**EXHIBIT 10.9**

 

**FC 1 CORP.2004 STOCK INCENTIVE PLAN**

 

**NONQUALIFIED STOCK OPTION AGREEMENT**

 

THISAGREEMENT, is made effective as of August 10, 2004 (the “**Date of Grant**”), between FC 1Corp. (the “**Company**”) and                       (the“**Participant**”).

 

RECITALS:

 

WHEREAS, theCompany has adopted the Plan (as defined below), the terms of which are herebyincorporated by reference and made a part of this Agreement; and

 

WHEREAS, theCommittee has determined that it would be in the best interests of the Companyand its stockholders to grant the Options provided for herein to theParticipant pursuant to the Plan and the terms set forth herein;

 

NOW,THEREFORE, in consideration of the mutual covenants hereinafter set forth, theparties agree as follows:

 

# 1.                                       **Definitions**.  Wheneverthe following terms are used in this Agreement, they shall have the meaningsset forth below.  Capitalized terms nototherwise defined herein shall have the same meanings as in the Plan.

#  

## (a)                                  **Actual Cash Costs**:  In respect of a fiscal year, with respect toeach mine, total operating expenses, excluding (i) all deprecation,depletion, impairment and amortization expense, (ii) all allocated andunallocated corporate overhead expense, (iii) purchased coal expense, (iv) inventoryvariances, (v) asset retirement obligation accretion expense and (vi) allroyalty payments, taxes and expenses which are directly related to revenues.

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## (b)                                 **Actual Cost Per Ton**:  In respect of a fiscal year, the sum of theMine Cost Per Ton with respect to each mine of the Company.

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## (c)                                  **Actual EBITDA**:  “EBITDA” as defined in the Credit Agreementdated as of July 30, 2004 by and among Foundation PA Coal Company, asborrower, FC 2 Corp. and Foundation Coal Corporation, as guarantors, andthe lenders named therein as in effect on the date hereof.

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## (d)                                 **Actual Free Cash Flow**:  In respect of a fiscal year, EBITDA lessthe sum of capital expenditures as set forth in the Company’s audited financialstatements; provided that the Board of Directors may make such equitableadjustments to capital expenditures as it reasonably deems to be appropriate inorder to achieve the intention of this Agreement after giving effect tosignificant events including, without limitation, acquisitions, dispositions,mergers or similar transactions.

 

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## (e)                                  **Actual Production**:  In respect of a fiscal year, the sum of (i) tonsproduced in East and (ii) tons produced in West divided by 5.

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## (f)                                    **Cause**:  “Cause” as defined in the EmploymentAgreement, including all of the procedures described therein applicable to atermination by the Company for Cause.

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## (g)                                 **Disability**:  “Disability” as defined in the EmploymentAgreement, including all of the procedures described therein applicable to atermination for Disability.

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## (h)                                 **Employment Agreement**:  The employment agreement between theParticipant and Foundation Coal Corporation, dated July 30, 2004.

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## (i)                                     **Expiration Date**:  The tenth anniversary of the Date of Grant.

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## (j)                                     **Good Reason**:  “Good Reason” as defined in the EmploymentAgreement, including all of the procedures described therein applicable to atermination by the Participant for Good Reason.

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## (k)                                  **Mine Cost Per Ton**:  With respect to each mine, the Actual CashCost for such mine during a fiscal year divided by the tons produced by suchmine for such fiscal year multiplied by a fraction, the numerator of which isthe tons produced by such mine for such fiscal year and the denominator ofwhich is the Actual Production for such fiscal year.

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## (l)                                     **Options**:  Collectively, the Time Option and PerformanceOption to purchase Shares granted under this Agreement.

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## (m)                               **Performance Option**:  An Option with respect to which the terms andconditions are set forth in Section 3(b) of this Agreement.

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## (n)                                 **Performance Actual**:  Each of the Actual Free Cash Flow, the ActualCost Per Ton, Actual EBITDA and Actual Production.

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## (o)                                 **Performance Target**:  Each of the Target Free Cash Flow, the TargetCost Per Ton, Target EBITDA and Target Production.

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## (p)                                 **Plan**:  The FC 1 Corp. 2004 Stock IncentivePlan, as from time to time amended.

