Execution Copy
 
EXHIBIT 10.9
 
COAL MINING LEASE AND SUBLEASE
(LEE RANCH RESERVES)
 
Between
 
FIELDCREST RESOURCES LLC
 
And
 
GALLO FINANCE COMPANY
 
Dated December 19, 2002
 

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COAL MINING LEASE AND SUBLEASE
 

 
ARTICLE 1
 
TERM OF LEASE
 
Section 1.1     Term
  
3
 
ARTICLE 2
 
MINING OPERATIONS
 
Section 2.1    Mining Operations
  
3
 
ARTICLE 3
 
ROYALTIES
 
Section 3.1    Minimum Rental Payments
  
4
Section 3.2    Production Royalty Payments
  
5
 
ARTICLE 4
 
DEFAULT
 
Section 4.1    Events of Default
  
7
Section 4.2    Remedies
  
8
Section 4.3    Arbitration
  
11
 
ARTICLE 5
 
INDEMNIFICATION
 
Section 5.1    Indemnification of Lessor
  
12
 
ARTICLE 6
 
TAXES AND INSURANCE
 
Section 6.1    Payment of Taxes
  
13
Section 6.2    Insurance
  
14

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ARTICLE 7
 
INSPECTION AND MINE PLANS
 
Section 7.1      Lessor’s Right to Inspect
  
16
Section 7.2      Mine Plans
  
16
      
ARTICLE 8
 
GENERAL
 
Section 8.1      Remedies Cumulative
  
17
Section 8.2      Notices
  
17
Section 8.3      Binding Effect of Lease
  
18
Section 8.4      Entire Agreement
  
18
Section 8.5      Governing Law and Section Headings
  
18
Section 8.6      Memorandum of Lease
  
18
Section 8.7      Relationship Between the Parties
  
18
Section 8.8      Separability of Provisions
  
19
Section 8.9      Force Majeure
  
19
Section 8.10    State Lease and Other Burdens
  
20
Section 8.11    Reconveyance
  
20

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COAL MINING LEASE AND SUBLEASE
 
THIS COAL MINING LEASE AND SUBLEASE (“Lease”) is made and entered into as of the
19th day of December, 2002, by and between Fieldcrest Resources LLC, a Delaware
limited liability company, having its principal offices at 2550 East Stone
Drive, Suite 200, Kingsport, TN 37660 (the “Lessor”), and Gallo Finance Company,
a Delaware corporation, having its principal offices at 701 Market Street, Suite
713, St. Louis, Missouri 63101 (the “Lessee”).
 
WITNESSETH:
 
WHEREAS, Lessor owns the fee interest in all seams of coal in the Cleary Member
of the Genesee Formation in certain tracts of land in McKinley County, New
Mexico as more fully described in Exhibit A attached hereto and made a part
hereof (the “Fee Coal Reserves”); and
 
WHEREAS, Lessor owns a leasehold interest in certain coal reserves in the Cleary
Member of the Genesee Formation in certain tracts of land in McKinley County,
New Mexico pursuant to those two certain New Mexico State Land Office Coal
Mining Leases, dated September 22, 1989 and November 14, 1989, respectively,
between the State of New Mexico and Lessor (as assignee of Cerrillos Land
Company) (together, the “State Leases”) which reserves are more fully described
in Exhibit B hereto (the “Leased Coal Reserves” and, together with the Fee Coal
Reserves, the “Coal Reserves”); and
 
WHEREAS, Lessee owns certain rights to use the surface over certain lands (the
“Surface Lands”) located in McKinley County, New Mexico, which lands include,
but are not limited to, the lands in which the Coal Reserves are located; and
 
WHEREAS, such rights were granted to Lessee pursuant to that certain Assignment
and Assumption Agreement dated June 25, 1993 (the “1993 Assignment”) between
Lessee and Santa Fe Pacific Mineral Corporation (“SFPM”) under which SFPM
assigned to Lessee an undivided non-exclusive interest in SFPM’s non-exclusive
easement granted to SFPM under that certain Agreement dated July 31, 1979, as
 

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amended by Amendment to Agreement dated December 17, 1982 and Second Amendment
to Agreement dated March 2, 1987 by and between Santa Fe Pacific Mineral
Corporation (successor to Cerrillos Land Company, as successor to Santa Fe
Pacific Railroad Company) and the Fernandez Company (the “Surface Agreement”);
and
 
WHEREAS, Peabody Natural Resources Company (“PNRC”) has assigned, conveyed and
transferred to Lessor an undivided, non-exclusive interest of Lessee’s rights
under the 1993 Assignment pursuant to a Partial Assignment and Assumption dated
the date hereof between Lessee and Lessor (the “2002 Assignment”); and
 
WHEREAS, Lessee desires to lease the Fee Coal Reserves and sublease the Leased
Coal Reserves from Lessor for the purpose of mining such coal reserves by the
surface, highwall and auger mining methods;
 
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
hereinafter contained, the parties hereto agree as follows:
 
Subject to the terms hereof, Lessor does hereby lease to Lessee the Fee Coal
Reserves, sublease unto Lessee the Leased Coal Reserves and assign and transfer
to Lessee all of Lessor’s right, title and interest under the 2002 Assignment
for the purpose of mining the Coal Reserves by the surface, highwall and auger
mining methods. Lessor also grants to Lessee all such mining rights held by
Lessor with respect to the Coal Reserves.
 
