------

 
9.4 Notices. All notices, requests, demands, claims and other communications
hereunder will be in writing. Any notice, request, demand, claim or other
communication hereunder will be deemed duly given if (and then three business
days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:

If to Employer:

Attn: Bobby Page, Corporate Secretary
405 N. Marienfeld, Third Floor
Midland, Texas 79701
Tel: (432) 571-8000
Fax: (432) 571-8099

with a copy (which shall not constitute notice):

Akin Gump Strauss Hauer & Feld LLP
Attn: Will Liebmann
300 Convent Street, Suite 1500
San Antonio, Texas 78205
Tel: (210) 281-7000
Fax: (210) 224-2035

If to Employee:

Charles McArthur
__________________________
Tel: ______________________
Fax: ______________________

Either Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication will be deemed to have been duly
given unless and until it actually is received by the intended recipient. Either
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.

9.5 Specific Performance. Each Party acknowledges and agrees that the other
Parties would be damaged irreparably if any provision of this Agreement is not
performed in accordance with its specific terms or is otherwise Breached.
Accordingly, each Party agrees that the other Party will be entitled to an
injunction or injunctions to prevent Breaches of the provisions of this
Agreement and to enforce specifically this Agreement and its terms and
provisions in any Action instituted in any state or federal court sitting in
Midland, Texas, in addition to any other remedy to which they may be entitled at
Law or in equity.
 
10

--------------------------------------------------------------------------------

 
9.6 Submission to Jurisdiction; No Jury Trial. 

(a) Submission to Jurisdiction. Each Party submits to the jurisdiction of any
state or federal court sitting in Midland, Texas in any Action arising out of or
relating to this Agreement and agrees that all claims in respect of the Action
may be heard and determined in any such court. Each Party also agrees not to
bring any Action arising out of or relating to this Agreement in any other
court. Each Party agrees that a final judgment in any Action so brought will be
conclusive and may be enforced by Action on the judgment or in any other manner
provided at Law or in equity. Each Party waives any defense of inconvenient
forum to the maintenance of any Action so brought and waives any bond, surety,
or other security that might be required of any other Party with respect
thereto.

(b) Waiver of Jury Trial. THE PARTIES EACH HEREBY AGREE TO WAIVE THEIR
RESPECTIVE RIGHTS TO JURY TRIAL OF ANY DISPUTE BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY OTHER AGREEMENTS RELATING HERETO OR ANY DEALINGS BETWEEN THEM
RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. The scope of this waiver is
intended to be all encompassing of any and all Actions that may be filed in any
court and that relate to the subject matter of the transactions contemplated
hereby, including Contract claims, tort claims, breach of duty claims, and all
other common Law and statutory claims. The Parties each acknowledge that this
waiver is a material inducement to enter into a business relationship and that
they will continue to rely on the waiver in their related future dealings. Each
Party further represents and warrants that it has reviewed this waiver with its
legal counsel, and that each knowingly and voluntarily waives its jury trial
rights following consultation with legal counsel. NOTWITHSTANDING ANYTHING TO
THE CONTRARY HEREIN, THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE
MODIFIED ORALLY OR IN WRITING, AND THE WAIVER WILL APPLY TO ANY AMENDMENTS,
RENEWALS, SUPPLEMENTS, OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING HERETO. In the event of an Action, this
Agreement may be filed as a written consent to trial by a court.

9.7 Time. Time is of the essence in the performance of this Agreement.

9.8 Counterparts. This Agreement may be executed in two or more counterparts,
each of which will be deemed an original but all of which together will
constitute one and the same instrument.

9.9 Headings. The article and section headings contained in this Agreement are
inserted for convenience only and will not affect in any way the meaning or
interpretation of this Agreement.

9.10 Governing Law. This Agreement and the performance of the Parties’
obligations hereunder will be governed by and construed in accordance with the
laws of the State of Texas, without giving effect to any choice of Law
principles.
 
11

--------------------------------------------------------------------------------

 
9.11 Amendments and Waivers. No amendment, modification, replacement,
termination, or cancellation of any provision of this Agreement will be valid,
unless the same will be in writing and signed by the Parties. No waiver by any
Party of any default, misrepresentation, or Breach of warranty or covenant
hereunder, whether intentional or not, may be deemed to extend to any prior or
subsequent default, misrepresentation, or Breach of warranty or covenant
hereunder or affect in any way any rights arising because of any prior or
subsequent such occurrence.