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## (q)                                 **Target Free Cash Flow**:  $65.6 million in respect of 2004,$120.6 million in respect of 2005, $192.1 million in respect of 2006,$92.4 million in respect of 2007 and $154.0 million in respect of2008; provided that the Board may make such equitable adjustments toTarget Free Cash Flow as it reasonably deems to be appropriate in order toachieve the intention of this agreement after giving effect to significantevents including, without limitation, acquisitions, dispositions, mergers orsimilar transactions.

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## (r)                                    **Target Cost Per Ton**:  $19.92 in respect of 2004, $19.42 in respectof 2005, $19.78 in respect of 2006, $19.56 in respect of 2007 and $20.07 inrespect of 2008; provided that the Board may make such equitableadjustments to Target Cost Per Ton as it

 

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## reasonably deems to beappropriate in order to achieve the intention of this agreement after givingeffect to (i) variances between the budgeted production of each mine (asset forth on Exhibit A) and the actual production of such mine and (ii) significantevents including, without limitation, acquisitions, dispositions, mergers orsimilar transactions.

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## (s)                                  **Target EBITDA**:  $160.3 million in respect of 2004,$245.6 million in respect of 2005, $275.9 million in respect of 2006,$270.8 million in respect of 2007 and $222.1 million in respect of2008; provided, that the Board of Directors may make any adjustment toEBITDA as it reasonably deems to be appropriate (including adjustments made asa result of acquisitions, dispositions, mergers, recapitalizations,reorganizations, consolidations, spin-offs, distributions, other extraordinarytransactions, other changes in the structure of the Company or any of itsAffiliates, or significant capital expenditures so that Target EBITDA equitablyreflects the basis for determining Actual EBITDA for the period in question).

##  

## (t)                                    **Target Production**:  27.8 million tons in respect of 2004,29.5 million tons in respect of 2005, 29.8 million tons in respect of2006, 28.9 million tons in respect of 2007 and 29.1 million tons inrespect of 2008; provided that the Board of Directors may make suchequitable adjustments to Target Production as it reasonably deems to beappropriate in order to achieve the intention of this agreement after givingeffect to significant events including, without limitation, acquisitions,dispositions, mergers or similar transactions.

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## (u)                                 **Time Option**:  An Option with respect to which the terms andconditions are set forth in Section 3(a) of this Agreement.

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## (v)                                 **Vested Portion**:  At any time, the portion of an Option whichhas become vested, as described in Section 3 of this Agreement.

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# 2.                                       **Grant of Options. **TheCompany hereby grants to the Participant the right and option to purchase, onthe terms and conditions hereinafter set forth, the number of Shares subject tothe Time Option and Performance Option set forth on Schedule A attachedhereto, subject to adjustment as set forth in the Plan.  The exercise price of the Shares subject tothe Time Option shall be $10.00 per Share and the exercise price of the Sharessubject to the Performance Options shall be $17.50 per Share, each subject toadjustment as set forth in the Plan (in each case, the “**OptionPrice**”).  The Options areintended to be nonqualified stock options, and are not intended to be treatedas ISOs that comply with Section 422 of the Code.

#  

# 3.                                       **Vesting of the Options**.

#  

## (a)                                  Vestingof the Time Option.

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### (i)                                     In General.  Subject to the Participant’s continuedEmployment with the Company and its Affiliates (except as provided in Section 4(a)),the Time Option shall vest and become exercisable with respect to twentypercent (20%) of the Shares subject to such Time Option on December 31,2004 and shall vest and become exercisable with respect to an additional twentypercent (20%) of the Shares subject to the Time Option on each December 31thereafter, until such Shares subject to the Time Option are one hundredpercent (100%) vested and exercisable.

 

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### (ii)                                  Change in Control.  Notwithstanding the foregoing, upon a Changein Control, the Time Option shall, to the extent not previously cancelled orexpired, immediately become one hundred percent (100%) vested andexercisable.

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## (b)                                 Vestingof the Performance Option.

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### (i)                                     InGeneral.  Subject to the Participant’scontinued Employment with the Company and its Affiliates, the PerformanceOption, to the extent not previously canceled or expired, shall become fullyvested and exercisable with respect to one hundred percent (100%) of theShares subject to the Performance Option on the eighth anniversary of the Dateof Grant.

