Document:

exv10w2

 

Exhibit 10.2

FORM OF

TAX SEPARATION AGREEMENT

          This TAX SEPARATION AGREEMENT is dated as of                      ___, 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.

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

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

     “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                     
___, 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                      ___,
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.

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     “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 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.

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          (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.

          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

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indemnifying Party the amount of any such Indemnification Tax Benefit actually realized. For
purposes of 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.

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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.

          (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

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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.

          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.

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          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 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

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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 (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

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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 (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

11

 

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 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,

12

 

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.

          (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

13

 

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
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.

14

 

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.

          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 63141

Attention: Joe Bean

General Counsel

Fax: 314-342-3419

          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.

15

 

          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.

          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]

16

 

          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:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 
	 	PATRIOT COAL CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

17exv10w3

 

Exhibit 10.3

FORM OF

EMPLOYEE MATTERS AGREEMENT

by and between

PEABODY ENERGY CORPORATION

and

PATRIOT COAL CORPORATION

Dated                      ___, 2007

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	Page	 
	ARTICLE 1 DEFINITIONS AND INTERPRETATION
	 	 	1	 
	 
	 	 	 	 
	Section 1.1 Definitions
	 	 	1	 
	Section 1.2 References; Interpretation
	 	 	5	 
	 
	 	 	 	 
	ARTICLE 2 GENERAL PRINCIPLES
	 	 	5	 
	 
	 	 	 	 
	Section 2.1 Assumption and Retention of Liabilities
	 	 	5	 
	Section 2.2 Patriot Employee Participation in PEC Benefit Plans
	 	 	6	 
	Section 2.3 Service Credit
	 	 	6	 
	Section 2.4 Approval of Patriot Plans by PEC as Sole Shareholder
	 	 	7	 
	 
	 	 	 	 
	ARTICLE 3 RETIREMENT PLANS
	 	 	7	 
	 
	 	 	 	 
	Section 3.1 PEC and Patriot 401(k) Plans
	 	 	7	 
	Section 3.2 PEC and Patriot Supplemental Defined Contribution Plans
	 	 	9	 
	Section 3.3 PEC Defined Benefit Retirement Plans
	 	 	9	 
	Section 3.4 PEC Notice to Patriot of Benefit Distributions
	 	 	9	 
	 
	 	 	 	 
	ARTICLE 4 HEALTH AND WELFARE PLANS
	 	 	10	 
	 
	 	 	 	 
	Section 4.1 Patriot Welfare Plans
	 	 	10	 
	Section 4.2 Reimbursement Account Plan
	 	 	10	 
	Section 4.3 Retiree Medical Benefits
	 	 	11	 
	Section 4.4 COBRA and HIPAA
	 	 	12	 
	Section 4.5 Liabilities
	 	 	12	 
	Section 4.6 Vacation and Other Time-Off Benefits
	 	 	13	 
	 
	 	 	 	 
	ARTICLE 5 LONG-TERM INCENTIVE AWARDS
	 	 	14	 
	 
	 	 	 	 
	Section 5.1 Treatment of Outstanding PEC Options
	 	 	14	 
	Section 5.2 Treatment of Outstanding PEC Restricted Stock
	 	 	15	 
	Section 5.3 Treatment of Outstanding PEC Performance Units Awards
	 	 	16	 
	Section 5.4 PEC ESPP
	 	 	17	 
	Section 5.5 Cooperation
	 	 	18	 
	Section 5.6 SEC Registration
	 	 	18	 
	Section 5.7 Savings Clause
	 	 	18	 
	 
	 	 	 	 
	ARTICLE 6 ADDITIONAL COMPENSATION MATTERS
	 	 	19	 
	 
	 	 	 	 
	Section 6.1 Annual Incentive Awards
	 	 	19	 
	Section 6.2 PEC Individual Arrangements
	 	 	20	 
	Section 6.3 Severance Benefits
	 	 	20	 
	Section 6.4 Benefit Administration
	 	 	20	 
	Section 6.5 Tax Matters
	 	 	20	 
	 
	 	 	 	 
	ARTICLE 7 INDEMNIFICATION
	 	 	21	 
	 
	 	 	 	 
	ARTICLE 8 GENERAL AND ADMINISTRATIVE
	 	 	21	 
	 
	 	 	 	 
	Section 8.1 Sharing of Information
	 	 	21	 
	Section 8.2 Reasonable Efforts/Cooperation
	 	 	21	 
	Section 8.3 Employer Rights
	 	 	22	 

 

 

	 	 	 	 	 
	 	 	Page	 
	Section 8.4 Effect on Employment
	 	 	22	 
	Section 8.5 Consent of Third Parties
	 	 	22	 
	Section 8.6 Access to Employees
	 	 	22	 
	Section 8.7 Beneficiary Designation/Release of Information/Right to Reimbursement
	 	 	22	 
	Section 8.8 Not a Change in Control
	 	 	23	 
	 
	 	 	 	 
	ARTICLE 9 MISCELLANEOUS
	 	 	23	 
	 
	 	 	 	 
	Section 9.1 Effect if Distribution Does not Occur
	 	 	23	 
	Section 9.2 Relationship of Parties
	 	 	23	 
	Section 9.3 Affiliates
	 	 	23	 
	Section 9.4 Notices
	 	 	23	 
	Section 9.5 Entire Agreement
	 	 	24	 
	Section 9.6 Waivers
	 	 	24	 
	Section 9.7 Amendments
	 	 	24	 
	Section 9.8 Termination
	 	 	24	 
	Section 9.9 Governing Law
	 	 	24	 
	Section 9.10 Dispute Resolution
	 	 	24	 
	Section 9.11 Titles and Headings
	 	 	24	 
	Section 9.12 Counterparts
	 	 	24	 
	Section 9.13 Assignment
	 	 	25	 
	Section 9.14 Severability
	 	 	25	 
	Section 9.15 Exhibits and Schedules
	 	 	25	 
	Section 9.16 Specific Performance
	 	 	25	 
	Section 9.17 Waiver of Jury Trial
	 	 	25	 
	Section 9.18 Authorization
	 	 	25	 
	Section 9.19 No Third-Party Beneficiaries
	 	 	26	 
	Section 9.20 Construction
	 	 	26	 

ii

 

EMPLOYEE MATTERS AGREEMENT

     This EMPLOYEE MATTERS AGREEMENT (the “Agreement”) is entered into                      ___,
2007, by and between Peabody Energy Corporation, a Delaware corporation (“PEC”), and
Patriot Coal Corporation (“Patriot”), a Delaware corporation (“Patriot”) (each a
“Party” and together the “Parties”).

RECITALS

     WHEREAS, PEC, acting through its direct and indirect Subsidiaries, currently conducts several
businesses in the coal industry;

     WHEREAS, the Board of Directors of PEC has determined that it is appropriate, desirable and in
the best interests of PEC and its shareholders to separate PEC into two separate, independent,
publicly traded companies by creating Patriot and distributing a portion of PEC’s coal mining
business to Patriot. The remainder of the PEC businesses will continue to be owned and conducted,
directly or indirectly, by PEC;

     WHEREAS, to effectuate the distribution, the Parties entered into that certain Separation
Agreement, Plan of Reorganization and Distribution dated of even date herewith (the “Separation
Agreement”); and

     WHEREAS, pursuant to the Separation Agreement, PEC and Patriot have agreed to enter into this
Agreement for the purpose of allocating between and among them assets, liabilities and
responsibilities with respect to certain non-collectively-bargained employee compensation and
benefit plans and arrangements;

     NOW, THEREFORE, in consideration of the foregoing premises, the mutual promises and covenants
hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Parties, intending to be legally bound, agree as follows:

ARTICLE 1

DEFINITIONS AND INTERPRETATION

     Section 1.1 Definitions. Capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Separation Agreement. The following terms shall have the
following meanings:

     “Adjusted PEC Option” shall have the meaning assigned thereto in Section 5.1(a) of
this Agreement.

     “Adjusted PEC Performance Units” shall have the meaning assigned thereto in Section
5.3(a) of this Agreement.

     “Agreement” shall have the meaning assigned thereto in the preamble to this Agreement.

 

 

     “Benefit Plan” means, with respect to an entity, each plan, program, arrangement,
agreement or commitment that is an employment, consulting, non-competition or deferred compensation
agreement, or an executive compensation, incentive bonus or other bonus, employee pension,
profit-sharing, savings, retirement, supplemental retirement, stock option, stock purchase,
performance units, restricted stock, other equity-based compensation, severance pay, salary
continuation, life, health, hospitalization, sick leave, vacation pay, disability or accident
insurance plan, corporate-owned or key-person life insurance or other employee benefit plan,
program, arrangement, agreement or commitment that covers non-collectively-bargained employees,
including any “employee benefit plan” (as defined in ERISA Section 3(3)) sponsored or maintained by
such entity (or to which such entity contributes or is required to contribute).

