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                                                                   EXHIBIT 10.26

                           PEABODY ENERGY CORPORATION

                         LONG-TERM EQUITY INCENTIVE PLAN

         1. PURPOSE. The purpose of the Peabody Energy Corporation Long-Term
Equity Incentive Plan (the "Plan") is to provide an incentive for employees to
achieve the Corporation's business objectives and to directly align the rewards
of key employees with the creation of value for shareholders of the Corporation.
The Plan serves to attract and encourage key executives to remain with, and
devote their best efforts to, the success of Peabody Energy Corporation (the
"Corporation"). The Plan encourages key employees of the Corporation and such
subsidiaries of the Corporation as the Administrator designates, to acquire
shares of common stock, $0.01 par value, of the Corporation ("Common Stock") or
to receive monetary payments based on the value of such stock or based upon
achieving certain goals related to increasing shareholder value.

         2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Corporation ("Board") or the Compensation Committee of the
Board as determined by the Board (the "Administrator").

         In accordance with the provisions of this Plan, the Administrator has
the authority and discretion to utilize various incentive approaches to
appropriately reflect changing business conditions with the goal of increasing
shareholder value. The authority to select persons eligible to participate in
the Plan, to grant benefits in accordance with Section 5 of the Plan, and to
establish the timing, pricing, amount and other terms and conditions of such
grants (which need not be uniform with respect to the various participants or
with respect to different grants to the same participant), may be exercised by
the Administrator in its sole discretion provided, that if the Administrator is
not the Board, the Board shall in all events have authority to approve or
disapprove of the Administrator's decision, which shall be final and binding on
the Administrator. An award of a benefit under this Plan shall be evidenced by
an award agreement that shall set forth the terms and conditions applicable to
that award. In the event of any inconsistency between the terms of such an award
agreement and terms of this Plan, the terms of the Plan shall prevail. An award
of benefits under this Plan is intended to be exempt for the one million dollar
limit on deductible compensation under Section 162(m) of the Internal Revenue
Code of 1986, as amended.

         Subject to the provisions of the Plan, the Administrator shall have
exclusive authority to interpret and administer the Plan, to establish
appropriate rules relating to the Plan, to delegate some or all of its authority
under the Plan and to take all such steps and make all such determinations in
connection with the Plan and the benefits granted pursuant to the Plan as it may
deem necessary or advisable. The validity, construction, and effect of the Plan
shall be determined in accordance with the laws of the State of Delaware. Any
decision of the Administrator in the interpretation and administration of the
Plan, as described herein, shall lie within its sole and absolute discretion and
shall be final, conclusive and binding on all parties concerned (including, but
not limited to, Participants and their beneficiaries or successors)


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                                                      PEABODY ENERGY CORPORATION
                                                 LONG-TERM EQUITY INCENTIVE PLAN
================================================================================


provided, that if the Administrator is not the Board, the Board shall in all
events have authority to approve or disapprove of the Administrator's decision
which shall be final and binding on the Administrator. The Administrator shall
have the full power and authority, subject to the approval of the Board if the
Administrator is other than the Board, to establish the terms and conditions of
any Award consistent with the provisions of the Plan and to waive any such terms
and conditions at any time (including, without limitation, accelerating or
waiving any vesting conditions). The Administrator shall require payment of any
amount it may determine to be necessary to withhold for federal, state, local or
other taxes as a result of the exercise, grant or vesting of an Award. Unless
the Administrator specifies otherwise, the Participant may elect to pay a
portion or all of such withholding taxes by (a) delivery in Shares or (b) having
Shares withheld by the Company from any Shares that would have otherwise been
received by the Participant.

         3. SHARES RESERVED UNDER THE PLAN. Subject to the provisions of Section
12 (relating to adjustment for changes in capital stock) an aggregate number of
two million five hundred thousand (2,500,000) shares of Common Stock of the
Corporation shall be available for issuance under the Plan. The shares of Common
Stock issued under the Plan may be authorized but unissued shares or shares
re-acquired by the Corporation, including shares purchased in the open market or
in private transactions.

         As used in this Section, the term "Plan Maximum" shall refer to the
number of shares of Common Stock of the Corporation that are available for
issuance pursuant to the Plan. Stock underlying outstanding options, stock
appreciation rights, or performance awards will reduce the Plan Maximum. Shares
underlying expired, canceled or forfeited options, stock appreciation rights or
performance awards shall be added back to the Plan Maximum. When the exercise
price of stock options is paid by delivery of shares of Common Stock of the
Corporation, or if the Administrator approves the withholding of shares from a
distribution in payment of the exercise price, the Plan Maximum shall be reduced
by the net (rather than the gross) number of shares issued pursuant to such
exercise, regardless of the number of shares surrendered or withheld in payment.
If the Administrator approves the payment of cash to an optionee equal to the
difference between the fair market value and the exercise price of stock subject
to an option, or if a stock appreciation right is exercised for cash or a
performance award is paid in cash in lieu of shares of Common Stock, the Plan
Maximum shall be increased by the number of shares with respect to which such
payment is applicable. Restricted stock issued pursuant to the Plan will reduce
the Plan Maximum while outstanding even while subject to restrictions. Shares of
restricted stock shall be added back to the Plan Maximum if such restricted
stock is forfeited or is returned to the Corporation as part of a restructuring
of benefits granted pursuant to this Plan.