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### (ii)                                  Acceleration.  Notwithstanding the foregoing and subject tothe Participant’s continued Employment with the Company and its Affiliates(except as provided in Section 4(a)), the Performance Option shall vestand become exercisable with respect to five percent (5%) of the Sharessubject to the Performance Option on December 31, 2004 and an additionalfive percent (5%) of the Shares on each of the first four anniversaries ofsuch date (December 31, 2004 and each such anniversary, an “**Accelerated Vesting Date**”) to theextent that any Performance Actual for a fiscal year ending on an AcceleratedVesting Date equals or exceeds (or in the case of Actual Cost Per Ton, equalsor is less than) the applicable Performance Target for such fiscal year.  For the avoidance of doubt, if each of thePerformance Actuals for a particular fiscal year equal or exceed (or in thecase of Actual Cost Per Ton, equals or is less than) the applicable PerformanceTarget, then twenty percent (20%) of the Shares subject to the PerformanceOption shall vest and become exercisable on the Accelerated Vesting Date forsuch fiscal year.

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### (iii)                               Catch-Up.  Notwithstanding the foregoing and subject tothe Participant’s continued Employment with the Company and its Affiliates(except as provided in Section 4(a)), if a Performance Actual does not equal of exceed (orin the case of Actual Cost Per Ton, equals or is less than) the applicable PerformanceTarget with respect to any fiscal year (a “**Missed Year**”) but the sum of thePerformance Actuals for the Missed Year and the subsequent fiscal year (the “**Excess Year**”) equals or exceeds (orin the case of Actual Cost Per Ton, equals or is less than) the sum of the applicablePerformance Targets for such Missed Year and Excess Year, then the PerformanceOption shall vest and become exercisable with respect to five percent (5%)of the Shares subject to the Performance Option in respect of such Missed Yearon the Accelerated Vesting Date of the Excess Year.

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### (iv)                              Change in Control.  Notwithstanding the foregoing, upon a Changein Control, the Performance Option shall, to the extent not previouslycancelled or expired, become vested and exercisable with respect to one hundredpercent (100%) of the number of Shares subject to the Performance Optionthat have not become eligible for accelerated vesting pursuant to Section 3(b)(ii) (including,the Shares eligible for accelerated vesting for the fiscal year in which theChange in Control occurs) if, and only if, the value realized by the Investorswith respect to their investment in the Company and Foundation Coal HoldingsLLC (the “**LLC**”), whether prior to or inthe Change in

 

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### Control transaction, and including amounts received throughdistributions (excluding tax and regular quarterly dividends) or disposition oftheir interests in units in the LLC or Shares (other than Shares received inexchange for units of the LLC in connection with the merger of the LLC into theCompany) of the Company represents a two times or greater return to theInvestors on their invested capital.

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## (c)                                  Terminationof Employment.

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### (i)                                     General.  Other than as described in Sections 3(c)(ii) and(iii), if the Participant’s Employment with the Company and its Affiliatesterminates for any reason, the Option, to the extent not then vested andexercisable, shall expire and be immediately canceled by the Company withoutconsideration.

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### (ii)                                  Time Option.  Notwithstanding Section 3(a) and 3(c)(i),in the event that the Participant’s Employment is terminated by the Companywithout Cause, by the Participant with Good Reason, or due to death orDisability, to the extent not previously cancelled or expired, the Time Optionshall immediately become vested and exercisable as to Shares subject to theTime Option that would have otherwise vested and become exercisable in thecalendar year in which such termination of Employment occurs.  Any portion of the Time Option which becomesvested and exercisable pursuant to this Section 3(c)(ii) shall beconsidered part of the Vested Portion of the Option, and shall expire asdescribed in Section 4(a)(i) or (iv), as applicable.