     “COBRA” means the continuation coverage requirements for “group health plans” under
Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and as codified
in Code Section 4980B and ERISA Sections 601 through 608, together with all regulations in effect
thereunder.

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

     “Detrimental Conduct Provisions” means any provisions that proscribe conduct of PEC
Employees, Patriot Employees, or former PEC Employees in their capacity as such, whether set forth
in outstanding awards issued under the PEC Stock Plans or otherwise, in each case as in effect from
time to time.

     “Distribution” means the distribution to the holders of PEC Common Stock of all of the
outstanding shares of Patriot Common Stock at the rate of one share of Patriot Common Stock for
every ten shares of PEC Common Stock outstanding as of the Record Date.

     “Distribution Date” means the date upon which the distribution described in the
Separation Agreement shall be effective, as defined in the Separation Agreement.

     “DOL” means the United States Department of Labor.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

     “HIPAA” means the Health Insurance Portability and Accountability Act of 1996, as
amended.

     “IRS” means the United States Internal Revenue Service.

     “Parties” shall have the meaning assigned thereto in the preamble to this Agreement.

     “Patriot” shall have the meaning assigned thereto in the preamble to this Agreement.

     “Patriot 401(k) Plan” shall have the meaning assigned thereto in Section 3.1(a) of
this Agreement.

     “Patriot Benefit Plan” means any Benefit Plan sponsored, maintained or contributed to
by any member of the Patriot Group as such Group is constituted on or after the Distribution Date.

2

 

     “Patriot Common Stock” means the outstanding shares of common stock, $0.01 par value,
of Patriot.

     “Patriot Employee” means any individual who is employed by or will be employed by
Patriot or any member of the Patriot Group, including active employees and employees on vacation
and approved leave of absence (including maternity, paternity, family, sick leave, qualified
military service under the Uniformed Services Employment and Reemployment Rights Act of 1994,
short- or long-term disability leave, leave under the Family Medical Leave Act and other approved
leave).

     “Patriot Participant” means any individual who, following the Distribution Date, is a
Patriot Employee or a beneficiary, dependent or alternate payee of a Patriot Employee.

     “Patriot Reimbursement Account Plan” shall have the meaning assigned thereto in
Section 4.2(a) of this Agreement.

     “Patriot Retiree Medical Program” shall have the meaning assigned thereto in Section
4.3(a) of this Agreement.

     “Patriot Senior Management Employee” means a member of the Patriot senior executive
team designated by PEC who transfers employment from PEC to Patriot as of the Distribution Date and
is party to a transition letter agreement with PEC.

     “Patriot Service Plans” means, collectively, the Patriot 401(k) Plan and the Patriot
Welfare Plans to the extent eligibility for or the level of benefits thereunder depends on length
of service, including the Patriot vacation, short-term disability and retiree medical programs.

     “Patriot Stock Plan” shall have the meaning assigned thereto in Section 2.4 of this
Agreement.

     “Patriot Supplemental Defined Contribution Plan” shall have the meaning assigned
thereto in Section 3.2(b) of this Agreement.

     “Patriot Welfare Plans” shall have the meaning assigned thereto in Section 4.1(a) of
this Agreement.

     “PEC” shall have the meaning assigned thereto in the preamble to this Agreement.

     “PEC 401(k) Plan” means the Peabody Investments Corp. Employee Retirement Account.

     “PEC Benefit Plan” means any Benefit Plan sponsored, maintained or contributed to by
any member of the PEC Group as such Group is constituted on or after the Distribution Date.

     “PEC Common Stock” means the outstanding shares of common stock, $0.01 par value, of
PEC.

     “PEC Employee” means any individual who is employed by or will be employed by PEC or
any member of the PEC Group, including active employees and employees on vacation and

3

 

approved leave of absence (including maternity, paternity, family, sick leave, qualified
military service under the Uniformed Services Employment and Reemployment Rights Act of 1994,
short- or long-term disability leave, leave under the Family Medical Leave Act and other approved
leave).

     “PEC ESPP” means the Peabody Energy Corporation Employee Stock Purchase Plan.

     “PEC Option” means an option to purchase shares of PEC Common Stock granted pursuant
to one of the PEC Stock Plans.

     “PEC Participant” means any individual who, following the Distribution Date, is a PEC
Employee, a former PEC Employee or a beneficiary, dependent or alternate payee of any of the
foregoing.

     “PEC Performance Unit” means a unit granted by PEC or one of its affiliates pursuant
to one of the PEC Stock Plans representing a general unsecured promise by PEC or one of its
affiliates to deliver a share of PEC Common Stock (or the cash equivalent) upon the satisfaction of
one or more performance-based vesting requirements.

     “PEC Reimbursement Account Plan” shall have the meaning assigned thereto in Section
4.2(a) of this Agreement.

     “PEC Restricted Share” means a share of PEC Common Stock granted by PEC or one of its
affiliates pursuant to one of the PEC Stock Plans which is subject to a vesting requirement or
other restriction.

     “PEC Retiree Medical Allowance” shall have the meaning assigned thereto in Section
4.3(a) of this Agreement.

     “PEC Pension Plan” means the Peabody Investments Corp. Retirement Plan for Salaried
Employees.

     “PEC SERA” shall have the meaning assigned thereto in Section 3.2(a) of this
Agreement.

     “PEC Service Plans” means, collectively, the PEC Pension Plan, the PEC 401(k) Plan and
the PEC Welfare Plans to the extent eligibility for or the level of benefits thereunder depends on
length of service, including the PEC vacation, short-term disability and retiree medical programs.

     “PEC Stock Plans” means, collectively, the Peabody Energy Corporation 2004 Long-Term
Equity Incentive Plan, the Peabody Energy Corporation Long-Term Equity Incentive Plan, the 1998
Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings Corporation, the Peabody
Energy Corporation Equity Incentive Plan for Non-Employee Directors and any other stock option or
stock incentive compensation plan or arrangement maintained before the Distribution Date for
employees, officers, or non-employee directors of PEC or its affiliates, as amended.

4

 

     “PEC Welfare Plans” shall have the meaning assigned thereto in Section 4.1(a) of this
Agreement.

     “Separation Agreement” shall have the meaning assigned thereto in the recitals to this
Agreement.

     “Service Crediting Date” means the date on which a PEC Employee who participates in
any of the PEC Service Plans becomes employed by a member of the Patriot Group (a) immediately
following employment with the PEC Group and (b) within one (1) year after the Distribution Date (or
such later date as mutually agreed to by the Parties), as further described in Section 2.3(a) of
this Agreement.

     “Subsequent Patriot Employee” means an individual who becomes employed by Patriot or
any member of the Patriot Group (a) later than the Distribution Date but within one (1) year after
the Distribution Date (or such later date as mutually agreed to by the parties) and (b) immediately
following employment with the PEC Group.

     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. Unless the context otherwise requires, 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, Annexes, Exhibits and Schedules shall be deemed to be references to Articles and Sections
of, and Annexes, Exhibits and Schedules to, this 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 2

GENERAL PRINCIPLES

     Section 2.1 Assumption and Retention of Liabilities.

     (a) As of the Effective Time, except as otherwise expressly provided for in this
Agreement, the Liability Assumption Agreements, or any other agreement by and between the
Parties and/or their affiliates, PEC shall, or shall cause one or more members of the PEC
Group to, retain and PEC hereby agrees to pay, perform, fulfill and discharge, in due course
in full: (i) all Liabilities under all PEC Benefit Plans; and (ii) any other Liabilities or
obligations expressly assigned to PEC or any of its affiliates under this Agreement.

     (b) As of the Effective Time, except as otherwise expressly provided for in this
Agreement, the Liability Assumption Agreements, or any other agreement by and between the
Parties and/or their affiliates, Patriot shall, or shall cause one or more members of the
Patriot Group to, retain or assume and Patriot hereby agrees to pay, perform, fulfill and
discharge, in due course in full: (i) all Liabilities under all Patriot
Benefit Plans; and (ii) any other Liabilities or obligations expressly assigned to
Patriot or any of its affiliates under this Agreement.

5

 

     (c) From time to time after the Distribution Date, Patriot shall promptly reimburse
PEC, upon PEC’s reasonable request and the presentation by PEC of such substantiating
documentation as Patriot shall reasonably request, for the cost of any obligations or
Liabilities satisfied or assumed by PEC or its affiliates that are, or that have been made
pursuant to this Agreement, the responsibility of Patriot or any of its affiliates. Except
as otherwise provided in this Agreement, any such request for reimbursement must be made by
PEC not later than the first anniversary of the Distribution Date.

