exv10w2



 





Exhibit 10.2


EXECUTION
COPY

TAX SEPARATION AGREEMENT




          This TAX SEPARATION AGREEMENT is dated as of October 22, 2007, by and among Peabody Energy
Corporation (“Peabody”), a Delaware corporation, and Patriot Coal Corporation (“Spinco”), a
Delaware corporation.




          WHEREAS, as of the date hereof, Peabody is the common parent of an affiliated group of
domestic corporations within the meaning of Section 1504(a) of the Code, and the members of the
affiliated group have heretofore joined in filing consolidated federal income Tax returns (the
“Affiliated Group”);




          WHEREAS, Peabody intends to distribute all of the outstanding shares of stock of Spinco pro
rata to the holders of Peabody common stock in a transaction that qualifies under sections 355 and
368 of the Code; and




          WHEREAS, as a result of the Distribution, the Parties desire to enter into this Tax Separation
Agreement to provide for certain Tax matters, including the assignment of responsibility for the
preparation and filing of Tax Returns, the payment of and indemnification for Taxes (including
Taxes with respect to the Distribution and related transactions as contemplated in the other
Transaction Agreements), entitlement to refunds of Taxes, and the prosecution and defense of any
Tax controversies;




          NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained
in this Agreement, the Parties hereby agree as follows:




ARTICLE I. DEFINITIONS




          SECTION 1.1. General. Capitalized terms used in this Agreement and not defined
herein shall have the meanings that such terms have in the Separation Agreement. As used in this
Agreement, the following terms shall have the following meanings:




          “Affiliated Group” shall have the meaning specified in the preamble hereof.




          “Agreement” shall mean this Tax Separation Agreement.





     “Business Day” or “Business Days” shall mean a day which is not a Saturday, Sunday or a
day on which banks in New York City are authorized or required by law to close.




     “Closing of the Books Method” shall mean the apportionment of items between portions of
a taxable period based on a closing of the books and records on the Distribution Date (as if
the Distribution Date was the end of the taxable period), provided
that, any items not susceptible to such apportionment shall be apportioned on
the basis of elapsed days during the relevant portion of the taxable period.



 









 






     “Code” shall mean the Internal Revenue Code of 1986, as amended.




     “Confidentiality Agreement” shall mean any agreement pursuant to which the parties
named therein have agreed to terms under which they were permitted to review certain
financial information relating to Spinco or the Spinco Business.




     “Consolidated Return” shall mean any Tax Return relating to Income Taxes filed pursuant
to Section 1502 of the Code, or any comparable combined, consolidated, or unitary group Tax
Return relating to Income Taxes filed under state or local tax law which, in each case,
includes Peabody and at least one subsidiary.




     “Contribution” shall have the meaning specified in the Separation Agreement.




     “Distribution” shall have the meaning specified in the Separation Agreement.




     “Distribution Date” shall mean the Business Day on which the Distribution is effected.




     “Distribution-Related Liability” shall mean any liability subject to indemnification
pursuant to Section 4.3.




     “Final Determination” shall mean the final resolution of liability for any Tax for any
taxable period, including any related interest or penalties, by or as a result of: (i) a
final and unappealable decision, judgment, decree or other order by any court of competent
jurisdiction; (ii) a closing agreement or accepted offer in compromise under Section 7121 or
7122 of the Code, or comparable agreement under the laws of other jurisdictions which
resolves the entire Tax liability for any taxable period; or (iii) any allowance of a refund
or credit in respect of an overpayment of Tax, but only after the expiration of all periods
during which such refund may be recovered by the jurisdiction imposing the Tax.




     “Income Tax” shall mean any income, franchise or similar Taxes imposed on (or measured
by) net income or net profits.




     “Income Tax Returns” shall mean all Tax Returns relating to Income Taxes.




     “Indemnification Tax Benefit” shall have the meaning specified in Section 2.4(b).




     “Indemnified Tax” shall have the meaning specified in Section 2.4(b).




     “IRS” shall mean the Internal Revenue Service.




     “Opinion” shall mean the opinion delivered by Ernst & Young LLP pursuant to Section
3.02(j) of the Separation Agreement.




     “Other Tax” shall mean any Tax other than an Income Tax.




     “Party” shall mean either Peabody or Spinco, as the case maybe.



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     “Payment Period” shall have the meaning specified in Section 2.4(c).



     “Peabody” shall have the meaning specified in the preamble hereof.



     “Proceeding” shall mean any audit, examination or other proceeding brought by a Taxing
Authority with respect to Taxes.



     “Prohibited Acts” shall have the meaning specified in Section 4.2.



     “Refund” shall have the meaning specified in Section 2.2.



     “Restricted Period” shall mean the two-year period commencing on the Distribution Date.



     “Retained Liabilities” shall mean the Liabilities covered by the “Liability Assumption
Agreements” as defined in the Separation Agreement.



     “Retained Liability Payment” shall have the meaning specified in Section 2.6.



     “Retained Liability Tax Benefit” shall have the meaning specified in Section 2.6.



     “Ruling” shall mean the private letter ruling issued by the IRS to Peabody dated
September 26, 2007, , attached hereto as Exhibit A, and any supplemental rulings related
thereto.



     “Separation Agreement” shall mean the agreement entitled “Separation Agreement, Plan of
Reorganization and Distribution,” entered into by Peabody and Spinco dated as of October 22,
2007.



     “Spinco” shall have the meaning set forth in the preamble hereof.



     “Spinco Business” shall have the same meaning as “Patriot Business” as defined in the
Separation Agreement.