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### (iii)                               Performance Option.  Notwithstanding Section 3(b) and 3(c)(i),in the event that the Participant’s Employment is terminated by the Companywithout Cause or by the Participant with Good Reason and a Performance Targetis achieved with respect to the year of such termination, to the extent notpreviously cancelled or expired, the Performance Option shall become vested andexercisable in the Shares subject to the Performance Option that would havevested and become exercisable upon the achievement of such Performance Targetas if the Participant’s Employment continued through the end of such year,including as to those Shares which would have become vested and exercisable inrespect of a Missed Year as a result of the achievement of such PerformanceTarget.  The portion of the PerformanceOption which is available to vest following termination of employment inaccordance with this Section 3(c)(iii) shall not be cancelled uponthe Participant’s termination of employment, but instead shall remainoutstanding until expiration in accordance with Section 4(a)(iv).

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# 4.                                       **Exercise of Options.**

#  

## (a)                                  Periodof Exercise.  Subject to theprovisions of the Plan and this Agreement, the Participant may exercise all orany part of the Vested Portion of an Option at any time prior to the ExpirationDate.  Notwithstanding the foregoing, ifthe Participant’s Employment terminates prior to the Expiration Date, theVested Portion of an Option shall remain exercisable only for the period setforth below (and shall expire upon termination of such period):

 

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### (i)                                     Death orDisability.  If the Participant’sEmployment with the Company and its Affiliates is terminated due to theParticipant’s death or Disability, the Participant may exercise the VestedPortion of an Option for a period ending on the earlier of (A) one yearfollowing the date of such termination and (B) the Expiration Date; and

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### (ii)                                  Termination by theCompany without Cause or Termination by the Participant.  If the Participant’s Employment with the Companyand its Affiliates is terminated (a) by the Company without Cause or (b) bythe Participant with Good Reason, the Participant may exercise the VestedPortion of an Option for a period ending on the earlier of (A) 90 days(120 days if such termination occurs prior to an initial registered publicoffering of the Shares (an “**IPO**”))following the date of such termination and (B) the Expiration Date; and

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### (iii)                               Termination by theCompany for Cause.  If theParticipant’s Employment with the Company and its Affiliates is terminated bythe Company for Cause, the Vested Portion of an Option shall immediatelyterminate in full and cease to be exercisable; and

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### (iv)                              Performance Catch-Up.  Notwithstanding the foregoing, (1) ifthe Participant’s termination of Employment for any reason other than by theCompany for Cause occurs after the close of a fiscal year but prior to the dateon which the Participant is advised by the Company whether a Performance Actualequals or exceeds (or in the case of Actual Cost Per Ton, equals or is lessthan) the applicable Performance Target in respect of such fiscal year (the “**Target Determination Date**”), theportion of the Performance Option which is available to vest on account of suchfiscal year’s performance (including the portion attributable to a Missed Year,if any) will expire (A) on the Target Determination Date, in respect ofthe portion of such Performance Option as to which a Performance Target was notattained (unless the application of clause (2) below would result ina later termination date), and (B) 90 days (120 days prior to an IPO)following the Target Determination Date in respect of the portion of suchPerformance Option as to which a Performance Target was attained, and (2) ifa Participant’s termination of Employment by the Company without Cause or bythe Participant for Good Reason occurs during a fiscal year, then the portionof the Performance Option which is available to vest on account of such fiscalyear’s performance in accordance with Section 3(c)(iii) (includingthe portion attributable to a Missed Year, if any) will expire (A) on theTarget Determination Date, in respect of the portion of such Performance Optionas to which the Performance Target was not attained and (B) 90 days(120 days prior to an IPO) following the Target Determination Date inrespect of the portion of such Performance Option which becomes vested inaccordance with Section 3(c)(iii).

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### (v)                                 Termination ofEmployment Prior to Change in Control.  Notwithstanding the foregoing, if the Participant’sEmployment is terminated by the Company without Cause and a Change in Controloccurs within 180 days following such termination, the Vested Portion ofan Option shall be recalculated taking into account the Change in Control as ifsuch Change in Control had occurred immediately prior to the

 

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### termination of the Participant, and any portion of an Option thatbecomes a Vested Portion pursuant to this Section 4(a)(v) shall beexercisable for a period of 90 days (120 days prior to an IPO)following such Change in Control.  TheCompany shall use reasonable best efforts to notify the Participant of suchChange in Control in a timely manner so as to permit the Participant toexercise the Option.