     (d) From time to time after the Distribution Date, PEC shall promptly reimburse
Patriot, upon Patriot’s reasonable request and the presentation by Patriot of such
substantiating documentation as PEC shall reasonably request, for the cost of any
obligations or Liabilities satisfied or assumed by Patriot or its affiliates that are, or
that have been made pursuant to this Agreement, the responsibility of PEC or any of its
affiliates. Except as otherwise provided in this Agreement, any such request for
reimbursement must be made by Patriot not later than the first anniversary of the
Distribution Date.

     Section 2.2 Patriot Employee Participation in PEC Benefit Plans. Except as otherwise
expressly provided for in this Agreement or as otherwise expressly agreed to in writing between the
Parties, effective as of the Distribution Date (or a Patriot Employee’s later date of separation
from service with the PEC Group) each Patriot Employee and any other Patriot service provider
(including any individual who is an independent contractor, temporary employee, temporary service
worker, consultant, freelancer, agency employee, leased employee, on-call worker, incidental
worker, or non-payroll worker of any member of the Patriot Group or in any other employment,
non-employment, or retainer arrangement, or relationship with any member of the Patriot Group)
shall cease to participate in, be covered by, accrue benefits under, be eligible to contribute to
or have any rights (other than to benefits that have accrued and vested by the Distribution Date
or, if later, the Patriot Employee’s date of separation from service with the PEC Group) under any
PEC Benefit Plan, and PEC and Patriot shall take all necessary action to effectuate each such
cessation.

     Section 2.3 Service Credit. Except as otherwise expressly provided in this Agreement
or as otherwise expressly agreed to in writing between the Parties, Patriot (acting directly or
through its affiliates) shall cause the Patriot Service Plans to provide each PEC Employee who
becomes a Patriot Participant credit for purposes of eligibility, vesting, determination of benefit
levels, and, to the extent applicable, benefit accruals under the Patriot Service Plans for such
Patriot Participant’s service with any member of the PEC Group, in accordance with subsections (a)
and (b) below, to the same extent such service was recognized by the applicable PEC Service Plan;
provided that such service shall not be recognized to the extent that such
recognition would result in the duplication of benefits.

     (a) If a PEC Employee who participates in any of the PEC Service Plans (i) becomes
employed by a member of the Patriot Group within one (1) year after the Distribution Date
(or such later date as mutually agreed to by the Parties) (the “Service Crediting
Date”), and (ii) such PEC Employee was continuously employed by the PEC
Group from a date before the Distribution Date until immediately before the date such
PEC Employee commences active employment with a member of the Patriot Group, then such PEC
Employee’s service with the PEC Group shall be recognized for purposes of

6

 

eligibility,
vesting and level of benefits under the appropriate Patriot Service Plans, in each case to
the same extent as such PEC Employee’s service with the PEC Group was recognized under the
corresponding PEC Service Plans.

     (b) If a PEC Employee who participates in any of the PEC Service Plans becomes employed
by a member of the Patriot Group either (i) after the Service Crediting Date or (ii) without
having been continuously employed by the PEC Group from a date before the Distribution Date
until immediately before the date such PEC Employee commences active employment with a
member of the Patriot Group, then, except to the extent required by applicable Law, such
individual’s service with the PEC Group will not be recognized for any purpose under any
Patriot Service Plan.

     Section 2.4 Approval of Patriot Plans by PEC as Sole Shareholder. Effective before
the Distribution Date, Patriot shall adopt the Patriot Coal Corporation 2007 Long-Term Equity
Incentive Plan (the “Patriot Stock Plan”), which shall permit the issuance of long-term
incentive awards that have material terms and conditions substantially similar to the long-term
incentive awards issued under the Peabody Energy Corporation 2004 Long-Term Equity Incentive Plan.
The Patriot Stock Plan and the annual incentive plan adopted by Patriot in accordance with Section
6.1(b) of this Agreement shall be approved prior to the Distribution Date by a PEC affiliate as
Patriot’s sole shareholder.

ARTICLE 3

RETIREMENT PLANS

     Section 3.1 PEC and Patriot 401(k) Plans.

     (a) Patriot 401(k) Plan. Effective as of the Distribution Date, Patriot shall,
or shall cause one of its affiliates to, establish a defined contribution retirement plan
and trust for the benefit of Patriot Participants (the “Patriot 401(k) Plan”).
Patriot shall be responsible for taking all necessary, reasonable and appropriate action to
establish, maintain and administer the Patriot 401(k) Plan so that it is qualified under
Code Section 401(a) and the trust thereunder is exempt under Code Section 501(a). Patriot
(acting directly or through its affiliates) shall be responsible for any and all Liabilities
and other obligations with respect to the Patriot 401(k) Plan.

     (b) Transfer of PEC 401(k) Plan Assets. Not later than thirty (30) days after
the Distribution Date (or at such later time as mutually agreed in writing by the Parties),
PEC shall cause the accounts (including any outstanding loan balances and any employer
contribution accounts, vested or unvested) in the PEC 401(k) Plan attributable to Patriot
Participants who are employed as of the transfer date and all of the assets in the PEC
401(k) Plan related thereto to be transferred (based on the investments, including PEC
Common Stock, in place on or as soon as administratively practicable before the transfer
date) to the Patriot 401(k) Plan, and Patriot shall cause the Patriot 401(k) Plan to accept
such transfer of accounts and underlying assets and, effective as of the date of such
transfer, to assume and to fully perform, pay and discharge all obligations of the PEC
401(k) Plan relating to the accounts of Patriot Participants as of the transfer date,
to the extent the assets related to those accounts are actually transferred from the PEC
401(k) Plan to the Patriot 401(k) Plan. The transfer of assets shall be conducted in
accordance

7

 

with Code Section 414(l), Treasury Regulation Section 1.414(1)-1, and ERISA
Section 208. The PEC 401(k) Plan accounts of individuals who become Patriot Participants
after the Distribution Date that are not transferred to the Patriot 401(k) Plan pursuant to
the procedure described above shall be governed by the regular terms of the PEC 401(k) Plan.

     (c) Continuation of Elections. As of the Distribution Date, Patriot (acting
directly or through its affiliates) shall cause the Patriot 401(k) Plan to recognize and
maintain PEC 401(k) Plan elections or designations, including participant deferral elections
(to the extent possible), investment elections, beneficiary designations, and the rights of
alternate payees under qualified domestic relations orders with respect to Patriot
Participants, to the extent such elections or designations are available under the Patriot
401(k) Plan and continued pursuant to procedures adopted under the Patriot 401(k) Plan.
With respect to Patriot Participant elections to invest in PEC Common Stock, the Patriot
401(k) Plan will invest new deferral amounts covered by such elections in the appropriate
default target retirement fund under the Patriot 401(k) Plan and Patriot Participants may
change the investment of such amounts in accordance with Patriot 401(k) Plan procedures.
The PEC Common Stock investment alternative shall remain available under the Patriot 401(k)
Plan for up to two years (as determined by the Patriot 401(k) Plan fiduciaries in their sole
discretion) only with respect to accounts transferred from the PEC 401(k) Plan as described
in paragraph (b) above and only to the extent that such accounts are invested in PEC Common
Stock at the time of the transfer. A Patriot Common Stock investment alternative may be
made available under the Patriot 401(k) Plan at a later date.

     (d) Form 5310-A. No later than thirty (30) days prior to the Distribution
Date, PEC shall, if necessary, file IRS Form 5310-A regarding the transfer of Assets and
Liabilities from the PEC 401(k) Plan to the Patriot 401(k) Plan as discussed in this Article
3.

     (e) Contributions through the Distribution Date; Performance Contributions.
All contributions payable to the PEC 401(k) Plan through the Distribution Date with respect
to employee deferrals and contributions for PEC Employees who become Patriot Employees as of
the Distribution Date, determined in accordance with the terms and provisions of the PEC
401(k) Plan, ERISA and the Code, shall be paid by PEC (or its affiliate) to the PEC 401(k)
Plan prior to the date of the asset transfer described in paragraph (b) above. With respect
to the performance contributions that could have been earned during calendar year 2007 by
PEC Employees (i) who become Patriot Employees in connection with the Distribution, (ii) for
whom the 2007 performance contribution liability resides with an entity that does not
operate the Patriot Business (as defined in the Separation Agreement), and (iii) who remain
employed with the Patriot Group on December 31, 2007, PEC shall determine, in accordance
with regular plan procedures, the performance contribution amount each such Patriot Employee
could have received under the PEC 401(k) Plan, based on PEC’s performance
and such individual’s pro-rated PEC salary for the year, and shall remit that amount in
cash to Patriot at the same time performance contributions are deposited into the PEC 401(k)
Plan. Patriot shall deposit

8

 

the corresponding amount into the Patriot 401(k) Plan account
of the affected Patriot Employee as soon as administratively feasible following receipt.