     “Spinco Pre-Closing NOL” shall mean any net operating loss from a taxable period ending
on or before the Distribution Date that is allocated to Spinco after the Distribution Date
under applicable Law.



     “Spinco Pre-Closing Tax Credit” shall mean any credit to which Section 383 of the Code
(or any corresponding provision under state, local or foreign Law) applies from a taxable
period ending on or before the Distribution Date that is allocated to Spinco after the
Distribution Date under applicable Law.



     “Straddle Period” shall mean any taxable period commencing prior to, and ending after,
the Distribution Date.



     “Tax” or “Taxes” shall mean any federal, state, local or foreign income, gross
receipts, property, sales, use, license, excise, franchise, employment, payroll,
withholding, alternative or add on minimum, ad valorem, transfer or excise tax, or any



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other
tax, custom, duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, imposed by any Taxing Authority.




     “Taxing Authority” shall mean any governmental authority (whether United States or
non-United States, and including, any state, municipality, political subdivision or
governmental agency) responsible for the imposition of any Tax.




     “Tax Returns” shall mean all reports or returns (including information returns and
amended returns) required to be filed or that may be filed for any period with any Taxing
Authority in connection with any Tax or Taxes (whether domestic or foreign).



          SECTION 1.2. References; Interpretation. References in this Agreement to any gender
include references to all genders, and references to the singular include references to the plural
and vice versa. The words “include”, “includes” and “including” when used in this Agreement shall
be deemed to be followed by the phrase “without limitation”. Unless the context otherwise
requires, references in this Agreement to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to, such Agreement.
Unless the context otherwise requires, the words “hereof”, “hereby” and “herein” and words of
similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any
particular Article, Section or provision of this Agreement.




ARTICLE II.   ALLOCATION OF TAX LIABILITIES




          SECTION 2.1.   Indemnity. (a) Subject to Article IV and without duplication, Peabody
shall indemnify Spinco from all liability for (i) Income Taxes of Spinco or any other member of the
Affiliated Group with respect to taxable periods ending on or before the Distribution Date and (ii)
Income Taxes of Spinco or relating to the Spinco Business for any Straddle Period, but only to the
extent attributable to the portion of the Straddle Period ending on or before the Distribution
Date. Taxes for a Straddle Period shall be apportioned in accordance with the Closing of the
Books Method.




          (b) Spinco shall indemnify Peabody from all liability for Other Taxes (excluding any such
Taxes covered by Section 4.5(g)) of Spinco or relating to the Spinco Business for any taxable
period.




          SECTION 2.2.   Refunds. (a) Subject to Section 3.5, if a Party receives a refund,
offset, credit, or other benefit (including interest received thereon) (a “Refund”) of Tax which
the other Party would have been obligated to indemnify had the Refund been a payment, then the
Party receiving the Refund shall promptly pay the amount of the Refund to the other Party, less
reasonable costs and expenses incurred in connection with such Refund, including any Taxes on such
Refund or interest thereon.




          (b) Each Party shall, if reasonably requested by the other Party, cause the relevant entity to
file for and use its reasonable best efforts to obtain and expedite the receipt of any Refund to
which such requesting Party is entitled under this Section 2.2.



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          SECTION 2.3.   Contests.




          (a)   In the case of any Proceeding that relates to Taxes for which Peabody is responsible
under Section 2.1 hereof, Peabody shall have the right to control, in its sole discretion, the
conduct of such Proceeding. Subject to the foregoing, Spinco shall have the right to participate
jointly in any Proceeding if the consequences of the resolution of such Proceeding could reasonably
be expected to affect the tax liability of Spinco for any tax period following the Distribution.




          (b)   In the case of any Proceeding that relates to Taxes for which Spinco is responsible
under Section 2.1 hereof, Spinco shall have the sole right to control the conduct of such
Proceeding.




          (c)   In the case of any Proceeding that relates to a Straddle Period of Spinco or the Spinco
Business the parties shall use reasonable efforts to cause such Proceeding to be bifurcated between
the period ending on the Distribution Date and the period beginning after the Distribution Date.
If the parties are able to cause the audit to be so bifurcated, then Sections 2.3(a) and (b) hereof
shall govern the control of such Proceedings. To the extent that the parties are unable to cause
such bifurcation, Peabody and Spinco shall jointly control such Proceeding.




          (d)   After the Distribution Date, each Party shall promptly notify the other Party in writing
upon receipt of written notice of the commencement of any Proceeding or of any demand or claim upon
it, which, if determined adversely, would be grounds for indemnification from such other Party
pursuant to Section 2.1 or could reasonably be expected to have an adverse Tax effect on the other
Party. Each Party shall, on a timely basis, keep the other Party informed of all developments in
the Proceeding and provide such other Party with copies of all pleadings, briefs, orders, and other
correspondence pertaining thereto.




          SECTION 2.4.   Treatment of Payments; After Tax Basis




          (a) Peabody and Spinco agree to treat any indemnification payments (other than payments of
interest pursuant to Section 2.4(c)) pursuant to this Agreement, including any payments made
pursuant to Section 2.6, as either a capital contribution or a distribution, as the case may be,
between Peabody and Spinco occurring immediately prior to the Distribution, and to challenge in
good faith any other characterization of such payments by any Taxing Authority. If,
notwithstanding such good faith efforts, the receipt or accrual of any such payment (other than
payments of interest pursuant to Section 2.4(c)) results in taxable income to the indemnified
Party, such payment shall be increased so that, after the payment of any Taxes with respect to the
payment, the indemnified Party shall have realized the same net amount it would have realized had
the payment not resulted in taxable income.