NOTWITHSTANDING ANY PROVISION IN THIS LEASE OR ANY AGREEMENT REFERRED TO HEREIN
OR ATTACHED HERETO, LESSOR MAKES NO WARRANTY, EXPRESS OR IMPLIED, WHETHER OF
MERCHANTABILITY, QUALITY, QUANTITY, RECOVERABILITY, TITLE OR OTHERWISE AS TO THE
COAL RESERVES OR LESSOR’S INTERESTS THEREIN OR MINING RIGHTS OWNED BY LESSOR, OR
AS TO THE CONDITION OF THE COAL RESERVES AND LESSEE SHALL RELY UPON ITS OWN
EXAMINATION THEREOF THROUGH
 

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ENGINEERS AND OTHER REPRESENTATIVES SELECTED AND EMPLOYED SOLELY BY LESSEE.
 
Lessee’s rights hereunder are subject, however, to all rights existing as of the
date hereof, including, but not limited to, coalbed methane rights, oil and
natural gas lease rights, public roads, public drainage ditches, easements for
power lines, pipelines, railroads and rights-of-way, telephone lines, buried
cables and all other easements.
 
TO HAVE AND TO HOLD the same unto the Lessee, its successors and assigns, for
and during the term herein set forth and upon the following terms and
conditions:
 
ARTICLE 1
 
TERM OF LEASE
 
Section 1.1 Term. The term of this Lease shall commence on the date hereof and
terminate on the earlier of (a) the date on which all of the “mineable” and
“merchantable” coal shall have been removed from the Coal Reserves or (b) the
Purchase Date (as defined in Section 9.1(a) of the Purchase and Sale Agreement
dated the date hereof (the “Purchase Agreement”) among Penn Virginia Resource
Partners, L.P., Peabody Energy Corporation (“Peabody”), PNRC and Eastern
Associated Coal Corp. For purposes of this Lease, the term “mineable coal” shall
mean coal which can be mined by the use of modern, practical and efficient
machinery, facilities and methods. The term “merchantable” coal shall mean coal
that is generally mineable at a profit to Lessee.
 
ARTICLE 2
 
MINING OPERATIONS
 
Section 2.1 Mining Operations. Lessee shall promptly upon execution of this
Lease begin and diligently continue to mine and remove the mineable and
merchantable Coal Reserves, subject only to Force Majeure (as defined in Section
8.9 hereof), in a skillful and professional manner in accordance with
commercially modern mining practices having due regard for the value of the Coal
Reserves so as to avoid
 

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damage and waste of the Coal Reserves. Lessee shall conduct its mining
operations and any other activities conducted by Lessee with respect to the Coal
Reserves, including but not limited to permitting, reclamation and bonding
obligations, in accordance with, and shall comply with, all federal, state and
local laws and the lawful rules, regulations and orders of any governmental
authority (collectively, “Laws and Regulations”) in respect of such mining
operations and other activities. Lessee shall have the obligation, at the cost
and expense of Lessee, to do and perform, with respect to the Coal Reserves,
whatever may be required by all Laws and Regulations (including, without
limitation, Environmental Laws (as defined in the Purchase Agreement)) to be
performed by Lessee, or may be deemed by Lessee to be so required or to be
advisable.
 
ARTICLE 3
 
ROYALTIES
 
Section 3.1 Minimum Rental Payments. Lessee will pay to Lessor a recoupable
monthly minimum rental payment (the “Minimum Rental Payment”) in the amount of
$166,666.67 commencing on the 25th day of the month immediately following the
month during which this Lease was executed and delivered and continuing each
month thereafter (it being acknowledged that the first Minimum Rental Payment
shall be that amount equal to (x) $166,666.67 times (y) a fraction the numerator
of which is the number of days remaining in the month during which this Lease is
executed and the denominator of which is 31) until the earlier to occur of (i)
the twelve-year anniversary of the date hereof, (ii) the date on which Lessee
has paid to Lessor Production Royalty Payments (as defined in Section 3.2
hereof) with respect to 80 million tons of Coal Reserves, or (iii) the date on
which the remaining Coal Reserves are insufficient to allow for recoupment of
the Minimum Rental Payments which have been paid but not recouped (the “Minimum
Period”); provided, however, that in the event that the remaining Coal Reserves
(whether or not mineable and/or merchantable) are in an amount insufficient to
allow for recoupment of the full Minimum Rental Payment, then the Minimum Rental
Payment for the applicable month shall be prorated in proportion to the ratio of
tons of Coal Reserves remaining (whether or not mineable and/or
 

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merchantable) to the tons necessary for recoupment of the full Minimum Rental
Payment. All Minimum Rental Payments shall be paid on the 25th day of each
calendar month during the Minimum Period and shall be recouped against
Production Royalty Payments as set forth in Section 3.2. Lessee’s obligation to
pay Minimum Rental Payments during the Minimum Period shall be absolute and
shall not be subject to Force Majeure or any other contingency or event.
 