     The Patriot Group shall fund and deposit into the Patriot 401(k) Plan the 2007
performance contributions on behalf of PEC Employees who become Patriot Employees in
connection with the Distribution and for whom the performance contribution liability resides
with an entity that operates the Patriot Business (as listed in Exhibit A to the Separation
Agreement).

     Section 3.2 PEC and Patriot Supplemental Defined Contribution Plans.

     (a) PEC Supplemental Employee Retirement Account Plan. Following the
Distribution Date, the PEC Group shall retain all obligations and Liabilities under, or with
respect to, the Peabody Investments Corp. Supplemental Employee Retirement Account (the
“PEC SERA”). Any rights of Patriot Employees earned under the PEC SERA before the
Distribution Date or their later date of separation from service with the PEC Group shall
remain with the PEC SERA and shall be governed by the terms and conditions of the PEC SERA
documents. Individuals, including Patriot Employees, who separate from service with the PEC
Group become eligible for distribution of their benefits under the PEC SERA in accordance
with the plan terms and administrative procedures.

     (b) Patriot Supplemental Defined Contribution Plan. Effective on or about the
Distribution Date, Patriot shall, or shall cause one of its affiliates to, establish a
non-qualified defined contribution plan that is substantially comparable to the PEC SERA as
in effect immediately prior to the Distribution Date to benefit, on a prospective basis,
Patriot Participants who participated in the PEC SERA immediately prior to the Distribution
Date and other eligible Patriot Employees (the “Patriot Supplemental Defined
Contribution Plan”).

     Section 3.3 PEC Defined Benefit Retirement Plans. Following the Distribution Date,
the PEC Group shall retain all obligations and Liabilities under, or with respect to, any PEC or
PEC Group qualified or non-qualified defined benefit retirement plan. Any rights of Patriot
Employees earned under any such defined benefit retirement plan before the Distribution Date or
their later date of separation from service with the PEC Group shall remain with such defined
benefit retirement plan and shall be governed by the terms and conditions of the applicable plan
documents. Individuals, including Patriot Employees, who separate from service with the PEC Group
become eligible for distribution of their benefits under the PEC Group qualified and non-qualified
defined benefit retirement plans in accordance with the plan terms and administrative procedures.

     Section 3.4 PEC Notice to Patriot of Benefit Distributions. The PEC Group agrees to
notify the Patriot human resources department, unless otherwise prohibited by law, of benefit
distribution elections submitted by Patriot Employees under the PEC SERA or a PEC Group
qualified or non-qualified defined benefit retirement plan within sixty (60) days after the
PEC Group receives such elections.

9

 

ARTICLE 4

HEALTH AND WELFARE PLANS

     Section 4.1 Patriot Welfare Plans.

     (a) Establishment of Patriot Welfare Plans. Effective as of the Distribution
Date, Patriot shall, or shall cause a Patriot affiliate to, establish health and welfare
benefit plans for the benefit of eligible Patriot Participants (the “Patriot Welfare
Plans”), the terms of which are substantially comparable to the applicable terms of the
PEC health and welfare benefit plans as in effect immediately prior to the Distribution Date
(the “PEC Welfare Plans”).

     (b) Terms of Participation in Patriot Welfare Plans. Patriot (acting directly
or through its affiliates) shall cause all Patriot Welfare Plans to (i) waive all
limitations as to preexisting conditions, exclusions, and service conditions with respect to
participation and coverage requirements applicable to Patriot Participants, other than
limitations that were in effect with respect to participants as of the Distribution Date
under the PEC Welfare Plans, and (ii) waive any waiting period limitation or evidence of
insurability requirement that would otherwise be applicable to a Patriot Participant
following the Distribution Date to the extent such Patriot Participant had satisfied any
similar limitation under the analogous PEC Welfare Plan.

     Section 4.2 Reimbursement Account Plan.

     (a) Patriot Reimbursement Account Plan. Effective as of the Distribution Date,
Patriot shall, or shall cause a Patriot affiliate to, establish a health and dependent care
reimbursement account plan (the “Patriot Reimbursement Account Plan”) with features
that are comparable to those contained in the health and dependent care reimbursement
account plan maintained by PEC (or its affiliate) immediately prior to the Distribution Date
(the “PEC Reimbursement Account Plan”). The account balance under the PEC
Reimbursement Account Plan of any PEC Participant who transfers to employment with the
Patriot Group directly from employment with the PEC Group during the period beginning on the
Distribution Date and ending on the Service Crediting Date shall be transferred within a
reasonable period to the Patriot Reimbursement Account Plan on behalf of that participant
and shall thereafter be administered in accordance with the terms of the Patriot
Reimbursement Account Plan. If a PEC Participant whose health reimbursement account is
transferred to the Patriot Reimbursement Account Plan has received health reimbursements
that exceed the amount he or she has contributed to the health reimbursement account as of
the transfer date, Patriot (or its affiliate) shall collect that Patriot Employee’s payroll
contributions in accordance with the Patriot Reimbursement Account Plan procedures and remit
them on a monthly basis to PEC until PEC has recouped the total health reimbursements paid
to or for that PEC Participant under the PEC Reimbursement Account Plan for the year;
provided that such contributions and remittances will cease upon the Patriot Employee’s
cessation of participation in the Patriot Reimbursement Account Plan. The PEC
Reimbursement Account Plan balance of any PEC Participant who transfers to employment
with the Patriot Group after the Service Crediting Date shall be handled in accordance with
the terms and procedures of the PEC Reimbursement Account Plan.

10

 

     PEC shall administer the Patriot Reimbursement Account Plan from the Distribution Date
through December 31, 2007 (including the claims run-out period following the end of the plan
year) and shall submit a monthly written invoice to Patriot detailing the reimbursement
claims and administrative fees incurred on Patriot’s behalf under the Patriot Reimbursement
Account Plan during that period. Patriot shall be liable for such amounts and shall pay
such invoices within thirty (30) business days after receipt. Patriot shall have the right,
at its own expense and upon reasonable notice to PEC, to audit, or to cause an inspection
body selected by Patriot and composed of members with appropriate professional
qualifications to audit, such invoices in a commercially reasonable manner during normal PEC
business hours, not more frequently than once each calendar quarter.

     (b) PEC Reimbursement Account Plan. PEC shall retain the Liability for
administering under the PEC Reimbursement Account Plan all reimbursement claims of PEC
Participants (including PEC Participants who participate in the PEC Reimbursement Account
Plan before becoming Patriot Employees) arising through and after the Distribution Date,
within the timeframes applicable under the plan terms.

     Section 4.3 Retiree Medical Benefits.

     (a) Patriot Retiree Medical Program. Effective on or about the Distribution
Date, Patriot shall, or shall cause one of its affiliates to, establish a retiree medical
program (the “Patriot Retiree Medical Program”) that is substantially comparable to
the retiree medical allowance arrangement maintained by PEC immediately prior to the
Distribution Date (the “PEC Retiree Medical Allowance”) to benefit, on a prospective
basis, Patriot Employees who participated in the PEC Retiree Medical Allowance prior to the
Distribution Date and other eligible Patriot Employees and certain retirees. Patriot shall
be responsible for all obligations and Liabilities under, or with respect to, the Patriot
Retiree Medical Program. The retiree medical allowance under the Patriot Retiree Medical
Program shall be based in part on service with the Patriot Group in accordance with
paragraphs (i) and (ii) below, as applicable.

     (i) Patriot Employees with No Accrued Benefit under the PEC Retiree Medical
Allowance. Patriot Employees who are eligible to participate in the Patriot
Retiree Medical Program and are not eligible for a retiree medical allowance under
the PEC Retiree Medical Allowance as of the Distribution Date or their later date of
separation from service with the PEC Group will receive credit under the Patriot
Retiree Medical Program for all of their service with the Patriot Group and the PEC
Group.

     (ii) Patriot Employees with Accrued Benefit under the PEC Retiree Medical
Allowance. Patriot Employees who are eligible for a retiree medical allowance
under the PEC Retiree Medical Allowance and are actively employed and not on
long-term disability leave as of the Distribution Date and Subsequent
Patriot Employees who are eligible for a retiree medical allowance under the
PEC Retiree Medical Allowance and are actively employed and not on long-term
disability leave as of their date of separation from service with the PEC Group will
retain their allowance accrued under the PEC Retiree Medical Allowance.