          (b) To the extent that any liability for Taxes that is subject to indemnification under
Section 2.1 (an “Indemnified Tax”) gives rise to an Indemnification Tax Benefit to the indemnified
Party in any taxable period, the indemnified Party will promptly remit to the indemnifying Party
the amount of any such Indemnification Tax Benefit actually realized. For purposes of




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this
Agreement, “Indemnification Tax Benefit” means a reduction in the amount of Taxes that are required
to be paid or increase in refund due, whether resulting from a deduction, from reduced gain or
increased loss from disposition of an asset, or otherwise. For purposes of this Agreement, an
indemnified Party will be deemed to have actually realized an Indemnification Tax Benefit at the
time the amount of Taxes such indemnified Party is required to pay is reduced or the amount of any
refund due is increased. The amount of any Indemnification Tax Benefit in this Section 2.4(b)
shall be calculated by comparing (i) the indemnified Party’s actual Tax liability taking into
account any Indemnified Tax with (ii) what the indemnified Party’s Tax liability would have been
without taking into account any Indemnified Tax. If, pursuant to this Agreement, the indemnified
Party makes a remittance to the indemnifying Party of any Indemnification Tax Benefit and all or
part of such Indemnification Tax Benefit is subsequently disallowed, the indemnifying Party will
promptly pay to the indemnified Party that portion of such remittance equal to the portion of the
Indemnification Tax Benefit that is disallowed.




          (c) Payments made pursuant to this Agreement that are not made within the period prescribed in
this Agreement or, if no period is prescribed, within thirty (30) days after demand for payment is
made (the “Payment Period”) shall bear interest for the period from and including the date
immediately following the last date of the Payment Period through and including the date of payment
at a per annum rate equal to the Applicable Rate. Such interest will be payable at the same time
as the payment to which it relates and shall be calculated on the basis of a year of 365 days and
the actual number of days for which due.




          SECTION 2.5.   Agent. Subject to the other applicable provisions of this Agreement,
Spinco hereby irrevocably designates Peabody as its sole and exclusive agent and attorney-in-fact
to take such action (including execution of documents) as Peabody, in its sole discretion, may deem
appropriate in any and all matters (including audits) relating to any Income Tax Return for which
Peabody has an indemnification obligation under Section 2.1.




          SECTION 2.6.   Retained Liabilities. To the extent that any payments made by
Peabody in respect of the Retained Liabilities (a “Retained Liability Payment”) gives rise to a
Retained Liability Tax Benefit to Spinco in any taxable period, Spinco will promptly remit to
Peabody the amount of any such Retained Liability Tax Benefit actually realized. For purposes of
this Agreement, “Retained Liability Tax Benefit” means a reduction in the amount of Taxes that are
required to be paid or increase in refund due, whether resulting from a deduction, credit,
increased basis, or otherwise. For purposes of this Agreement, Spinco will be deemed to have
actually realized a Retained Liability Tax Benefit at the time the amount of Taxes Spinco is
required to pay is reduced or the amount of any refund due is increased. The amount of any
Retained Liability Tax Benefit in this Section 2.6 shall be calculated by comparing (i) Spinco’s
actual Tax liability taking into account any Retained Liability Payment with (ii) what Spinco’s Tax
liability would have been without taking into account any Retained Liability Payment. If, pursuant
to this Agreement, Spinco makes a remittance to Peabody of any Retained Liability Tax Benefit and
all or part of such Retained Liability Tax Benefit is subsequently disallowed,
Peabody will promptly pay to Spinco that portion of such remittance equal to the portion of
the Retained Liability Tax Benefit that is disallowed.




ARTICLE III.   RETURNS AND TAXES ATTRIBUTABLE TO SPINCO




          SECTION 3.1.   Peabody’s Responsibility for the Preparation of Tax Returns and for the
Payment of Taxes.



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          (a)   Peabody shall prepare and file or cause to be prepared and filed all Tax Returns of
Spinco or relating to the Spinco Business that are due on or before the Distribution Date (taking
into account any valid extensions thereof and including any Tax Returns for the short year ending
on the Distribution Date) and all Income Tax Returns of the Affiliated Group.




          (b)   With respect to Income Tax Returns that are to be prepared and filed by Peabody pursuant
to the preceding paragraph (including separate Tax returns of Spinco included in a Consolidated
Return but not including any Tax Returns for the short year ending on the Distribution Date)
Peabody shall provide a copy of such Tax Returns to Spinco no later than the Distribution Date.
With respect to Tax Returns for the short year ending on the Distribution Date, Peabody shall
provide to Spinco the following:





            (i)   An estimate of taxable income (loss) and the components of such taxable income
(loss) to be reported on such Tax Returns no later than two and one-half months after the
Distribution Date and any updates to such estimates as they occur and become available;




            (ii)   A copy of such Tax Returns to Spinco not later than thirty (30) days prior to
the due date for filing of such Tax Returns. Spinco shall have the right to review such Tax
Returns and to review all work papers and procedures used to prepare any such Tax Returns.
If Spinco, within ten (10) days after delivery of any such Tax Returns, notifies Peabody in
writing of any objections Spinco has to positions taken or statements made in such Tax
Returns that could reasonably be expected to have a material adverse impact on Spinco,
Peabody agrees to consider such objections in good faith. If Spinco does not so notify
Peabody of any objection, Spinco shall be considered to have consented to the filing of such
Tax Returns.