         Notwithstanding the above, the maximum number of shares subject to
stock options that may be awarded under this plan in any calendar year to any
individual shall not exceed 300,000 shares (as adjusted in accordance with
Section 12).



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                                                      PEABODY ENERGY CORPORATION
                                                 LONG-TERM EQUITY INCENTIVE PLAN
================================================================================

         4. PARTICIPANTS. Participants will consist of such officers and key
employees of, and independent contractors for and service providers to, the
Corporation or any designated subsidiary as the Administrator in its sole
discretion shall determine. Designation of a participant in any year shall not
require the Administrator to designate such person to receive a benefit in any
other year or to receive the same type or amount of benefit as granted to the
participant in any other year or as granted to any other participant in any
year. The Administrator shall consider such factors as it deems pertinent in
selecting participants and in determining the type and amount of their
respective benefits.

         5. TYPES OF BENEFITS. The following benefits may be granted under the
Plan: (a) stock appreciation rights ("SARs"); (b) restricted stock ("Restricted
Stock"); (c) performance awards ("Performance Awards"); (d) incentive stock
options ("ISOs"); (e) nonqualified stock options ("NQSOs"); and (f) Stock Units,
all as described below. No more than fifty percent of the total number of shares
reserved for issuance under the Plan may be granted in the form of awards other
than ISO's or NQSO's.

         6. STOCK APPRECIATION RIGHTS. A SAR is the right to receive all or a
portion of the difference between the fair market value of a share of Common
Stock at the time of exercise of the SAR and the exercise price of the SAR
established by the Administrator, subject to such terms and conditions set forth
in a SAR agreement as may be established by the Administrator in its sole
discretion. At the discretion of the Administrator, SARs may be exercised (a) in
lieu of exercise of an option, (b) in conjunction with the exercise of an
option, (c) upon lapse of an option, (d) independent of an option or (e) each of
the above in connection with a previously awarded option under the Plan. If the
option referred to in (a), (b) or (c) above qualified as an ISO pursuant to
Section 422 of the Internal Revenue Code of 1986 ("Code"), the related SAR shall
comply with the applicable provisions of the Code and the regulations issued
thereunder. At the time of grant, the Administrator may establish, in its sole
discretion, a maximum amount per share which will be payable upon exercise of a
SAR, and may impose conditions on exercise of a SAR. At the discretion of the
Administrator, payment for SARs may be made in cash or shares of Common Stock of
the Corporation, or in a combination thereof. SARs will be exercisable not later
than ten years after the date they are granted and will expire in accordance
with the terms established by the Administrator.

         7. RESTRICTED STOCK. Restricted Stock is Common Stock of the
Corporation issued or transferred under the Plan (other than upon exercise of
stock options or as Performance Awards) at any purchase price less than the fair
market value thereof on the date of issuance or transfer, or as a bonus, subject
to such terms and conditions set forth in a Restricted Stock agreement as may be
established by the Administrator in its sole discretion. In the case of any
Restricted Stock:

            (a) The purchase price, if any, will be determined by the
         Administrator.

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                                                      PEABODY ENERGY CORPORATION
                                                 LONG-TERM EQUITY INCENTIVE PLAN
================================================================================

            (b) The period of restriction shall be established by the
         Administrator for any grants of Restricted Stock;

            (c) Restricted Stock may be subject to (i) restrictions on the sale
         or other disposition thereof; (ii) rights of the Corporation to
         reacquire such Restricted Stock at the purchase price, if any,
         originally paid therefor upon termination of the employee's employment
         within specified periods; (iii) representation by the employee that he
         or she intends to acquire Restricted Stock for investment and not for
         resale; and (iv) such other restrictions, conditions and terms as the
         Administrator deems appropriate.

            (d) The participant shall be entitled to all dividends paid with
         respect to Restricted Stock during the period of restriction and shall
         not be required to return any such dividends to the Corporation in the
         event of the forfeiture of the Restricted Stock.

            (e) The participant shall be entitled to vote the Restricted Stock
         during the period of restriction.

            (f) The Administrator shall determine whether Restricted Stock is to
         be delivered to the participant with an appropriate legend imprinted on
         the certificate or if the shares are to be issued in the name of a
         nominee or deposited in escrow pending removal of the restrictions.