11

 

Such
employees will be eligible to accrue an additional retiree medical allowance under
the Patriot Retiree Medical Program based on their service with the Patriot Group
and will not be required to satisfy the minimum years of service requirement under
the Patriot Retiree Medical Program. The Patriot Retiree Medical Program shall not
recognize the PEC Group service of any Patriot Employee or Subsequent Patriot
Employee who earned a benefit under the PEC Retiree Medical Allowance in such a
manner that such service recognition would result in duplication of the retiree
medical allowance benefits earned under the PEC Retiree Medical Allowance.

     For the avoidance of doubt, the Patriot Group shall be responsible for the retiree
medical benefits of former employees who were employed by an entity that operates the
Patriot Business (as listed in Exhibit A to the Separation Agreement), other than retiree
healthcare benefits of former employees of Peabody Coal Company, LLC under the Peabody
Investments Corp. and Affiliates Welfare Benefit Plan that are covered by the Salaried
Employee Liabilities Assumption Agreement between the Parties and certain of their
affiliates.

     (b) PEC Retiree Medical Allowance. PEC shall retain all obligations and
Liabilities under, or with respect to, the PEC Retiree Medical Allowance for Patriot
Employees and Subsequent Patriot Employees covered by paragraph (ii) above. Any rights such
Patriot Employees accrued under the PEC Retiree Medical Allowance before the Distribution
Date and rights such Subsequent Patriot Employees accrued under the PEC Retiree Medical
Allowance before their date of separation from service with the PEC Group shall remain with
the PEC Retiree Medical Allowance and shall be governed by the terms and conditions of the
PEC Retiree Medical Allowance arrangement.

     Section 4.4 COBRA and HIPAA. Effective as of the Distribution Date, Patriot (acting
directly or through its affiliates) shall assume, or shall cause the Patriot Welfare Plans to
assume, responsibility for compliance with the health care continuation coverage requirements of
COBRA with respect to Patriot Employees who, immediately prior to the Distribution Date, were
covered under a PEC Welfare Plan pursuant to COBRA. PEC (acting directly or through its
affiliates) shall be responsible for administering compliance with any certificate of creditable
coverage requirements of HIPAA or Medicare applicable to the PEC Welfare Plans with respect to
Patriot Employees incurred while they were participants in the PEC Welfare Plans. The Parties
hereto agree that neither the Distribution nor any transfers of employment directly from the PEC
Group to the Patriot Group that occur as of the Distribution Date shall constitute a COBRA
qualifying event for purposes of COBRA.

     Section 4.5 Liabilities.

     (a) Insured Benefits. With respect to employee welfare and fringe benefits
that are provided through the purchase of insurance, (i) PEC (acting directly or through its
affiliates) shall cause the PEC Welfare Plans, through the appropriate insurers, to fully
perform, pay and discharge, within the timeframes applicable under the relevant plan,
all claims that are incurred under the PEC Welfare Plans through and after the Distribution
Date, and (ii) Patriot (acting directly or through its affiliates) shall cause the Patriot
Welfare Plans, through the appropriate insurers, to fully perform, pay and discharge,

12

 

within
the timeframes applicable under the relevant plan, all claims that are incurred under the
Patriot Welfare Plans from and after the Distribution Date.

     (b) Self-Insured Benefits. With respect to employee welfare and fringe
benefits that are provided on a self-insured basis, (i) PEC (acting directly or through its
affiliates) shall fully perform, pay and discharge, within the timeframes applicable under
the relevant PEC Welfare Plans, all claims that are incurred under the PEC Welfare Plans
through and after the Distribution Date, and (ii) Patriot (acting directly or through its
affiliates) shall fully perform, pay and discharge, within the timeframes applicable under
the relevant Patriot Welfare Plans, all claims that are incurred under the Patriot Welfare
Plans from and after the Distribution Date.

     (c) Invoices. PEC shall administer the Patriot Welfare Plans from the
Distribution Date through December 31, 2007 (including the claims run-out period following
the end of the plan year) and shall submit a monthly written invoice to Patriot detailing
the self-insured health and welfare benefit claims, insured benefit premiums and
administrative fees incurred on Patriot’s behalf under the Patriot Welfare Plans during that
period. Patriot shall be liable for such amounts and shall pay such invoices within thirty
(30) business days after receipt. Patriot shall have the right, at its own expense and upon
reasonable notice to PEC, to audit, or to cause an inspection body selected by Patriot and
composed of members with appropriate professional qualifications to audit, such invoices in
a commercially reasonable manner during normal PEC business hours, not more frequently than
once each calendar quarter.

     (d) Incurred Claim Definition. For purposes of this Section 4.5, a claim or
Liability is deemed to be incurred (i) with respect to medical, dental, vision and/or
prescription drug benefits, upon the rendering of health services giving rise to such claim
or Liability; (ii) with respect to disability benefits, upon the date of an individual’s
disability, as determined by the disability benefit insurance carrier or claim
administrator, giving rise to such claim or Liability; and (iii) with respect to a period of
continuous hospitalization, upon the date of admission to the hospital.

     Section 4.6 Vacation and Other Time-Off Benefits. Patriot (or its affiliate) shall
credit each individual who becomes a Patriot Employee as of the Distribution Date and each
Subsequent Patriot Employee with the amount of accrued but unused vacation time (including banked
vacation time) and other time-off benefits as such Patriot Employee or Subsequent Patriot Employee
had with the PEC Group as of the Distribution Date or, if later, his or her date of transfer from
the PEC Group to the Patriot Group. The Patriot Employees and Subsequent Patriot Employees for
whom Patriot (or its affiliate) provides vacation and other time-off credits as described above
shall not have a right to a cash payment for their accrued but unused vacation time (including
banked vacation time) or other time-off benefits upon their transfer from the PEC Group to the
Patriot Group as a result of the Distribution.

     Notwithstanding the foregoing, Patriot (or its affiliate) shall not be required to credit any
Patriot Employee or Subsequent Patriot Employee with any vacation or time-off accrual to the extent
that a benefit attributable to such accrual is retained and provided by the PEC Group. The accrued
but unused vacation time (including banked vacation time) and other time-off benefits of PEC
Employees who become Patriot Employees after the Service Crediting Date shall be

13

 

handled in
accordance with the terms and procedures of the PEC vacation and time-off benefits plans and
policies.

ARTICLE 5

LONG-TERM INCENTIVE AWARDS

     Section 5.1 Treatment of Outstanding PEC Options.

     (a) Adjustment of All PEC Options. Except as otherwise provided herein or
otherwise agreed in writing by the Parties, each PEC Option that is outstanding immediately
prior to the Distribution Date shall, as of the Distribution Date, be converted into an
adjusted PEC Option (an “Adjusted PEC Option”) based on a formula determined by the
PEC Compensation Committee in accordance with the pertinent terms of the applicable PEC
Stock Plan and described in Exhibit A attached hereto. Such adjustment may involve an
adjustment of the PEC Option exercise price, the number of underlying shares, and/or other
adjustments permitted by the applicable PEC Stock Plan.

     (b) Adjusted PEC Options of Patriot Employees. Adjusted PEC Options held by
Patriot Employees who are not Patriot Senior Management Employees that have not been
exercised or forfeited shall remain in effect and continue to vest following the
Distribution Date based on the optionee’s service with the Patriot Group. An Adjusted PEC
Option shall remain subject to the terms and conditions (including the exercise provisions)
of the underlying PEC Option as in effect immediately prior to the Distribution Date,
subject to amendments to the PEC Stock Plan and/or the applicable award agreement.

     (c) PEC Options of Patriot Senior Management Employees.

     (i) Options Scheduled to Vest on or Before January 3, 2008. Adjusted
PEC Options held by a Patriot Senior Management Employee that are scheduled to vest
on or before January 3, 2008 and have not been forfeited by the Distribution Date
shall continue to vest based on the optionee’s service with the Patriot Group
through the earlier of his or her date of termination from Patriot or January 3,
2008. The Patriot Senior Management Employee shall have six (6) months after the
earlier of January 3, 2008 or his or her date of termination from the Patriot Group
to exercise the vested portion of his or her Adjusted PEC Options in accordance with
the terms of the applicable plan and option agreement. An Adjusted PEC Option shall
remain subject to the terms and conditions of the underlying PEC Option as in effect
immediately prior to the Distribution Date, including any Detrimental Conduct
Provisions and terms relating to post-termination exercise periods provided for in
any option holder’s employment agreement, subject to amendments to the PEC Stock
Plan and/or the applicable award agreement.