          (c)   To the extent that Spinco or the Spinco Business is included in any Consolidated Return
for a taxable period that includes the Distribution Date, Peabody shall include in such
Consolidated Return the results of Spinco and the Spinco Business on the basis of the Closing of
the Books Method. To the extent permitted by law or administrative practice with respect to other
Income Tax Returns, the taxable period relating to Spinco or the Spinco Business shall be treated
as ending on the Distribution Date, and if the taxable period does not, in fact, end on the
Distribution Date, the Parties shall apportion all tax items between the portions of the taxable
period before and after the Distribution Date on the Closing of the Books Method.




          (d) Where Peabody prepares and files or causes to be prepared and filed a Tax Return that
reflects information related to Spinco or the Spinco Business pursuant to paragraphs (a) and (c) of
this Section 3.1, the portions of such Tax Returns relating to Spinco shall be submitted to Spinco
no later than thirty (30) days prior to the due date (including extensions) for
filing of such Tax Returns (or if such due date is within 45 days following the Distribution
Date, as promptly as practicable following the Distribution Date). Within ten (10) days after
delivery of any such portions of any Tax Return, Spinco shall provide comments to Peabody in
writing to the extent Spinco objects to any statements that could reasonably be expected to
adversely impact it, and Peabody agrees to consider such objections in good faith. If Spinco does
not so notify Peabody of any objection, Spinco shall be considered to have consented to the filing
of such Tax Return.




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          SECTION 3.2.   Spinco’s Responsibility for the Preparation of Tax Returns and for the
Payment of Taxes. Spinco shall prepare and file or cause to be prepared and filed all Tax
Returns relating to Taxes of Spinco or the Spinco Business that have not been filed before the
Distribution Date, except for Income Tax Returns of the Affiliated Group and Income Tax Returns of
Spinco for any Straddle Period as described in Sections 3.1 and 3.3.




          SECTION 3.3.   Responsibility for the Preparation of Straddle Period Income Tax Returns
and for the Payment of Straddle Period Income Taxes. Peabody shall prepare and file or cause
to be prepared and filed all Income Tax Returns of Spinco for any Straddle Period. All such Income
Tax Returns that are to be prepared and filed by Peabody pursuant to this paragraph shall be
submitted to Spinco not later than thirty (30) days prior to the due date for filing of such Tax
Returns (or if such due date is within 45 days following the Distribution Date, as promptly as
practicable following the Distribution Date). Spinco shall have the right to review such Tax
Returns and to review all work papers and procedures used to prepare any such Tax Return. If
Spinco, within ten (10) business days after delivery of any such Tax Return, notifies Peabody in
writing that it objects to any of the items in such Tax Return, Peabody and Spinco shall attempt in
good faith to resolve the dispute and, if they are unable to do so, the disputed items shall be
resolved (within a reasonable time, taking into account the deadline for filing such Tax Return) by
an internationally recognized independent accounting firm chosen by both Peabody and Spinco. Upon
resolution of all such items, the relevant Straddle Period Tax Return shall be filed on that basis.
The costs, fees and expenses of such accounting firm shall be borne equally by Peabody and Spinco.




          SECTION 3.4.   Manner of Preparation. All Income Tax Returns filed on or after the
Distribution Date shall be prepared in a manner that is consistent with the Ruling and the Opinion,
or any other rulings obtained from other Taxing Authorities in connection with the Distribution (in
the absence of a Final Determination to the contrary) and shall be filed on a timely basis
(including pursuant to extensions) by the Party responsible for such filing under this Agreement.
In the absence of a Final Determination to the contrary, a controlling change in law or
circumstances, or accounting method changes pursuant to applications that are approved by the
Internal Revenue Service, all Income Tax Returns of Spinco for tax periods commencing prior to the
Distribution Date shall be prepared on a basis consistent with the elections, accounting methods,
conventions, assumptions and principles of taxation used with respect to the Spinco Business for
the most recent taxable periods for which Tax Returns of the Affiliated Group have been filed.




          SECTION 3.5.   Carrybacks. Spinco agrees not to carry back any net operating losses,
capital losses or credits for any taxable period ending after the Distribution Date to a taxable
period, or portion thereof, ending on or before the Distribution Date. To the extent that
Spinco is required by applicable law to carry back any such net operating losses, capital
losses or credits, any refund of Taxes attributable to such carryback shall be for Peabody’s
account.




          SECTION 3.6.   Retention of Records; Cooperation; Access. 




          (a)   Peabody and Spinco shall, and shall cause each of their Subsidiaries to retain adequate
records, documents, accounting data and other information (including computer data) necessary for
the preparation and filing of all Tax Returns required to be filed by Peabody or



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Spinco and for any
Proceeding relating to such Tax Returns or to any Taxes payable by Peabody or Spinco.




          (b)   Peabody and Spinco shall, and shall cause each of their Subsidiaries to cooperate and
provide reasonable access to (i) all records, documents, accounting data and other information
(including computer data) necessary for the preparation and filing of all Tax Returns required to
be filed by Peabody or Spinco and for any Proceeding relating to such Tax Returns or to any Taxes
payable by Peabody or Spinco and (ii) its personnel and premises, for the purpose of the
preparation, review or audit of such Tax Returns, or in connection with any Proceeding, as
reasonably requested by either Peabody or Spinco.




          (c)   The obligations set forth above in Sections 3.6(a) and 3.6(b) shall continue until the
longer of (i) the time of a Final Determination or (ii) expiration of all applicable statutes of
limitations, to which the records and information relate. For purposes of the preceding sentence,
each Party shall assume that no applicable statute of limitations has expired unless such Party has
received notification or otherwise has actual knowledge that such statute of limitations has
expired.