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## (b)                                 Methodof Exercise.

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### (i)                                     Subject to Section 4(a) ofthis Agreement, the Vested Portion of an Option may be exercised by deliveringto the Company at its principal office written notice of intent to so exercise;provided that the Option may be exercised with respect to whole Sharesonly.  Such notice shall specify thenumber of Shares for which the Option is being exercised and, other than asdescribed in clause (C) or (D) of the following sentence, shallbe accompanied by payment in full of the aggregate Option Price in respect ofsuch Shares.  Payment of the aggregateOption Price may be made (A) in cash, or its equivalent, (B) bytransferring to the Company Shares or units of the LLC having a Fair MarketValue equal to the aggregate Option Price for the Shares being purchased; providedthat such Shares or units meet such requirements as may be necessary in orderfor the Company to not incur adverse accounting consequences on account of suchtransfer (as reasonably determined by the Company), (C) if there is a publicmarket for the Shares at the time of payment, subject to such rules as maybe established by the Committee, through delivery of irrevocable instructionsto a broker to sell the Shares otherwise deliverable upon the exercise of theOption and deliver promptly to the Company an amount equal to the aggregateOption Price, (D) to the extent it does not result in adverse accountingtreatment to the Company (as reasonably determined by the Company), by havingShares that would otherwise have been delivered to the Participant uponexercise of an Option withheld by the Company or (E) such other method asapproved by the Committee.  NoParticipant shall have any rights to dividends or other rights of a stockholderwith respect to the Shares subject to an Option until the Participant has givenwritten notice of exercise of the Option, paid in full for such Shares orotherwise completed the exercise transaction as described in the precedingsentence and, if applicable, has satisfied any other conditions imposed pursuantto this Agreement.

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### (ii)                                  Notwithstanding anyother provision of the Plan or this Agreement to the contrary, absent anavailable exemption to registration or qualification, an Option may not beexercised prior to the completion of any registration or qualification of theOption or the Shares under applicable state and federal securities or otherlaws, or under any ruling or regulation of any governmental body or nationalsecurities exchange that the Committee shall in its sole reasonable discretiondetermine to be required by such laws, rulings or regulations.

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### (iii)                               Upon the Company’sdetermination that an Option has been validly exercised as to any of theShares, the Company shall issue certificates in the Participant’s name for suchShares.  However, the Company shall notbe liable to the Participant for damages relating to any reasonable delays inissuing the certificates to the Participant or any loss by the Participant ofthe certificates.

 

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### (iv)                              In the event of theParticipant’s death, the Vested Portion of an Option shall remain vested andexercisable by the Participant’s executor or administrator, or the person orpersons to whom the Participant’s rights under this Agreement shall pass bywill or by the laws of descent and distribution as the case may be, to theextent set forth in Section 4(a) of this Agreement.  Any heir or legatee of the Participant shalltake rights herein granted subject to the terms and conditions hereof.

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### (v)                                 As a condition to theexercise of any Option evidenced by this Agreement, the Participant shallexecute the Stockholders Agreement.

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# 5.                                       **No Right to Continued Employment**.  Neither the Plan nor this Agreement shall beconstrued as giving the Participant the right to be retained in the employ of,or in any consulting relationship to, the Company or any Affiliate.  Further, the Company or its Affiliate may atany time dismiss the Participant or discontinue any consulting relationship,free from any liability or any claim under the Plan or this Agreement, exceptas otherwise expressly provided herein.

#  

# 6.                                       **Legend on Certificates**. The certificates representing the Shares purchased by exercise of anOption shall be subject to such stop transfer orders and other restrictions asthe Committee may determine is required by the rules, regulations, and otherrequirements of the Securities and Exchange Commission, any stock exchange uponwhich such Shares are listed, any applicable federal or state laws and theCompany’s Certificate of Incorporation and Bylaws, and the Committee may causea legend or legends to be put on any such certificates to make appropriatereference to such restrictions.