     (ii) Options Granted before 2006 and Scheduled to Vest After January 3,
2008. Adjusted PEC Options held by a Patriot Senior Management Employee that
were granted before January 1, 2006, are scheduled to vest after January 3, 2008 and
have not been forfeited by the Distribution Date shall vest in full

14

 

immediately
prior to the Distribution and shall be converted to a dollar value, determined by
subtracting the exercise price from the closing price of the PEC Common Stock on the
Distribution Date, and that value will be distributed to the Patriot Senior
Management Employee as soon as practicable on or after the Distribution Date in the
form of registered shares of PEC Common Stock based on the closing price of PEC
Common Stock on the Distribution Date.

     (iii) Options Granted During 2006 or 2007. PEC Options held by a
Patriot Senior Management Employee that were granted during 2006 or 2007 and have
not been exercised or forfeited by the Distribution Date shall vest in full
immediately prior to the Distribution and shall be converted into a number of
registered shares of PEC Common Stock determined by dividing the targeted
compensation value used at the time of the option grant to determine the number of shares subject to the options by the closing price of PEC Common Stock on the
applicable grant date. This number of shares shall be adjusted to take the
Distribution into account based on the formula described in Exhibit A attached
hereto. The resulting number of shares of PEC Common Stock shall be distributed to
the Patriot Senior Management Employee as soon as practicable on or after the
Distribution Date.

     (d) Amendment of PEC Stock Plans. Prior to the Distribution Date, PEC shall
amend the applicable PEC Stock Plans as necessary, effective as of the Distribution Date, to
provide that for purposes of the Adjusted PEC Options (including the determination of
exercisability and the post-termination exercise period), a Patriot Employee’s service with
the Patriot Group following the Distribution Date shall be deemed to be continued service
with PEC.

     (e) Exercise of Adjusted PEC Options. Upon the exercise of an Adjusted PEC
Option, regardless of the holder thereof, the exercise price shall be paid (or otherwise
satisfied to the satisfaction of PEC) in accordance with the terms of the Adjusted PEC
Option. PEC shall administer the applicable PEC Stock Plan and award agreement in
accordance with their terms and, to the extent that any tax withholding or reporting is
required, PEC shall collect the withholding amount and remit it and the pertinent
information to the entity with the withholding and reporting obligation.

     Section 5.2 Treatment of Outstanding PEC Restricted Stock.

     (a) Rights of All PEC Restricted Stock Awards. Each holder of PEC Restricted
Shares that remain outstanding on the Record Date shall receive, as of the Distribution
Date, the dividend paid in connection with the Distribution with respect to his or her PEC
Restricted Shares in accordance with the terms of the applicable plan and award agreement
and on the same basis as other PEC shareholders.

     (b) PEC Restricted Shares of Patriot Employees. PEC Restricted Shares held by
Patriot Employees who are not Patriot Senior Management Employees that have not been
forfeited by the Distribution Date shall remain in effect and continue to vest following the
Distribution Date based on the holder’s service with the Patriot Group. The PEC Restricted
Shares shall remain subject to the terms and conditions of the underlying

15

 

PEC Restricted
Shares award as in effect immediately prior to the Distribution Date, subject to amendments
to the PEC Stock Plan and/or the applicable award agreement.

     (c) PEC Restricted Shares of Patriot Senior Management Employees.

     (i) PEC Restricted Shares Scheduled to Vest on or Before January 3,
2008. PEC Restricted Shares held by Patriot Senior Management Employees that
have not been forfeited by the Distribution Date shall remain in effect and continue
to vest based on the holder’s service with the Patriot Group through the earlier of
his or her date of termination from Patriot or January 3, 2008. The PEC Restricted
Shares shall remain subject to the terms and conditions of the underlying PEC
Restricted Shares award as in effect immediately prior to the Distribution Date,
including any Detrimental Conduct Provisions provided for in any holder’s employment
agreement, subject to amendments to the PEC Stock Plan and/or the applicable award
agreement.

     (ii) Restricted Shares Scheduled to Vest After January 3, 2008. PEC
Restricted Shares held by Patriot Senior Management Employees that are scheduled to
vest later than January 3, 2008 and have not been forfeited by the Distribution Date
shall become fully vested immediately prior to the Distribution and shall be
distributed to the Patriot Senior Management Employees in the form of registered shares of PEC Common Stock as soon as practicable on or after the Distribution Date.

     (d) Amendment of PEC Stock Plans. Prior to the Distribution Date, PEC shall
amend the applicable PEC Stock Plans as necessary, effective as of the Distribution Date, to
provide that for purposes of continued vesting of PEC Restricted Shares, a Patriot
Employee’s service with the Patriot Group following the Distribution Date shall be deemed to
be continued service with PEC

     (e) Settlement of PEC Restricted Stock Awards. Upon the vesting of PEC
Restricted Shares, PEC shall be responsible for the settlement of such PEC Restricted
Shares. PEC shall administer the applicable PEC Stock Plan and award agreement in
accordance with their terms and, to the extent that any tax withholding or reporting is
required, PEC shall collect the withholding amount and remit it and the pertinent
information to the entity with the withholding and reporting obligation.

     Section 5.3 Treatment of Outstanding PEC Performance Units Awards.

     (a) Adjustment of all PEC Performance Unit Awards. Each PEC Performance Unit
that is outstanding immediately prior to the Distribution Date shall be converted, as of the
Distribution Date, into an adjusted PEC Performance Unit (an “Adjusted PEC Performance
Unit”) based on a formula determined by the PEC
Compensation Committee in accordance with the pertinent terms of the applicable PEC
Stock Plan and described in Exhibit A attached hereto. Such adjustment may involve an
adjustment in the number of underlying shares and/or other adjustments permitted by the
applicable PEC Stock Plan.

16

 

     (b) Adjusted PEC Performance Units of Patriot Senior Management Employees.

     (i) Adjusted PEC Performance Units Scheduled to Vest on or Before December
31, 2007. Adjusted PEC Performance Units held by Patriot Senior Management
Employees that have not been forfeited by the Distribution Date shall remain in
effect and continue to vest based on the holder’s service with the Patriot Group
through the earlier of his or her date of termination from Patriot or December 31,
2007. The Adjusted PEC Performance Units shall remain subject to the terms and
conditions of the underlying PEC Performance Units award as in effect immediately
prior to the Distribution Date, including any Detrimental Conduct Provisions
provided for in the holder’s employment agreement.

     (ii) Adjusted PEC Performance Units Scheduled to Vest After December 31,
2007. Adjusted PEC Performance Units held by a Patriot Senior Management
Employee that are scheduled to vest after December 31, 2007 and have not been
forfeited by December 31, 2007 shall become payable at their full value (without
proration) based on PEC’s actual performance results as of December 31, 2007,
provided that the Patriot Senior Management Employee remains employed with Patriot
on December 31, 2007. PEC shall pay the value of such Adjusted PEC Performance
Units in the form of PEC Common Stock in accordance with regular PEC Stock Plan
administrative procedures as soon as practicable on or after December 31, 2007, but
no later than March 15, 2008. If a Patriot Senior Management Employee terminates
employment with Patriot before December 31, 2007, a pro rata portion of his or her
Adjusted PEC Performance Units may be payable based on the terms and conditions of
the underlying PEC Performance Units award. The Adjusted PEC Performance Units
shall remain subject to the terms and conditions of the underlying PEC Performance
Units award as in effect immediately prior to the Distribution Date, including any
Detrimental Conduct Provisions provided for in the holder’s employment agreement.

     (c) Amendment of PEC Stock Plans. Prior to the Distribution Date, PEC shall
amend the applicable PEC Stock Plans as necessary, effective as of the Distribution Date, to
provide that for purposes of continued vesting of the Adjusted PEC Performance Units, a
Patriot Employee’s service with the Patriot Group following the Distribution Date through
December 31, 2007 shall be deemed to be continued service with PEC.

     (d) Settlement of Adjusted PEC Performance Unit Awards. Upon the vesting and
payment of the Adjusted PEC Performance Units, PEC shall be responsible for the settlement
of all Adjusted PEC Performance Unit awards. PEC shall administer the applicable PEC Stock
Plan and award agreement in accordance with their terms and, to the extent that any tax
withholding or reporting is required, PEC shall collect the
withholding amount and remit it and the pertinent information to the entity with the
withholding and reporting obligation.