          SECTION 3.7.   Confidentiality; Ownership of Information; Privileged Information. The
provisions of Article XIII of the Separation Agreement relating to confidentiality of information,
ownership of information, privileged information and related matters shall apply with equal force
to any records and information prepared and/or shared by and among the Parties in carrying out the
intent of this Agreement.




          SECTION 3.8.   Sections 382 and 383 Limitations. Peabody agrees to make a timely and
valid election under Treasury Regulation Section 1.1502-95 and Section 1.1502-98 (and any
corresponding elections under state, local or foreign Law) to allocate to Spinco a portion of the
“consolidated section 382 limitation” and “consolidated section 383 credit limitation” (as those
terms are defined under the Treasury Regulations issued pursuant to Code Section 1502) (and any
corresponding limitations under state, local or foreign Law) of the Affiliated Group in an amount
that is equal to the sum of all applicable Spinco Pre-Closing NOLs and Spinco Pre-Closing Tax
Credits, respectively; provided, that Peabody shall not be required to adjust any such
allocation made pursuant to this Section 3.8 as the result of any adjustment by the IRS (or
applicable governmental authority) to any Spinco Pre-Closing NOL or Spinco Pre-Closing Tax Credit.




ARTICLE IV.   DISTRIBUTION AND RELATED TAX MATTERS




          Notwithstanding anything herein to the contrary, the provisions of this Article IV shall
govern all matters among the parties hereto related to a Distribution-Related Liability.




          SECTION 4.1.   Compliance with the Ruling. Spinco and Peabody hereby confirm and
agree to comply with any and all covenants, agreements and representations in the Ruling applicable
to Spinco and Peabody, respectively (including but not limited, in the case of Spinco, to agreeing
that Spinco will not cease the active conduct of its trade or business within the meaning of
Section 355(b) of the Code).




          SECTION 4.2.   Opinion Requirement for Major Transactions Undertaken by Spinco During the
Restricted Period. Spinco agrees that during the Restricted Period it will not





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(i) merge or
consolidate with or into any other corporation, (ii) liquidate or partially liquidate (within the
meaning of such terms as defined in Section 346 and Section 302, respectively, of the Code), (iii)
sell or transfer all or substantially all of its assets (within the meaning of Rev. Proc. 77-37,
1977-2 C.B. 568) in a single transaction or series of related transactions, or sell or transfer any
portion of its assets that would violate the “continuity of business enterprise” requirement of
Treas. Reg. §1.368-1(d), (iv) redeem or otherwise repurchase any of its capital stock other than
pursuant to open market stock repurchase programs meeting the requirements of section 4.05(1)(b) of
Rev. Proc. 96-30, 1996-1 C.B. 696, or (v) enter into any negotiations, agreements or arrangements
with respect to transactions or events (including any transactions described in Sections
4.2(i)-(iv) (and, for this purpose, including any redemptions made pursuant to open market stock
repurchase programs), stock issuances, pursuant to the exercise of options or otherwise, option
grants, capital contributions or acquisitions, entering into any partnership or joint venture
arrangements, or a series of such transactions or events, but excluding the Distribution) that may
cause the Distribution to be treated as part of a plan pursuant to which one or more persons
acquire directly or indirectly stock of Spinco representing a “50-percent or greater interest”
therein within the meaning of Section 355(d)(4) of the Code (collectively the “Prohibited Acts”).
Notwithstanding the foregoing, Spinco may take any of the Prohibited Acts, subject to Section 4.3,
if (x) Spinco first obtains (at its expense) an opinion in form and substance reasonably acceptable
to Peabody of a nationally recognized law firm reasonably acceptable to Peabody, which opinion may
be based on usual and customary factual representations or (y) at Spinco’s request, Peabody (at the
expense of Spinco) obtains a supplemental ruling from the Internal Revenue Service, that such
Prohibited Act or Acts, and any transaction related thereto, will not (a) affect any of the
conclusions set forth in the Ruling, including (i) the qualification of the Contribution under
Section 368 of the Code, (ii) the qualification of the Distribution under Section 355 of the Code,
and (iii) the nonrecognition of gain to Peabody in the Contribution and the Distribution or (b)
cause the stock of Spinco distributed in the Distribution to fail to be treated as qualified
property pursuant to Section 355(e) of the Code. Spinco may also take any of the Prohibited Acts,
subject to Section 4.3, with the consent of Peabody in its sole and absolute discretion. During
the Restricted Period, Spinco shall provide all information reasonably requested by Peabody
relating to any transaction involving an acquisition (directly or indirectly) of 5% or more of
Spinco stock. Spinco will provide Peabody with notice of all acquisitions (direct or indirect)
within the meaning of Section 355(e) of the Code once the aggregate amount of such transactions
exceeds 25% of Spinco stock.