         8. PERFORMANCE AWARDS. Performance Awards are Common Stock of the
Corporation, monetary units or some combination thereof, to be issued without
any payment therefor, in the event that certain performance goals established by
the Administrator are achieved over a period of time designated by the
Administrator, but not in any event more than five years. The goals established
by the Administrator may include return on average total capital employed,
earnings per share, increases in share price or such other goals as may be
established by the Administrator; provided that the Administrator shall be
permitted to adjust or modify goals or Performance Awards upon the occurrence or
existence of extraordinary corporate events, or other circumstances that, in the
good faith determination of the Administrator, warrant such adjustment or
modification. In the event the minimum corporate goal is not achieved at the
conclusion of the period, no payment shall be made to the participant. Actual
payment of the award earned shall be in cash or in Common Stock of the
Corporation or in a combination of both, as the Administrator in its sole
discretion determines. If Common Stock of the Corporation is used, the
participant shall not have the right to vote and receive dividends until the
goals are achieved and the actual shares are issued.

         9. INCENTIVE STOCK OPTIONS. ISOs are stock options awarded to employees
to purchase shares of Common Stock at not less than 100% of the fair market
value of the shares on the date the option is granted (110% if the optionee owns
stock possessing more than 10% of the combined voting power of all owners of
stock of the Corporation or a subsidiary), subject to such




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                                                      PEABODY ENERGY CORPORATION
                                                 LONG-TERM EQUITY INCENTIVE PLAN
================================================================================

terms and conditions set forth in an option agreement as may be established by
the Administrator in its sole discretion that conform to the requirements of
Section 422 of the Code. Such purchase price may be paid (a) by payment in cash
or cash equivalent, (b), in the discretion of the Administrator, by the delivery
of shares of Common Stock already owned by the participant for at least six
months, (c), in the discretion of the Administrator, by using shares of Common
Stock that would otherwise have been received by the participant upon exercise
of the option (which method may be restricted to a cashless exercise procedure
involving a broker or dealer approved by the Administrator) or (d) in the
discretion of the Administrator, by a combination of any of the foregoing, in
the manner and subject to the restrictions provided in the option agreement. The
aggregate fair market value (determined as of the time an option is granted) of
the stock with respect to which ISOs are exercisable for the first time by an
optionee during any calendar year (under all option plans of the Corporation and
its subsidiary corporations) shall not exceed $100,000.

         10. NONQUALIFIED STOCK OPTIONS. NQSOs are nonqualified stock options to
purchase shares of Common Stock at purchase prices established by the
Administrator on the date the options are granted, subject to such terms and
conditions set forth in an option agreement as may be established by the
Administrator in its sole discretion. The purchase price may be paid (a) by
payment in cash or cash equivalent, (b), in the discretion of the Administrator,
by the delivery of shares of Common Stock already owned by the participant for
at least six months, (c), in the discretion of the Administrator, by using
shares of Common Stock that would otherwise have been received by the
participant upon exercise of the option (which method may be restricted to a
cashless exercise procedure involving a broker or dealer approved by the
Administrator) or (d) in the discretion of the Administrator, by a combination
of any of the foregoing, in the manner and subject to the restrictions provided
in the option agreement.

         11. STOCK UNITS. A Stock Unit represents the right to receive a share
of Common Stock from the Corporation at a designated time in the future, subject
to such terms and conditions set forth in a Stock Unit agreement as may be
established by the Administrator in its sole discretion. The participant
generally does not have the rights of a shareholder until receipt of the Common
Stock. The Administrator may in its discretion provide for payments in cash, or
adjustment in the number of Stock Units, equivalent to the dividends the
participant would have received if the participant had been the owner of shares
of Common Stock instead of the Stock Units.

         12. ADJUSTMENT PROVISIONS.

             (a) If the Corporation shall at any time change the number of
         issued shares of Common Stock without new consideration to the
         Corporation (such as by stock dividends or stock splits), the total
         number of shares reserved for issuance under this Plan and the number
         of shares covered by each outstanding benefit shall be adjusted so that
         the aggregate consideration payable to the Corporation, if any, and the
         value of each such



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                                                      PEABODY ENERGY CORPORATION
                                                 LONG-TERM EQUITY INCENTIVE PLAN
================================================================================

         benefit shall not be changed. Benefits may also contain provisions for
         their continuation or for other equitable adjustments after changes in
         the Common Stock resulting from reorganization, sale, merger,
         consolidation, issuance of stock rights or warrants, or similar
         occurrence.

             (b) Notwithstanding any other provision of this Plan, and without
         affecting the number of shares reserved or available hereunder, the
         Board may authorize the issuance or assumption of benefits in
         connection with any merger, consolidation, acquisition of property or
         stock, or reorganization upon such terms and conditions as it may deem
         appropriate.