Section 3.2 Production Royalty Payments.
 
(a) Payment for Coal Mined. For all coal mined from the Coal Reserves by Lessee
hereunder and sold by Lessee, Lessee shall pay to Lessor a royalty (a
“Production Royalty Payment”) in a fixed amount per ton of coal sold by Lessee
as follows:
 
Time Coal Sold
    
Production Royalty Rate
Commencement of Lease – December 31, 2003
    
$1.50
January 1, 2004 – December 31, 2004
    
$1.60
January 1, 2005 – December 31, 2005
    
$1.74
January 1, 2006 – December 31, 2006
    
$1.88
January 1, 2007 – December 31, 2007
    
$2.00
January 1, 2008 – December 31, 2008
    
$2.06
January 1, 2009 – December 31, 2009
    
$2.12
January 1, 2010 – December 31, 2010
    
$2.19
January 1, 2011 – December 31, 2011
    
$2.26
January 1, 2012 – December 31, 2012
    
$2.33
January 1, 2013 – December 31, 2013
    
$2.41
January 1, 2014 and thereafter
    
$2.48

 
In the event that the Production Royalty Payment in any month is less than the
Minimum Rental Payment, the excess of the Minimum Rental Payment over the
Production Royalty Payment (“Recoupable Royalty”) shall be recoupable as
provided below. In the event that the Production Royalty Payment in any month
equals or exceeds the Minimum Rental Payment, no Minimum Rental Payment shall be
due. In
 

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the event that the Production Royalty Payment in any month exceeds the Minimum
Rental Payment and there exists a balance in the Cumulative Recoupable Royalty
(defined below), the Production Royalty Payment for such month shall be reduced
by all or a portion of the Cumulative Recoupable Royalty. The resultant
Production Royalty Payment for such month shall not be reduced to an amount less
than the Minimum Rental Payment for such month. The reduction shall be referred
to as the “Reduction Amount.” The “Cumulative Recoupable Royalty” for any month
shall be the aggregate total of the Recoupable Royalty for all months preceding
the current month less any Reduction Amount used to reduce the Production
Royalty Payment for any months preceding the current month.
 
(b) Lessee to Keep Records. Lessee shall keep accurate records of truck scale
weights and/or railroad car weights, whichever is or are applicable, which shall
be taken as the basis for payment of Production Royalty Payments. Lessee shall
keep a true and correct record of all coal mined, removed and sold from the Coal
Reserves. Lessee shall keep a true and correct record of the produced but unsold
inventory of coal mined from the Coal Reserves at the end of each calendar year
and shall deliver a copy of such record to Lessor by February 1st of each year
during the term hereof. In accordance with the provisions contained in Section
7.1, Lessee shall permit Lessor or its agents, at all reasonable times, to
inspect the records, and perform other practical and reasonable investigations
to check the accuracy of the weighing records of Lessee. Lessor, through its
agents, may enter upon the Coal Reserves at any time for the purpose of
verifying the quantity of coal removed therefrom.
 
(c) Time and Place of Payment of Production Royalty Payments. All Production
Royalty Payments shall be paid by Lessee to Lessor on or before the 25th day of
each calendar month on all coal sold by Lessee from the Coal Reserves during the
preceding calendar month (or any part thereof) during the term hereof. All
Production Royalty Payments shall be paid in immediately available funds by wire
transfer to such account as Lessor may designate from time to time in writing.
Contemporaneously with each payment of Production Royalty Payments made
hereunder, Lessee shall deliver to Lessor a statement from Lessee showing the
number
 

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of tons of coal sold from the Coal Reserves by Lessee during the preceding
calendar month for which such Production Royalty Payment relates, and the
computation of royalties payable on such coal so sold during such calendar
month, offset by Minimum Rental Payments made pursuant to Section 3.1 and
recoupable in accordance with Section 3.2. Any late payment of Production
Royalty Payments shall bear interest at the rate of 8% compounded annually.
 
ARTICLE 4
 
DEFAULT
 
Section 4.1 Events of Default. Upon the occurrence of any of the following
events (an “event of default”), Lessor shall have the remedies provided in
Section 4.2:
 
(a) Lessee shall fail to pay any Minimum Rental Payment or Production Royalty
Payment after the same is due hereunder and such failure shall continue for two
business days after Lessor has given notice to Lessee; or
 
(b) Lessee shall fail for a period of 30 days after written demand therefor to
pay any sums due for Taxes as provided herein; or
 
(c) Lessee shall abandon the mineable Coal Reserves; or
 
(d) Lessee or any of its successors or assigns, shall, pursuant to Title 11,
United States Code, as amended, or any similar Federal or state law for the
relief of creditors (“Bankruptcy Law”), (i) commence a voluntary case; (ii)
consent to the entry of an order for relief against it or any of its
Subsidiaries (as defined in the Purchase Agreement) in an involuntary case in
which it is the debtor; (iii) consent to the appointment of a receiver; trustee,
assignee, liquidator, custodian or similar official under any Bankruptcy Law; or
(iv) make a general assignment for the benefit of its creditors; or
 
(e) Lessee shall fail to keep and perform any of the other terms, conditions,
covenants and agreements of this Lease to be kept and performed; and any such
failure shall continue for more than 30 days following written notice thereof
from

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Lessor to Lessee; provided, however, that if such failure under this Section
4.1(e) cannot be cured within such 30-day period, Lessee shall have such
additional reasonable time to cure such failure if Lessee has commenced such
cure during such 30-day period and continues to diligently attempt to cure such
failure.
 