9.12 Severability. The provisions of this Agreement will be deemed severable and
the invalidity or unenforceability of any provision will not affect the validity
or enforceability of the other provisions hereof; provided that if any provision
of this Agreement, as applied to any Party or to any circumstance, is adjudged
by a court of competent jurisdiction or arbitrator not to be enforceable in
accordance with its terms, the Parties agree that the court of competent
jurisdiction or arbitrator making such determination will have the power to
modify the provision in a manner consistent with its objectives such that it is
enforceable, and/or to delete specific words or phrases, and in its reduced
form, such provision will then be enforceable and will be enforced.

9.13 Expenses. Except as otherwise expressly provided in this Agreement, each
Party will bear its own costs and expenses incurred in connection with the
preparation, execution and performance of this Agreement and the Transactions
including all fees and expenses of agents, representatives, financial advisors,
legal counsel and accountants.

9.14 Construction. The Parties have participated jointly in the negotiation and
drafting of this Agreement. If an ambiguity or question of intent or
interpretation arises, this Agreement will be construed as if drafted jointly by
the Parties and no presumption or burden of proof will arise favoring or
disfavoring any Party because of the authorship of any provision of this
Agreement. Any reference to any federal, state, local, or foreign Law will be
deemed also to refer to Law as amended and all rules and regulations promulgated
thereunder, unless the context requires otherwise. The words “include,”
“includes,” and “including” will be deemed to be followed by “without
limitation.” Pronouns in masculine, feminine, and neuter genders will be
construed to include any other gender, and words in the singular form will be
construed to include the plural and vice versa, unless the context otherwise
requires. The words “this Agreement,” “herein,” “hereof,” “hereby,” “hereunder,”
and words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. The Parties intend that each
representation, warranty, and covenant contained herein will have independent
significance. If any Party has breached any representation, warranty, or
covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached will not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty, or covenant.

9.15 Incorporation of Exhibits. The Exhibits identified in this Agreement are
incorporated herein by reference and made a part hereof.

9.16 Remedies. Except as expressly provided herein, the rights, obligations and
remedies created by this Agreement are cumulative and in addition to any other
rights, obligations, or remedies otherwise available at Law or in equity. Except
as expressly provided herein, nothing herein will be considered an election of
remedies.
 
12

--------------------------------------------------------------------------------

 
9.17 Electronic Signatures.

(a) Notwithstanding the Electronic Signatures in Global and National Commerce
Act (15 U.S.C. Sec. 7001 et. seq.), the Uniform Electronic Transactions Act, or
any other Law relating to or enabling the creation, execution, delivery, or
recordation of any Contract or signature by electronic means, and
notwithstanding any course of conduct engaged in by the Parties, no Party will
be deemed to have executed this Agreement or other document contemplated thereby
(including any amendment or other change thereto) unless and until such Party
shall have executed this Agreement or other document on paper by a handwritten
original signature or any other symbol executed or adopted by a Party with
current intention to authenticate this Agreement or such other document
contemplated.

(b) Delivery of a copy of this Agreement or such other document bearing an
original signature by facsimile transmission (whether directly from one
facsimile device to another by means of a dial-up connection or whether mediated
by the worldwide web), by electronic mail in “portable document format” (“.pdf”)
form, or by any other electronic means intended to preserve the original graphic
and pictorial appearance of a document, will have the same effect as physical
delivery of the paper document bearing the original signature. “Originally
signed” or “original signature” means or refers to a signature that has not been
mechanically or electronically reproduced.

IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date first above written.

 
EMPLOYER:
         
 
UNITED FUEL & ENERGY CORPORATION
                 
 
By:
/s/ Thomas E. Kelly
 
 
Name: 
Thomas E. Kelly
 
 
Title:
Chairman
                 
 
EMPLOYEE:
                 
 
/s/ Charles McArthur
 
 
CHARLES McARTHUR
 

 
13

--------------------------------------------------------------------------------

EXHIBIT A

Description of Benefits
 
Four weeks’ paid vacation per annum.

Car allowance of $1,000 per month.

14

--------------------------------------------------------------------------------