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# 7.                                       **Transferability**. Unless otherwise determined by the Committee, an Option may not beassigned, alienated, pledged, attached, sold or otherwise transferred orencumbered by the Participant otherwise than by will or by the laws of descentand distribution, and any such purported assignment, alienation, pledge,attachment, sale, transfer or encumbrance shall be void and unenforceableagainst the Company or any Affiliate; provided that the designation of abeneficiary shall not constitute an assignment, alienation, pledge, attachment,sale, transfer or encumbrance.  Duringthe Participant’s lifetime, an Option is exercisable only by the Participant.

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# 8.                                       **Withholding**.  TheParticipant may be required to pay to the Company or its Affiliate and theCompany or its Affiliate shall have the right and is hereby authorized towithhold from any payment due or transfer made under the Option or under thePlan or from any compensation or other amount owing to a Participant the amount(in cash, Shares, other securities, other Awards or other property) of anyapplicable withholding taxes in respect of the Option, its exercise, or anypayment or transfer under the Option or under the Plan and to take such actionas may be necessary in the option of the Company to satisfy all obligations forthe payment of such taxes.  TheParticipant may pay a portion or all of such withholding taxes by having Shareswith a Fair Market Value equal to the statutory minimum withholding liabilitywithheld by the Company from any Shares that would have otherwise beendeliverable upon the exercise of the Option.

 

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# 9.                                       **Securities Laws**.  Uponthe acquisition of any Shares pursuant to the exercise of an Option, theParticipant will make or enter into such written representations, warrantiesand agreements as the Committee may reasonably request in order to comply withapplicable securities laws or with this Agreement.  As soon as practicable following an IPO, theCompany shall use its commercially reasonable efforts to file a registrationstatement on Form S-8 (or any successor thereof) with respect to theShares subject to the Plan.

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# 10.                                 **Notices**.  Any noticeunder this Agreement shall be addressed to the Company in care of its GeneralCounsel, addressed to the principal executive office of the Company and to theParticipant at the address last appearing in the personnel records of theCompany for the Participant or to either party at such other address as eitherparty hereto may hereafter designate in writing to the other.  Any such notice shall be deemed effectiveupon receipt thereof by the addressee.

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# 11.                                 **Entire Agreement/Employment Agreement**.  This Agreement, together with theStockholders Agreement, contains the entire understanding of the parties withrespect to the grant of equity awards pursuant to Exhibit A of theEmployment Agreement and this Agreement supercedes the terms of Exhibit Aof the Employment Agreement.  TheParticipant acknowledges that the differences between the Performance Targetsset forth herein and the performance targets set forth in Exhibit A of theEmployment Agreement are the result of inadvertent errors in the calculationsof such Performance Targets.

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# 12.                                 **Governing Law**.  ThisAgreement shall be governed by and construed in accordance with the laws of theState of Delaware without regard to conflicts of laws.

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# 13.                                 **Options Subject to Plan and Stockholders Agreement**.  By entering into this Agreement theParticipant agrees and acknowledges that the Participant has received and reada copy of the Plan and the Stockholders Agreement.  The Options and the Shares received upon exerciseof the Options are subject to the Plan and the Stockholders Agreement.  The terms and provisions of the Plan and theStockholders Agreement as each may be amended from time to time are herebyincorporated by reference.  In the eventof a conflict between any term or provision contained herein and a term orprovision of the Plan or the Stockholders Agreement, the applicable terms andprovisions of the Plan or the Stockholders Agreement will govern andprevail.  In the event of a conflictbetween any term or provision of the Plan and any term or provision of theStockholders Agreement, the applicable terms and provisions of the StockholdersAgreement will govern and prevail.

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# 14.                                 **Signature in Counterparts**. This Agreement may be signed in counterparts, each of which shall be anoriginal, with the same effect as if the signatures thereto and hereto wereupon the same instrument.

 

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IN WITNESSWHEREOF, this Agreement has been executed and delivered by the parties hereto.

 
|   | FC 1 CORP. |
|--------|-----------------|
|   |            |
|   |            |
|   | By:             |   |   |
|   |   Its |   |   |
|   |            |
|   |            |
|   |            |   |
|   | Participant     |
|        |                 |  |  |  |  |

 

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**EXHIBIT A**

 

**Schedule A**

 

The number ofShares subject to each Option is set forth below:

 

Time Option:                                                                                                                           [        ]

 

Performance Option:                                                                                [        ]

 

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