Section 4.2 Remedies.
 
(a) Termination of Lease. Upon the occurrence of an event of default, all rights
of Lessee hereunder to mine, process and ship coal as provided herein shall, at
the option of the Lessor (except for an event specified in Section 4.1(d)
hereof, which event shall cause a forfeiture and termination ipso facto), become
forfeited and cease and determine (the date of such forfeiture and cessation to
be referred to herein as the “Date of Termination”), and Lessor shall have the
right, without notice or demand (except as required by Section 4.2(b)), and
without legal action or notice or process required by any Laws and Regulations,
to reenter and reclaim the Coal Reserves and to exclude Lessee therefrom and to
hold the Coal Reserves free of any claims of Lessee; provided, however, that
Lessor shall not have the right to reenter and reclaim the Coal Reserves if
Lessee has paid to Lessor the Breach Sale Price (as defined in Section 4.2(b));
provided further, however, that (i) Lessee shall fully comply with, perform and
complete all of its reclamation, environmental and other obligations hereunder
until such time, if any, as such obligations are assumed by a third party, (ii)
the termination of this Lease in any manner or for any cause whatever shall not
relieve Lessee of its obligation for any payment of any sum which may have
accrued hereunder at or prior to the Date of Termination, it being acknowledged
that certain of such accrued obligations may be payable under Section 4.2(b)(i)
as part of the Breach Sale Price and (iii) in the event Lessor shall assume this
Lease pursuant to Section 365 of Title 11 of the United States Code (the
“Bankruptcy Code”), then Lessee as debtor-in-possession, or any trustee,
receiver or liquidator appointed for Lessee’s benefit shall provide adequate
assurance of performance of the terms of this Lease and shall satisfy all other
Bankruptcy Code requirements for the assumption of this Lease; and if the
trustee does not cure all events of default then existing and provide such
adequate assurances under the Bankruptcy Code within the applicable time periods
provided by the Bankruptcy Code,
 

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then Lessee hereby agrees that cause exists under 11 U.S.C. §362(d) for granting
relief from the bankruptcy automatic stay, or Lessor may determine in its sole
discretion that the Lease shall be deemed rejected and Lessor shall have the
right to immediate possession of the Coal Reserves and shall be entitled to all
remedies provided by the Bankruptcy Code for damages for breach and/or
termination of this Lease. The remedy of termination in the event of default by
Lessee as above authorized shall not be deemed or interpreted as the exclusive
remedy available to Lessor, and Lessor shall have the remedy of damages and may
require and enforce performance by Lessee of each and every term and provision
of this Lease incumbent upon the Lessee to be kept and performed, utilizing any
available remedy therefore unless Lessee shall have paid to Lessor the Breach
Sale Price in which case Lessor shall not have any further remedies available
for a breach and/or termination of this Lease other than damages incurred in
connection with Lessee’s failure to fully comply with its obligations described
in Section 4.2(a)(ii).
 
(b) Mandatory Sale for Breach. Upon and after the Date of Termination, Lessor
shall have the following rights:
 
(i) Mandatory Sale for Breach. Lessor shall first notify (the “Breach Sale
Notice”) Lessee in writing that Lessor desires to sell, assign and transfer the
then-remaining Coal Reserves to Lessee on account of such event of default,
which notice shall include the purchase price (the “Breach Sale Price”) payable
for such remaining Coal Reserves which shall be computed as follows: the Breach
Sale Price shall be the amount equal to (x) the difference between (i) 80
million tons (less any tons of Coal Reserves attributable to State Leases which
are not transferred to Lessor) and (ii) that number of tons of Coal Reserves
with respect to which Lessor had received (A) Production Royalty Payments and
(B) Cumulative Recoupable Royalty Payments which are then outstanding prior to
the Date of Termination times (y) the Production Royalty rate in effect on the
Date of Termination. The Breach Sale Price shall be payable by not later than
three business days after the date of the Breach Sale (the “Due Date”) and, upon
receipt of the Breach Sale Price, Lessor shall convey to Lessee or one of its
 

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affiliates by special warranty deed all of its interest in the Fee Coal Reserves
and by assignment all of its interest in the Leased Reserves, the 2002
Assignment and the other coal rights leased hereunder.
 