          SECTION 4.3.   Indemnification by Spinco. If Spinco takes any action or enters into
any agreement to take any action, including any of the Prohibited Acts as defined in Section 4.2 of
this Agreement, or if there is a breach by Spinco of Section 4.1 hereof, or if there is any direct
or indirect acquisition of Spinco stock, and as a result (i) the Distribution shall fail to qualify
under Section 355 of the Code, (ii) the stock of Spinco distributed in the Distribution
shall fail to be treated as qualified property pursuant to Section 355(e) of the Code or (iii)
the Contribution fails to qualify under Section 368 of the Code or Peabody recognizes any gain in
connection with the Contribution, then Spinco shall indemnify and hold harmless Peabody against any
and all Taxes imposed upon or incurred by Peabody (and any Taxes of Peabody shareholders to the
extent Peabody is liable with respect to such Taxes, whether to a Taxing Authority, to a
shareholder or to any other person) as a result, unless such Taxes would, in any event, have been
imposed upon or incurred by Peabody without regard to such actions, breaches or events, as
determined at such time. To the extent Peabody recognizes income under clauses




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(i), (ii) or (iii)
of the preceding sentence and such income is offset by net operating losses of Peabody, the amount
of Taxes for which Spinco shall indemnify and hold harmless Peabody under this Section 4.3 shall be
determined as if such income had not been offset by such net operating losses. Peabody shall be
indemnified and held harmless under this Section 4.3 without regard to whether an opinion or
supplemental ruling pertaining to the action pursuant to Section 4.2 was obtained, and without
regard to whether Peabody gave its consent to such action pursuant to Section 4.2 or otherwise.




          SECTION 4.4.   Information Sharing. On or before the Distribution Date, Peabody
agrees to furnish Spinco with: (i) a copy of all Confidentiality Agreements, and (ii) a list of
persons who may be deemed, in Peabody’s sole judgment, to have reached an agreement, understanding
or arrangement, or to have engaged in substantial negotiations with Peabody concerning a potential
acquisition of Spinco or the Spinco Business or any portion thereof at the time of the Distribution
within the meaning of Treas. Reg. § 1.355-7(d). Notwithstanding the foregoing, Spinco shall not be
relieved of any obligation under Section 4.2 or any liability to Peabody under Section 4.3 with
respect to any person not included in the list described in subsection (ii) herein.




          SECTION 4.5.   Procedural Matters.




          (a)   Notice. If either Spinco or Peabody receives any written notice of deficiency,
claim or adjustment or any other written communication from a Taxing Authority that may result in a
Distribution-Related Liability, the Party receiving such notice or communication shall promptly
give written notice thereof to the other Party, provided that any delay by Peabody in so notifying
Spinco shall not relieve Spinco of any liability to Peabody hereunder except to the extent Spinco
is materially and adversely prejudiced by such delay. Peabody undertakes and agrees that from and
after such time as Peabody obtains knowledge that any representative of a Taxing Authority has
begun to investigate or inquire into the Distribution (whether or not such investigation or inquiry
is a formal or informal investigation or inquiry), Peabody shall (i) notify Spinco thereof,
provided that any delay by Peabody in so notifying Spinco shall not relieve Spinco of any liability
to Peabody hereunder except to the extent Spinco is materially and adversely prejudiced by such
delay, (ii) consult with Spinco from time to time as to the conduct of such investigation or
inquiry, (iii) provide Spinco with copies of all correspondence between Peabody or its
representatives and such Taxing Authority or any representative thereof pertaining to such
investigation or inquiry and (iv) cooperate with Spinco to permit a representative (reasonably
satisfactory to Peabody) of Spinco to be present and participate in all meetings with such Taxing
Authority or any representative thereof pertaining to such investigation or inquiry,
provided, that any costs relating to Spinco’s representation at such meetings shall
be borne by Spinco.




          (b)   Written Acknowledgment. Promptly upon receipt of notice as provided in Section
4.5(a), Spinco shall respond in writing to Peabody as to whether the liability asserted in the
notice of deficiency, claim or adjustment or other written communication would, if imposed upon or
incurred by Peabody or its Subsidiaries, be a Distribution-Related Liability. If Spinco believes
in good faith that such liability may not be a Distribution-Related Liability, Spinco shall set
forth in writing to Peabody the grounds for such belief. For the avoidance of doubt, Spinco will
satisfy the requirements of this Section 4.5(b) if it believes in good faith that there is
insufficient information




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to determine whether such liability would, if imposed or incurred on
Peabody or its subsidiaries, be a Distribution-Related Liability.




          (c)   Tax Proceedings Controlled by Spinco. Any Proceeding that may result in a
Distribution-Related Liability, which is acknowledged as such by Spinco pursuant to the first
sentence of Section 4.5(b), shall be conducted in accordance with this Section 4.5(c).





            (i)   Promptly upon Spinco’s written acknowledgment that the asserted liability is a
Distribution-Related Liability pursuant to Section 4.5(b), Spinco may assume and direct the
defense or settlement of the Proceeding, provided that Spinco shall permit a
representative of Peabody to be present and participate in all hearings before any court and
in all meetings with the relevant Taxing Authority or any representative thereof pertaining
to such Proceeding (with any costs solely relating to Peabody’s representation at such
meetings to be borne by Peabody), provided further that, if Spinco
fails to prosecute the Proceeding in a reasonably diligent manner, Peabody may (at Spinco’s
expense and subject to the provisions in Section 4.5(d)) assume and direct the defense or
settlement of the Proceeding. If the Distribution-Related Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, Peabody and Spinco shall use
their respective reasonable best efforts to cause the Distribution-Related Liability to be
the subject of a separate Proceeding. If such severance is not possible, Spinco shall
assume, direct and be responsible only for the matters relating to the Distribution-Related
Liability and Peabody shall assume, direct and be responsible for all other matters.




            (ii)   Upon request, during the course of the Proceeding, Spinco shall from time to
time furnish Peabody with evidence reasonably satisfactory to Peabody of its ability to pay
the full amount of the Distribution-Related Liability. If at any time during such
Proceeding, Peabody reasonably determines, after due investigation, that Spinco may not be
able to pay the full amount of the Distribution-Related Liability, if required, then Spinco
shall be required to furnish a guarantee or performance bond satisfactory to Peabody in an
amount equal to the amount of the Distribution-Related Liability asserted by the Taxing
Authority. If Spinco fails to furnish such guarantee or bond, Peabody may assume control of
the Proceedings in accordance with Section 4.5(d).