     Section 5.4 PEC ESPP. A PEC Participant who (a) is contributing to the PEC ESPP for
the offering period in effect on the Distribution Date and (b) terminates employment with

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PEC and
transfers directly to employment with Patriot in connection with the Distribution shall be
permitted to purchase shares during that offering period with the cash credited to his or her PEC
ESPP option account as of his or her employment termination date, provided that
such PEC Participant’s employment termination date and transfer to Patriot occurs within three (3)
months before the end of the PEC ESPP offering period. If the employment termination and Patriot
transfer date is more than three (3) months before the end of the PEC ESPP offering period, the PEC
Participant shall not be permitted to purchase shares during the offering period in effect on the
Distribution Date and his or her contributions will be refunded in accordance with the terms of the
PEC ESPP. The payroll deductions of PEC Participants covered by this provision shall continue
through the last day on which such individuals are on the PEC payroll. PEC shall amend the PEC
ESPP on or before the Distribution Date to facilitate the share purchase described in the first
sentence of this section. The PEC ESPP otherwise shall operate in accordance with its current
terms, including, among other provisions, the 18-month stock holding period requirement.

     Section 5.5 Cooperation. Each of the Parties shall establish an appropriate
administration system to handle, in an orderly manner, exercises of Adjusted PEC Options and the
settlement of PEC Restricted Shares and Adjusted PEC Performance Units. The Parties will work
together to unify and consolidate all indicative data and payroll and employment information on
regular timetables and make certain that each applicable entity’s data and records in respect of
such awards are correct and updated on a timely basis. The foregoing shall include employment
status and information required for tax withholding/remittance, compliance with trading windows and
compliance with the requirements of the Exchange Act and other applicable Laws. In addition, the
Patriot Group agrees to notify the PEC human resources department of the termination of employment
of any Patriot Employee who previously was a PEC Employee and participated in a PEC Stock Plan as
soon as administratively feasible after such individual’s separation from service with the Patriot
Group.

     Section 5.6 SEC Registration. The Parties mutually agree to use commercially
reasonable efforts to maintain effective registration statements with the SEC with respect to the
long-term incentive awards described in this Article 5, to the extent any such registration
statement is required by applicable Law. To the extent that a registration requirement applies to
a PEC Stock Plan, PEC shall be responsible for SEC rule compliance. To the extent that a
registration requirement applies to a Patriot Stock Plan on or after the Distribution Date, Patriot
shall be responsible for SEC rule compliance.

     Section 5.7 Savings Clause. The Parties hereby acknowledge that the provisions of
this Article 5 are intended to achieve certain tax, legal and accounting objectives and, in the
event such objectives are not
achieved, the Parties agree to negotiate in good faith regarding such other actions that may
be necessary or appropriate to achieve such objectives.

18

 

ARTICLE 6

ADDITIONAL COMPENSATION MATTERS

     Section 6.1 Annual Incentive Awards.

     (a) PEC Employees who become Patriot Employees in connection with the Distribution
shall receive their annual incentive awards for the full 2007 calendar year, calculated as
described below.

     (i) Patriot Senior Management Employees. With respect to Patriot
Senior Management Employees, sixty percent (60%) of the annual incentive shall be
nondiscretionary and based on PEC’s performance in accordance with the terms of the
PEC annual incentive plan (using PEC’s twelve-month results) and forty percent (40%)
of the annual incentive will be discretionary and based on the Patriot Senior
Management Employee’s efforts related to the Distribution in accordance with
criteria established by the Patriot Board of Directors or the Compensation Committee
thereof. The annual incentive awards will be calculated and paid, in accordance
with paragraph (b) below and the existing guidelines used by PEC to calculate and
pay such bonuses, as soon as practicable on or after December 31, 2007, but no later
than March 15, 2008.

     (ii) Other Patriot Employees. With respect to Patriot Employees who
are not Patriot Senior Management Employees, the annual incentive shall be
determined based in part on the portion of the 2007 calendar year the Patriot
Employee is employed with the PEC Group and in part on the portion of the 2007
calendar year the Patriot Employee is employed with the Patriot Group. The portion
of the annual incentive attributable to employment with the PEC Group shall be based
on PEC’s performance (using PEC’s twelve-month results) and the terms of the PEC
annual incentive plan and shall be prorated to correspond with the period of 2007
employment with the PEC Group. The portion of the annual incentive attributable to
employment with the Patriot Group shall be based on criteria established by the
Patriot Board of Directors or the Compensation Committee thereof and shall be
prorated to correspond with the period of 2007 employment with the Patriot Group.
The annual incentive awards will be calculated and paid, in accordance with
paragraph (b) below and the existing guidelines used by PEC to calculate and pay
such bonuses, as soon as practicable on or after December 31, 2007, but no later
than March 15, 2008.

     (b) Annual Incentive Liability. Except as otherwise provided in this Section
6.1, PEC shall retain responsibility for all Liabilities and fully perform, pay and
discharge all obligations, when such obligations become due, relating to any 2007 annual
incentive awards under any PEC annual incentive plan. To the extent that any such
obligations relate to PEC Employees who become Patriot Employees in connection with the
Distribution and for whom the 2007 annual incentive award liability resides with an entity
that does not operate the Patriot Business (as defined in the Separation Agreement),
(i) the PEC Group shall pay to the applicable Patriot Employees the portion of their
2007 annual incentive, if any, that corresponds with their period of employment with the PEC
Group during the 2007 calendar year, and (ii) Patriot shall pay the portion of their 2007

19

 

annual incentive, if any, that corresponds with their period of employment with the Patriot
Group during the 2007 calendar year.

     The Patriot Group shall be responsible for and pay the 2007 annual incentive awards of
PEC Employees who become Patriot Employees in connection with the Distribution and for whom
the 2007 annual incentive award liability resides with an entity that operates the Patriot
Business (as listed in Exhibit A to the Separation Agreement).

     (c) Establishment of Patriot Annual Incentive Plan. Effective on or before
January 1, 2008, Patriot (or its affiliate) shall adopt an annual incentive plan that
permits the issuance of annual incentive awards on terms and conditions substantially
comparable to those under the PEC annual incentive plan, provided that the payment amounts
and individual performance criteria shall be established in the discretion of the Patriot
Board of Directors or the Compensation Committee thereof.

     Section 6.2 PEC Individual Arrangements. PEC acknowledges and agrees that, except as
otherwise provided herein, PEC (or its affiliate) shall have full responsibility with respect to
any Liabilities and the payment or performance of any obligations arising out of or relating to any
employment, consulting, non-competition, retention or other compensatory arrangement previously
provided by any member of the PEC Group to any PEC Participant, including life insurance policies
not held in any trust and covering any PEC Participant.

     Section 6.3 Severance Benefits. PEC and Patriot acknowledge and agree that the
transactions contemplated by the Separation Agreement will not constitute a termination of
employment for purposes of any policy, plan, program or agreement of PEC or any member of the PEC
Group that provides for the payment of severance, separation pay, salary continuation or similar
benefits in the event of a termination of employment.

     Section 6.4 Benefit Administration. In addition to the benefit plans and other
programs PEC (or its affiliate) is to administer on Patriot’s behalf in accordance with this
Agreement, PEC (or its affiliate) shall administer such other programs as agreed upon and
identified in writing by the Parties for the benefit of Patriot Employees from the Distribution
Date through December 31, 2007.

     Section 6.5 Tax Matters.

     (a) Tax Deductions in General. The Parties agree to take the actions that are
necessary or desirable to enable the Party responsible for any payment under this Agreement
to receive, to the extent possible, the benefit of any tax deduction related to such
payment. If the Patriot Group receives a tax benefit as a result of any payment or benefit
funded by the PEC Group under this Agreement, the Patriot Group shall
reimburse the PEC Group for that tax benefit at the time and to the extent that such
tax benefit is realized.

     (b) Equity-Based Compensation Deductions. The Parties agree that, to the
extent permitted by law, tax deductions for equity-based compensation described in Sections
5.1Section 5.1, 5.2, and 5.3 shall be allocated to and claimed by the entity or

20

 

entities
that employed the individual receiving the compensation during the relevant vesting period
based on the number of months of such individual’s employment with such entity or entities.
Tax withholding and reporting obligations will be the responsibility of the entity claiming
the deduction. To the extent deductions cannot be claimed in this manner or are disallowed
or adjusted on audit, the entity that receives the tax benefit shall reimburse the entity
that would have received such tax benefit pursuant to the preceding sentence as and when
realized. To the extent such reimbursement is treated as taxable income, the reimbursing
party shall gross-up the reimbursement amount for taxes.

     (c) Code Sections 162(m) and 409A. Notwithstanding anything in this Agreement
to the contrary (including the treatment of supplemental and deferred compensation plans,
outstanding long-term incentive awards and annual incentive awards as described herein), the
Parties agree to take the actions that are necessary or desirable to ensure that (a) a
federal income tax deduction for the payment of such supplemental or deferred compensation
or long-term incentive award, annual incentive award or other compensation is not limited by
reason of Code Section 162(m), and (b) the treatment of such supplemental or deferred
compensation or long-term incentive award, annual incentive award or other compensation does
not cause the imposition of a tax under Code Section 409A.