(ii) Access Rights; Purchase of Property. If Lessee has not paid to Lessor the
Breach Sale Price by the Due Date, then, promptly upon written demand (the
“Demand Notice”) by Lessor, (A) the Breach Access Rights (as defined in the 2002
Assignment) shall become operative as described in the 2002 Assignment and (B)
Lessee shall, at the option of Lessor, either (I) sell, assign and transfer to
Lessee or its designee, at the Fair Market Value Price (as hereinafter defined)
(subject to Lessee’s obtaining any applicable mortgage and/or UCC-3 releases
securing the Assets (as defined below) at such time), or (II) lease to Lessor or
its designee pursuant to a lease agreement customary in the industry to be
entered into, at the Fair Market Rental (as defined below), all assets owned by
Lessee and related to the mining of the Coal Reserves, including, but not
limited to, all mining infrastructure, machinery and equipment, the Lee Ranch
rail loadout, silos and other fixtures, applicable computer files, all permits
and permit applications and applicable records relating to the mining of the
Coal Reserves (collectively, the “Assets”); provided that, Lessor or its
designee obtains insurance coverage covering the leased premises on terms
mutually agreeable as between Lessor and Lessee. For purposes of this Section
4.2 (b)(ii)(B), “Fair Market Value Price” shall mean the price agreed upon
between Lessor and Lessee; provided, however, that if Lessor and Lessee are
unable to agree upon the Fair Market Value Price within five business days after
the date of the Demand Notice (the “Negotiation Period”), then Lessor and Lessee
shall each appoint an Eligible Mining Consultant (as hereinafter defined) of its
choice within five days after the Negotiation Period. The two Eligible Mining
Consultants appointed by the respective parties shall appoint a third Eligible
Mining Consultant not later than five business days after such two Eligible
Mining Consultants have been so appointed. Within 15 business days from the
appointment of the third Eligible Mining Consultant, each Eligible Mining
Consultant appointed as aforesaid shall provide Lessor and Lessee with a written
 

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valuation, with appropriate documentation, setting forth its valuation of the
Fair Market Value Price in U.S. dollars, of the Assets. The Fair Market Value
Price shall be the average of the three valuations; provided, however, that for
purposes of calculating the average, the highest valuation shall in no event be
deemed to be more than 10% above the second highest valuation and the lowest
valuation shall in no event be deemed to be more than 10% below the second
highest evaluation. The determination of the Fair Market Value Price pursuant to
this Section 4.2(b)(ii)(B) shall be final and binding on Lessor and Lessee and
shall not be appealable. For purposes of this Section 4.2(b)(ii)(B), “Fair
Market Rental” shall have a correlative meaning to Fair Market Value Price,
shall be calculated pursuant to an analogous procedure, and the determination
thereof shall similarly be final and binding on Lessor and Lessee and shall not
be appealable. Each of Lessor and Lessee shall be responsible for the costs and
expenses of its Eligible Mining Consultant appointee, and the costs of the third
Eligible Mining Consultant shall be shared equally by them. For the purposes of
this Agreement, “Eligible Mining Consultant” shall mean any of Marshall Miller
and Associates, Inc., John T. Boyd, NorWest Mine Services, Inc., Marston &
Marston, or Weir International and their respective successors and assigns.
 
(c) Mine Maintenance. Lessor and Lessee acknowledge that, after the Date of
Termination, it will be necessary to maintain the Lee Ranch mine in which the
Coal Reserves are located and from which the Coal Reserves are or may be
produced. If Lessee has not paid the Breach Sale Price to Lessor, Lessee agrees
that it will be responsible, at its sole cost and expense, to maintain such mine
in a commercially reasonable manner at all times during the period commencing on
the Date of Termination and ending on the four-month anniversary thereof.
 
Section 4.3 Arbitration. Any disagreement between Lessor and Lessee arising
hereunder shall be submitted to binding arbitration in accordance with the rules
of the American Arbitration Association then in effect. A panel of three
arbitrators knowledgeable with the coal industry shall be named, one to be
selected by Lessee, one to be selected by Lessor, and within 15 days those two
arbitrators shall name a
 

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third arbitrator. Each party shall name their representative arbitrator within
15 days of receipt of notice from the other party requesting arbitration. If the
two representative arbitrators are unable to agree on the selection of a third
arbitrator within 15 days, then the American Arbitration Association shall
designate a disinterested person to act as such third arbitrator. If either of
the parties should, for a period of 15 days after receipt of the notice referred
to above, fail to select and make known in writing to the other party the
arbitrator selected by it, the one party-selected arbitrator and an arbitrator
selected by the American Arbitrator Association shall constitute the Board.
Either party may at any time serve upon the other a notice setting forth the
point or points upon which the decision of the Board of Arbitration is desired
and the other party may, within ten days thereafter, serve a counter-notice
specifying any additional points or differences arbitrable hereunder upon which
such other party may desire a decision. The Board shall give ten days written
notice of the time and place of hearing to the respective parties, which hearing
shall be held within 15 days after the appointment of the third arbitrator. The
Board shall make its decision and award in writing within 20 days of such
hearing. The decision and award of a majority of the arbitrators shall be final,
conclusive and obligatory upon the said parties to this Lease, their successors
and assigns, and without appeal, and each party hereto agrees to abide by and
comply with every such decision and award. All questions of costs shall in each
case be determined by the Board when it renders its decision and in the interim
each party shall pay one half of the costs of the Board.
 