            (iii)   Spinco shall pay all expenses directly related to the Distribution-Related
Liability, including but not limited to reasonable fees for attorneys, accountants, expert
witnesses or other consultants retained by it and, to the extent that any such expenses have
been or are paid by Peabody or any of its Subsidiaries, Spinco shall promptly reimburse
Peabody or such subsidiary therefor.




            (iv)   Peabody shall, at Spinco’s sole cost (including but not limited to any
reasonable out-of-pocket costs incurred by Peabody), take such action as Spinco may
reasonably request (including but not limited to the execution of powers of attorney for one
or more persons designated by Spinco and the filing of a petition, complaint, amended Tax
Return or claim for refund) in contesting the Distribution-Related Liability. Spinco shall,
on a timely basis, keep Peabody informed of all developments in the Proceeding and provide
Peabody with copies of all pleadings, briefs, orders, and other written papers pertaining
thereto.



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            (v)   Subject to satisfaction of the conditions herein set forth, Spinco may direct
Peabody to settle the Distribution-Related Liability on such terms and for such amount as
Spinco may direct. Peabody may condition such settlement on receipt, prior to the
settlement, from Spinco of the indemnity payment with respect to the Distribution-Related
Liability less any amounts to be paid directly by Spinco to the Taxing Authority. Spinco
may direct Peabody, at Spinco’s expense, to pay an asserted deficiency for the
Distribution-Related Liability out of funds provided by Spinco, and to file a claim for
refund. Peabody shall not pay (unless otherwise required by a proper notice of assessment
and after prompt notification to Spinco of Peabody’s receipt of notice and demand for
payment) any portion of the Distribution-Related Liability without the written consent of
Spinco, which shall not be unreasonably withheld.



          (d)   Tax Proceedings Controlled by Peabody. In the event that (i) Spinco does not
provide Peabody with the written acknowledgment contemplated by Section 4.5(b) to the effect that
Spinco confirms that the asserted liability is a Distribution-Related Liability within thirty (30)
days following receipt of notice provided in Section 4.5(a), or (ii) following such confirmation,
Spinco fails within thirty (30) days following request therefor to furnish to Peabody evidence of
its ability to pay the full amount of the Distribution-Related Liability, or (iii) Peabody
reasonably believes after due investigation that Spinco may not be able to pay the full amount of
the Distribution-Related Liability, if required, and Spinco fails to furnish a guarantee or
performance bond satisfactory to Peabody in an amount equal to the amount of the
Distribution-Related Liability then being asserted by the Taxing Authority, or (iv) should Spinco
fail to prosecute the Proceeding in a reasonably diligent manner, then Peabody may assume control
of the Proceeding upon the following terms: (1) Peabody will diligently defend against the claim of
the Taxing Authority, including the pursuit of the appeal of any adverse determinations to the
appropriate tribunal (unless advised in writing by independent outside counsel at Spinco’s sole
cost in its reasonable judgment that Peabody would not prevail upon any such appeal) and shall
employ such resources, including independent counsel, in conducting such defense as are reasonably
commensurate to the nature and magnitude of the claim; (2) Peabody will consult with Spinco as to
the conduct of all Proceedings, will provide Spinco with copies of all protests, pleadings, briefs,
filings, correspondence and similar materials relative to the Proceedings and will permit a
representative of Spinco to be present and participate in all meetings with the relevant Taxing
Authority and all hearings before any court; and (3) Peabody will not settle, compromise or concede
any claim that would result in a Distribution-Related Liability without Spinco’s consent, not to be
unreasonably withheld. Subject to the above, any such Proceeding shall be controlled and directed
exclusively by Peabody and any related expenses incurred by any member of the PEC Group, including
but not limited to, reasonable fees for attorneys, accountants, expert witnesses or other
consultants directly related to the Distribution-Related Liability shall be reimbursed by Spinco,
if Spinco admits or is found to
have incorrectly failed to acknowledge the asserted liability as a Distribution-Related
Liability as provided in Section 4.5(b); provided, however, that Peabody will not be required to
pursue the claim in the federal district court, Court of Claims or any state court if as a
prerequisite to such Court’s jurisdiction, it is required to pay the asserted liability unless the
funds necessary to invoke such jurisdiction are provided by Spinco at no cost to Peabody.




          (e)   Time and Manner of Payment. Unless otherwise agreed in writing, Spinco shall pay
to Peabody the amount with respect to a Distribution-Related Liability (less any amount paid
directly by Spinco to the Taxing Authority or made available to Peabody under Section 4.5(d)) at




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least two (2) Business Days prior to the date payment of the Distribution-Related Liability is to
be made to the Taxing Authority. Such payment shall be paid by Spinco to Peabody by wire transfer
of immediately available funds to an account designated by Peabody by written notice to Spinco
prior to the due date of such payment. If Spinco delays making payment beyond the due date
hereunder, Spinco shall pay interest to Peabody on the amount unpaid at the rate of the monthly
average of the “prime rate” as published in the Wall Street Journal for each day and the actual
number of days for which any amount due hereunder is unpaid; provided, however, that this provision
for interest shall not be construed to give Spinco the right to defer payment beyond the due date
hereunder.