         13. NONTRANSFERABILITY. Each benefit granted under the Plan to an
employee shall not be transferable otherwise than by will or the laws of descent
and distribution; provided, however, NQSOs granted under the Plan may be
transferred, without consideration, to a Permitted Transferee (as defined
below). Benefits granted under the Plan shall be exercisable, during the
participant's lifetime, only by the participant or a Permitted Transferee. In
the event of the death of a participant, exercise or payment shall be made only:

             (a) By or to the Permitted Transferee, executor or administrator of
         the estate of the deceased participant or the person or persons to whom
         the deceased participant's rights under the benefit shall pass by will
         or the laws of descent and distribution; and

             (b) To the extent that the deceased participant or the Permitted
         Transferee, as the case may be, was entitled thereto at the date of his
         death.

For purposes of this Section, "Permitted Transferee" shall include (i) one or
more members of the participant's family, (ii) one or more trusts for the
benefit of the participant and/or one or more members of the participant's
family, or (iii) one or more partnerships (general or limited), corporations,
limited liability companies or other entities in which the aggregate interests
of the participant and members of the participant's family exceed 80% of all
interests. For this purpose, the participant's family shall include only the
participant's spouse, children and grandchildren.

         14. TAXES. The Corporation shall be entitled to withhold the amount
necessary to enable the Corporation to remit to the appropriate government
entity or entities the amount of any tax required to be withheld from wages
attributable to any amounts payable or shares deliverable under the Plan, after
giving the person entitled to receive such payment or delivery notice as far in
advance as practicable. The Corporation may defer making payment or delivery as
to any benefit if any such tax is payable until indemnified to its satisfaction.
The person entitled to any such delivery may, by notice to the Corporation at
the time the requirement for such delivery is first established, elect to have
such withholding satisfied by a reduction of the number of shares otherwise so
deliverable, such reduction to be calculated based on a closing market price on
the date of such notice.

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                                                      PEABODY ENERGY CORPORATION
                                                 LONG-TERM EQUITY INCENTIVE PLAN
================================================================================

         15. TENURE. A participant's right, if any, to continue to serve the
Corporation and its subsidiaries as an officer, employee, or otherwise, shall
not be enlarged or otherwise affected by his or her designation as a participant
under the Plan.

         16. DURATION, INTERPRETATION, AMENDMENT AND TERMINATION. No benefit
shall be granted more than ten years after the date of adoption of this Plan;
provided, however, that the terms and conditions applicable to any benefit
granted within such period may thereafter be amended or modified by mutual
agreement between the Corporation and the participant or such other person as
may then have an interest therein. Also, by mutual agreement between the
Corporation and a participant hereunder, stock options or other benefits may be
granted to such participant in substitution and exchange for, and in
cancellation of, any benefits previously granted such participant under this
Plan. To the extent that any stock options or other benefits granted under the
Plan within the terms of the Plan would qualify under present or future laws for
tax treatment that is beneficial to a recipient, then any such beneficial
treatment shall be considered within the intent, purpose and operational purview
of the Plan and the discretion of the Administrator, and to the extent that any
such stock options or other benefits would so qualify within the terms of the
Plan, the Administrator shall have full and complete authority to grant stock
options or other benefits that so qualify (including the authority to grant,
simultaneously or otherwise, stock options or other benefits which do not so
qualify) and to prescribe the terms and conditions (which need not be identical
as among recipients) in respect to the grant or exercise of any such stock
option or other benefits under the Plan.

         The Board may amend the Plan from time to time or terminate the Plan at
any time. However, no action authorized by this paragraph shall reduce the
amount of any outstanding award or change the terms and conditions thereof to
the detriment of the participant without such participant's consent. Subject to
Section 12, to the extent necessary to comply with or get an exemption from any
provision of the Code, including regulations thereunder, or of the Securities
Exchange Act of 1934, as amended, no amendment of the Plan shall, without
approval of the stockholders of the Corporation, (a) increase the total number
of shares which may be issued under the Plan or increase the amount or type of
benefits that may be granted under the Plan, or (b) modify the requirements as
to eligibility for benefits under the Plan.

         17. EFFECTIVE DATE. This Peabody Energy Corporation Long-Term Equity
Incentive Plan shall become effective as of the date it is adopted by the Board
of the Corporation subject only to approval by the holders of a majority of the
outstanding voting stock of the Corporation within twelve months before or after
the adoption of the Plan by the Board.

         The undersigned hereby certifies that this Peabody Energy Corporation
Long-Term Equity Incentive Plan was adopted by the Board of the Corporation at
its meeting on _____________________, 2001.


                             By:      ____________________________________

                             Title:   ____________________________________

                             Date:    ____________________________________



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