ARTICLE 5
 
INDEMNIFICATION
 
Section 5.1 Indemnification of Lessor. Lessee does hereby indemnify and hold
Lessor, its parent, subsidiaries and other affiliates and its and their
respective officers, directors, partners, employees, agents, successors and
assigns (collectively, the “Indemnitees”) harmless of, from and against, any and
all claims, damages, demands, expenses, fines and liabilities (of any character
or nature whatsoever, regardless of by whom imposed), and losses of every
conceivable kind, character and nature whatsoever (including, but not limited
to, claims for losses or damages to any
 

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property or injury to or death of any person) asserted by or on behalf of any
person or entity arising out of, resulting from or in any way connected with
Lessee’s presence on the real property in which the Coal Reserves are situated
or mining of the coal from the Coal Reserves. Lessee also covenants and agrees,
at its expense, to pay, and to indemnify and save the Indemnitees harmless of,
from and against, all costs, reasonable attorneys’ fees and expenses incurred by
any Indemnitee in connection with any claim for which any Indemnitee is
indemnified hereunder. The indemnification obligations under this Article 5
shall survive the termination of this Lease.
 
ARTICLE 6
 
TAXES AND INSURANCE
 
Section 6.1 Payment of Taxes. Lessee shall pay, at the times they become due and
payable in accordance with all Laws and Regulations, all taxes (except income
taxes payable by Lessor on account of its receipt of payments due hereunder),
fees, levies, assessments, including, but not limited to, ad valorem, excise,
license, privilege or severance taxes, and any other charges due with respect
to: (a) the fee estate or other interests of Lessor in the Coal Reserves; (b)
Lessee’s interest in this Lease; (c) the leasehold estate hereby created; (d)
all coal mined and produced from the Coal Reserves by Lessee and the products
thereof; (e) any buildings, structures, improvements, equipment or other
personal property of any kind owned or used by Lessee in connection with the
Coal Reserves; and (f) the exercise of any right or privileges in connection
with Lessee’s operations hereunder (collectively “Taxes”); so that Lessor shall
be entirely relieved from such charges. Lessee shall forward evidence of the
payment of real estate taxes to Lessor promptly after such payment is made, and
Lessee shall permit Lessor and its agents at all reasonable times to inspect the
records evidencing payments of all other Taxes.
 
If Lessor makes any payment, either voluntarily or as required by law, on
account of any Taxes, then the amount thereof shall be repaid by Lessee to
Lessor immediately after the date Lessor submits a written statement to Lessee
regarding such payment.

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Section 6.2 Insurance.
 
(a) Types and Amounts of Coverage. Lessee shall obtain and continue in force,
during the term of this Lease from Pacific Employers Insurance Company or other
insurance companies of similar size and reputation (or, in the case of Black
Lung, insurance as described in Section 6.2(a)(v)), the following insurance
coverages (including commercially reasonable deductible amounts):
 
(i) (A) Statutory workers’ compensation insurance or evidence of same through a
state self-insured workers’ compensation privilege or participation in a state
workers’ compensation fund in accordance with requirements of applicable Laws
and Regulations and (B) Employer’s Liability Insurance with limits of $2,000,000
each occurrence.
 
(ii) Comprehensive Automobile Liability insurance covering owned, non-owned and
hired motor vehicles which may be used in any connection with the mining
operations contemplated hereunder with limits of not less than $1,000,000
combined single limits in any one occurrence, for all liability arising out of
injury to or death of one or more persons, and for all liability arising out of
damage to or destruction of property, including loss of use thereof and
downtime.
 
(iii) Property Insurance in amounts equal to the full replacement cost (or the
highest insurable value if coverage for replacement cost is not available)
covering all real and personal property and fixtures located on the real
property in which the Coal Reserves are situated, against loss or damage by
fire, lightning, explosion or other hazards covered under extended coverage
insurance. The proceeds of any loss payable under such policies as above
required shall be used by Lessee in the restoration, repair, or replacement of
the destroyed or damaged property as required for the performance of Lessee’s
obligations under this Lease.
 

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(iv) Comprehensive General Liability insurance, including Contractual Liability,
Pollution Liability, Owners and Contractors Protective Liability, Broad Form
Property Damage Liability and Explosion and Collapse Hazards coverages with
Bodily Injury limits of $2,000,000 each person and $2,000,000 each occurrence.
 
(v) State and Federal Black Lung Insurance, as required, and/or evidence of same
through a state self-insured privilege and/or participation in a state fund in
accordance with requirements of applicable Laws and Regulations, including any
liability arising out of the Federal Coal Mine Health and Safety Act of 1969, as
shall be amended from time to time, and/or any substitute, replacement, or
supplement thereto.
 