          (f)   Refund of Amounts Paid by Spinco. Should Peabody or any other member of the
Affiliated Group receive a refund in respect of amounts paid by Spinco to any Taxing Authority on
Peabody’s behalf or paid by Spinco to Peabody for payment to a Taxing Authority with respect to a
Distribution-Related Liability, or should any such amounts that would otherwise be refundable to
Peabody be applied or credited by the Taxing Authority to obligations of Peabody unrelated to a
Distribution-Related Liability, then Peabody shall, promptly following receipt (or notification of
credit), remit such refund (including any statutory interest that is included in such refund or
credited amount) to Spinco.




          (g)   Transfer Taxes. Peabody shall bear any and all stamp, duty, transfer, sales and
use or similar Taxes incurred in connection with the Contribution and Distribution.




          (h) Cooperation. Subject to the provisions of Section 3.7, Peabody and Spinco shall
reasonably cooperate with one another in a timely manner with respect to any Tax matter covered by
this Agreement, including any Proceeding described in Section 2.3. Peabody and Spinco agree that
such cooperation shall include, without limitation, making available to the other Party, during
normal business hours, all books, records and information, officers and employees (without
substantial interruption of employment) necessary or useful in connection with any such Tax matter.
The Party requesting or otherwise entitled to any books, records, information, officers or
employees pursuant to this Section 4.5(h) shall bear all reasonable out-of-pocket costs and
expenses (except reimbursement of salaries, employee benefits and general overhead) incurred in
connection with providing such books, records, information, officers or employees.




          (h)   Supplemental Rulings. Peabody shall provide Spinco a copy of and an opportunity
to comment upon any supplemental ruling sought from the Internal Revenue Service with respect to
the Ruling and no supplemental ruling request shall be made without Spinco’s consent if such
supplemental ruling would materially expand Spinco’s indemnification obligations under Section 4.3.




ARTICLE V.   MISCELLANEOUS




          SECTION 5.1.   Complete Agreement; Construction. This Agreement shall constitute the
entire agreement between the Parties with respect to the subject matter hereof and shall supersede
all previous negotiations, commitments and writings with respect to such subject matter.




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          SECTION 5.2.   Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and shall become
effective when one or more such counterparts have been signed by both Parties.




          SECTION 5.3.   Survival of Agreements. Except as otherwise contemplated by this
Agreement, all covenants and agreements of the Parties contained in this Agreement shall survive
the Distribution Date.




          SECTION 5.4.   Notices. All notices and other communications hereunder shall be in
writing and hand delivered or mailed by registered or certified mail (return receipt requested) or
sent by any means of electronic message transmission with delivery confirmed (by voice or
otherwise) to the Parties at the following addresses (or at such other addresses for a Party as
shall be specified by like notice) and will be deemed given on the date on which such notice is
received:



To Peabody:



Peabody Energy Corporation

701 Market Street

St. Louis, MO 63101

Attention: Alexander Schoch

Executive Vice President – Law

Fax: 314-342-3419



To Spinco:



Patriot Coal Corporation

12312 Olive Boulevard, Suite 400

St. Louis, MO 63101

Attention: Joseph W. Bean

Senior Vice President, General Counsel and Corporate Secretary

Fax:




          SECTION 5.5.   Waivers. The failure of any Party to require strict performance by the
other Party of any provision in this Agreement will not waive or diminish that Party’s right to
demand strict performance thereafter of that or any other provision hereof.




          SECTION 5.6.   Amendments. This Agreement may not be modified or amended except by an
agreement in writing signed by the Parties hereto.




          SECTION 5.7.   Assignment. This Agreement shall not be assignable, in whole or in
part, directly or indirectly, by any Party hereto without the prior written consent of the other
Party hereto, and any attempt to assign any rights or obligations arising under this Agreement
without such consent shall be void.




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          SECTION 5.8.   Successors and Assigns. The provisions to this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the Parties and their respective
successors and permitted assigns.




          SECTION 5.9.   Additional Members. Any new members of the Affiliated Group shall
automatically become a Party to this Agreement upon becoming members.




          SECTION 5.10.   Third Party Beneficiaries. This Agreement is solely for the benefit of
the Parties hereto and should not be deemed to confer upon third parties any remedy, claim,
liability, reimbursement, claim of action or other right in excess of those existing without
reference to this Agreement.




          SECTION 5.11.   Title and Headings. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.




          SECTION 5.12.   Exhibits. The Exhibits to this Agreement shall be construed with and
as an integral part of this Agreement to the same extent as if the same had been set forth verbatim
herein.




          SECTION 5.13.   GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO ITS CONFLICTS OF LAW RULES.




          SECTION 5.14.   Consent to Jurisdiction. The Parties hereto hereby agree that the
appropriate forum and venue for any disputes between any of the Parties hereto arising out of this
Agreement shall be any state or federal court sitting in St. Louis, Missouri and each of the
Parties hereto hereby submits to the personal jurisdiction of any such court. The foregoing shall
not limit the rights of any Party to obtain execution of judgment in any other jurisdiction.




          SECTION 5.15.   Severability. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The Parties shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the
economic effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.




[remainder of page intentionally left blank]




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          IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed as of the day
and year first above written.




	 	 	 	 	 
	 	PEABODY ENERGY CORPORATION

 	 
	 	By:  	/s/ Richard A. Navarre
 	 
	 	 	Name:  	Richard A. Navarre 	 
	 	 	Title:  	Executive Vice President 	 
	 



	 	 	 	 	 
	 	PATRIOT COAL CORPORATION

 	 
	 	By:  	/s/ Richard M. Whiting
 	 
	 	 	Name:  	Richard M. Whiting 	 
	 	 	Title:  	President & Chief Executive Officer 	 
	 




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