(b) Other Requirements. All policies and endorsements providing the insurance
required shall:
 
(i) Name Lessor as an Additional Insured;
 
(ii) Be primary to any and all other insurance of Lessor and the Indemnified
Parties with respect to any and all claims and demands which may be made against
them for bodily injury or death to Lessor’s or Lessee’s employees, contractors,
agents, invitees and guests, and for property damage, including damage to
Lessor’s or Lessee’s property, caused by or alleged to have been caused by any
act, omission or default, negligent or otherwise, of Lessee by reason of the
mining or other activities under this Lease; and
 
(iii) Provide that it applies separately to each insured against which claim is
made or suit is brought, however in no event for more than the limit of
liability of the applicable policy.
 
(c) Certificates of Insurance. Lessee shall promptly provide to Lessor
acceptable evidence in the form of an original certificate or certificates of
insurance from the respective insurance companies confirming that all coverages
and policies required hereinbefore are in full force and effect in the form
required, and confirming that Lessor

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will be notified in writing not less than 30 days prior to the cancellation or
non renewal of any such insurance. Lessee shall require its contractors,
subcontractors and other agents performing any work in connection with this
Lease to obtain and maintain insurance for the risks and in accordance with all
the terms in this Section but at reasonable limits designated by Lessee.
 
ARTICLE 7
 
INSPECTION AND MINE PLANS
 
Section 7.1 Lessor’s Right to Inspect. Lessor or its representatives at all
reasonable times, and upon advance notice, shall have the right to enter the
Coal Reserves for the purpose of inspecting the mine workings and premises or to
make surveys of the workings in the Coal Reserves herein leased to determine the
accuracy of Lessee’s surveys of such workings and to examine maps and
engineering records of Lessee with reference to said surveys. Lessee shall keep
records of all coal mined and sold from the Coal Reserves and Lessor shall have
the right to inspect the records at all reasonable times. Lessor agrees to treat
Lessee’s records as confidential and not to disclose such records. Lessee shall
not be responsible for any injury, loss or damages suffered by Lessor’s
representatives that enter the Coal Reserves, except for any injury, loss or
damages caused in whole or in part by the gross negligence of Lessee, its agents
or employees.
 
Section 7.2 Mine Plans. Lessee shall furnish to Lessor copies, in electronic and
paper formats, Lessee’s mine plan maps and any revisions thereto (which maps
shall depict mining plans and projections, Coal Reserve thickness, including
seam thickness, and the interrelation of coal thickness and overburden
thickness, and elevation of coal seams). Such maps and files shall be provided
not less than twice each year showing the extent of workings through June 30 and
December 31 of each year. Such maps shall be provided not later than August 15
and February 15 of each year, as appropriate. Lessee shall also make available
to Lessor for inspection all permits (and applications therefor, including all
maps and diagrams submitted herewith) or other authorizations issued to Lessee
with respect to the Coal Reserves by any

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regulatory authority. Lessor shall not interfere with Lessee’s permitting
activities, provided that Lessee shall have complied with the terms and
conditions of this Lease. Lessor agrees to treat Lessee’s maps and files as
confidential and not to disclose such maps and files (except as required by
applicable law or as publicly filed).
 
ARTICLE 8
 
GENERAL
 
Section 8.1 Remedies Cumulative. Except as provided in Section 4.2(b)(i) and
(ii), each right, power and remedy of Lessor or Lessee provided for in this
Lease shall be cumulative and concurrent and shall be in addition to every other
right, power or remedy provided for in this Lease or now or hereafter existing
at law or in equity or by statute or otherwise, and the exercise or beginning of
the exercise or the failure to exercise by Lessor or Lessee of any one or more
of the rights, powers or remedies provided for in this Lease or now or hereafter
existing at law or in equity or by statute or otherwise shall not preclude the
simultaneous or later exercise by Lessor or Lessee of any or all rights, powers
or remedies.
 
Section 8.2 Notices. All notices and other communications with respect to this
Lease shall be in writing and shall be deemed effectively given when delivered
personally, by telecopy or by courier, such as Federal Express, or seventy-two
(72) hours after mailing by certified mail, postage prepaid, to the following
addresses of the parties:
 
President
Fieldcrest Resources LLC
2550 East Stone Drive,
Suite 200 Kingsport, TN 37660
Telecopy No.: 423-723-0210
 
President
Gallo Finance Company
701 Market Street, Suite 713
St. Louis, Missouri 63101
Telecopy No.: 314-342-7720

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Each party may change its address by giving written notice of such change to the
other party.
 
Section 8.3 Binding Effect of Lease. This Lease shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that Lessee will not assign, let, mortgage or
otherwise transfer its rights hereunder, without the prior written consent of
Lessor, which consent shall not be unreasonably withheld; provided, however,
Lessee may assign this Lease or sublease the Coal Reserves to an Affiliate (as
hereinafter defined). For purposes of this Lease, “Affiliate” shall mean any
entity which controls, is controlled by, or is under common control with Lessee.
No assignment, sublease, mortgage or other transfer by Lessee will release
Lessee from its obligations hereunder. Lessor may sell, assign, mortgage or
otherwise transfer its rights hereunder in any transaction effectuated pursuant
to Article IX of the Purchase Agreement.
 
Section 8.4 Entire Agreement. This Lease constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof, and no
alteration, modification or interpretation hereof shall be binding upon the
parties hereto unless in writing and signed by Lessor and Lessee.
 
Section 8.5 Governing Law and Section Headings. This Lease shall be interpreted
and construed in accordance with the laws of the state of New Mexico. The titles
of the Articles and Sections in this Lease have been inserted as a matter of
convenience of reference only and shall not control or affect the meaning or
construction of any of the terms and provisions hereof.
 
Section 8.6 Memorandum of Lease. Lessor and Lessee agree to execute and record a
short form of this Lease called a Memorandum of Lease, the form of which is
attached hereto as Exhibit C and made a part hereof.
 
Section 8.7 Relationship Between the Parties. Nothing contained herein or
implied hereby including, without limitation, the rights of Lessor to receive
and examine mining plans and maps, to review Lessee’s records and otherwise
audit and inspect

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Lessee’s operations shall in any way be construed as creating or constituting
any obligation or right in Lessor to control or otherwise correct Lessee’s acts
and omissions or any relationship of partnership, joint venture or agency
between Lessor and Lessee. It is expressly understood and agreed that the
relationship between Lessor and Lessee in connection with this Lease shall be
solely that of landlord and tenant.
 
Section 8.8 Separability of Provisions. If any provision of this Lease shall to
any extent be held to be unenforceable, the remainder of this Lease shall not be
affected thereby, and each provision of this Lease shall be valid and
enforceable to the extent permitted by law.
 
Section 8.9 Force Majeure. Lessee’s obligations to conduct mining operations
under this Lease shall be suspended in the event coal mining operations on the
Coal Reserves are suspended or are prevented or prohibited by any event of force
majeure. An event of force majeure shall mean any event of the type listed below
which is beyond Lessee’s reasonable control and which is not caused by the
negligence or willful misconduct of Lessee, its agents or employees, including
the following: an act of God or of the public enemy; a law, ordinance or other
governmental regulation or court order not in effect on the date hereof;
inability to obtain mining or related permits provided that Lessee has used
commercially reasonable means to secure such permits; strike, lockout or
industrial disturbance; sabotage; failure of carriers to transport or furnish
transportation equipment and facilities; explosion; fire; storm; or natural
flood. Lessee shall have the right to determine and settle any strikes, lockouts
or industrial disputes in its sole discretion. Promptly upon the occurrence of
any event of force majeure, Lessee shall give written notice thereof to Lessor
in reasonable detail including without limitation the nature thereof, the
current and projected effect on mining operations, and the proposed steps to
remedy the same. Additionally, immediately upon the occurrence of an event of
force majeure, Lessee shall take commercially reasonable steps to remedy the
same or to avoid the effects thereof and shall continue such efforts diligently
until such event of force majeure is no longer applicable.

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Section 8.10 State Lease and Other Burdens. Lessee and Lessor agree Lessee shall
(a) comply with all of the terms and conditions, and fulfill all of Lessee’s
obligations under, the State Leases, including, without limitation, the
obligation to pay all amounts due under the State Leases, including, but not
limited to (i) the royalties due under Section 1 of each State Lease, (ii)
rentals due under Section 2 of each State Lease, (iii) advance royalties payable
under Section 6 of each State Lease if such royalties must be paid in order to
extend the term of either of the State Leases, (iv) the 1% overriding royalty
payable with respect to coal produced under the State Leases pursuant to an
option agreement dated June 19, 1979, to Utah International and (v) other
amounts due in connection with the State Leases (the “State Lease Burdens”) and
(b) comply with all of the terms and conditions, and fulfill all of the
obligations of Lessee under, the Surface Agreement, including, but not limited
to, the obligation to pay all amounts due under the Surface Agreement,
including, but not limited to, (i) all royalties due under Section 2(a) of the
Surface Agreement and (ii) all fees payable under Section 3 of the Surface
Agreement, and (iii) other amounts due in connection with the Surface Agreement
(the “Surface Agreement Burdens”) in a timely manner. Neither the State Lease
Burdens nor the Surface Agreement Burdens will result in any decrease or
otherwise effect any Production Royalty Payment, Minimum Rental Payment or other
amount due to Lessor under this Lease.
 
Section 8.11 Reconveyance. In a timely manner after the date on which all
mineable and merchantable coal shall have been removed from the Coal Reserves,
Lessor shall convey to Lessee or one of its affiliates by special warranty deed
all of its interest in the Fee Coal Reserves and by assignment all of its
interest in the Leased Reserves, the 2002 Assignment and the other coal rights
leased hereunder.

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IN WITNESS WHEREOF, the parties hereto have each caused this Lease to be
executed by one of its duly authorized officers as of the date first above
written.
 
FIELDCREST RESOURCES LLC
     
By:
 
Peabody Natural Resources Company, its sole member
     
By:
 

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Name:  Mark N. Schroeder
   
Title:    Vice President
     
GALLO FINANCE COMPANY
     
By:
 

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Name:  Mark N. Schroeder
   
Title:    Vice President

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EXHIBIT A
 
Legal Description of Lee Ranch Reserves