ARTICLE 7

INDEMNIFICATION

Any claim for indemnification under this Agreement shall be governed by, and be subject
to, the provisions of Article VI of the Separation Agreement, which provisions are hereby
incorporated by reference into this Agreement, and any references to “Agreement” in such
Article VI as incorporated herein shall be deemed to be references to this Agreement.

ARTICLE 8

GENERAL AND ADMINISTRATIVE

     Section 8.1 Sharing of Information. PEC and Patriot (acting directly or through their
respective affiliates) shall provide to the other and their respective agents and vendors all
Information as the other may reasonably request to enable the requesting Party to administer
efficiently and accurately each of its Benefit Plans and to determine the scope of, as well as
fulfill, its obligations under this Agreement. Such information shall, to the extent reasonably
practicable, be provided in the format and at the times and places requested, but in no event shall
the Party providing such information be obligated to
incur any out-of-pocket expenses not reimbursed by the Party making such request or make such
information available outside of its normal business hours and premises. Any information shared or
exchanged pursuant to this Agreement shall be subject to the confidentiality requirements set forth
in Section 13.04 of the Separation Agreement. The Parties also hereby agree to enter into
any business associate agreements that may be required for the sharing of any Information pursuant
to this Agreement to comply with the requirements of HIPAA.

     Section 8.2 Reasonable Efforts/Cooperation. Each of the Parties hereto will use its
commercially reasonable efforts to promptly take, or cause to be taken, all actions and to do, or

21

 

cause to be done, all things necessary, proper or advisable under applicable Laws and regulations
to consummate the transactions contemplated by this Agreement, including adopting plans or plan
amendments. Each of the Parties hereto shall cooperate fully on any issue relating to the
transactions contemplated by this Agreement for which the other Party seeks a determination letter
or private letter ruling from the IRS, an advisory opinion from the DOL or any other filing,
consent or approval with respect to or by a Governmental Entity.

     Section 8.3 Employer Rights. Nothing in this Agreement shall prohibit Patriot or any
Patriot affiliate from amending, modifying or terminating any Patriot Benefit Plan at any time
within its sole discretion after the Distribution Date. In addition, other than as provided in
Article 3, Article 4, Article 5, or Article 6, nothing in this Agreement shall prohibit PEC or any
PEC affiliate from amending, modifying or terminating any PEC Benefit Plan at any time within its
sole discretion.

     Section 8.4 Effect on Employment. Except as expressly provided in this Agreement, the
occurrence of the distribution alone shall not cause any employee to be deemed to have incurred a
termination of employment that entitles such individual to the commencement of benefits under any
of the PEC Benefit Plans. Furthermore, nothing in this Agreement is intended to confer upon any
employee or former employee of PEC, Patriot or any of their respective affiliates any right to
continued employment, or any recall or similar rights to an individual on layoff or any type of
approved leave.

     Section 8.5 Consent of Third Parties. If any provision of this Agreement depends on
the consent of any third party and such consent is withheld, the Parties shall use commercially
reasonable efforts to implement the applicable provisions of this Agreement to the fullest extent
practicable. If any provision of this Agreement cannot be implemented due to the failure of such
third party to consent, the Parties shall negotiate in good faith to implement the provision in a
mutually satisfactory manner.

     Section 8.6 Access to Employees. Following the Distribution Date, PEC and Patriot
shall, or shall cause their respective affiliates to, make available to each other those of their
employees who may reasonably be
needed in order to defend or prosecute any legal or administrative action (other than a legal
action between PEC and Patriot) to which any employee, director or Benefit Plan of the PEC Group or
the Patriot Group is a party and which relates to their respective Benefit Plans prior to the
Distribution Date. The Party to whom an employee is made available in accordance with this Section
8.6 shall pay or reimburse the other Party for all reasonable expenses which may be incurred by
such employee in connection therewith, including all reasonable travel, lodging, and meal expenses,
but excluding any amount for such employee’s time spent in connection herewith.

     Section 8.7 Beneficiary Designation/Release of Information/Right to Reimbursement. To
the extent permitted by applicable Law and except as otherwise provided for in this Agreement, all
beneficiary designations, authorizations for the release of information and rights to reimbursement
made by or relating to Patriot Employees under PEC Benefit Plans shall be transferred to and be in
full force and effect under the corresponding Patriot Benefit Plans until such beneficiary
designations, authorizations or rights are replaced or revoked by, or no longer apply to, the
relevant Patriot Employee.

22

 

     Section 8.8 Not a Change in Control. The Parties hereto acknowledge and agree that
the transactions contemplated by the Separation Agreement and this Agreement do not constitute a
“change in control” for purposes of any PEC Benefit Plan, PEC Stock Plan or Patriot Benefit Plan.

ARTICLE 9

MISCELLANEOUS

     Section 9.1 Effect if Distribution Does not Occur. Notwithstanding anything in this
Agreement to the contrary, if the Separation Agreement is not executed or if it terminates prior to
the Effective Time, then all actions and events that are, under this Agreement, to be taken or
occur effective prior to, as of or following the Distribution Date, or otherwise in connection with
the distribution, shall not be taken or occur except to the extent specifically agreed to in
writing by PEC and Patriot and neither Party shall have any Liability or further obligation to the
other Party under this Agreement.

     Section 9.2 Relationship of Parties. Nothing in this Agreement shall be deemed or
construed by the Parties or any third party as creating the relationship of principal and agent,
partnership or joint venture between the Parties, it being understood and agreed that no provision
contained herein, and no act of the Parties, shall be deemed to create any relationship between the
Parties other than the relationship set forth herein.

     Section 9.3 Affiliates. Each of PEC and Patriot shall cause to be performed, and hereby guarantees the performance
of, all actions, agreements and obligations set forth in this Agreement to be performed by each of
their affiliates, respectively.

     Section 9.4 Notices. All notices and communications under this Agreement shall be in
writing and shall be deemed to have been given (a) when received, if such notice or communication
is delivered by facsimile, hand delivery or overnight courier, or (b) three (3) business days after
mailing if such notice or communication is sent by United States registered or certified mail,
return receipt requested, first class postage prepaid. All notices and communications, to be
effective, must be properly addressed to the party to whom they are directed at its address as
follows:

To PEC:

Peabody Energy Corporation

701 Market Street

St. Louis, MO 63101

Attn: Alexander Schoch, Executive Vice President – Law

Facsimile: 314.342.3419

To Patriot:

Patriot Coal Corporation

12312 Olive Boulevard, Suite 400

St. Louis, MO 63141

Attn: Joseph W. Bean, Senior Vice President, General Counsel and Secretary

Facsimile: 314.342.3419

23

 

Either Party may, by written notice delivered to the other Party in accordance with this Section
9.4, change the address to which delivery of any notice shall thereafter be made.

     Section 9.5 Entire Agreement. This Agreement, the Separation Agreement, and each
other Ancillary Agreement, including any annexes, schedules and exhibits hereto and thereto, as
well as any other agreements and documents referred to herein and therein, 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. In the
event of any inconsistency between this Agreement and any exhibit or schedule hereto, the exhibit
or schedule shall prevail.

     Section 9.6 Waivers. No waiver of any terms, provision or condition of or failure to
exercise or delay in exercising any rights or remedies under this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term,
provision, condition, right or remedy or as a waiver of any other term, provision or condition of
this Agreement.

     Section 9.7 Amendments. Subject to the terms of Section 9.8 of this Agreement, this Agreement may not be modified
or amended except by an instrument in writing signed by both of the Parties.

     Section 9.8 Termination. If permitted by the Separation Agreement, this Agreement
(including Article 7 hereof (Indemnification)) may be terminated and abandoned at any time prior to
the Distribution Date by and in the sole discretion of PEC without the approval of Patriot or the
shareholders of PEC, and it shall be deemed terminated if and when the Separation Agreement is
terminated. In the event of such termination, neither Party shall have any liability of any kind
to the other Party or any other Person, except as may be provided in transition letters issued by
PEC to Patriot Senior Management Employees. After the Distribution Date, this Agreement may not be
terminated except by an agreement in writing signed by both Parties; provided, however, that
Article 7 shall not be terminated after the Distribution Date in respect of any PEC Indemnitee or
Patriot Indemnitee without the consent of such Person.

     Section 9.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal Laws of the State of Delaware, without regard to the conflicts of law
rules of such state).

     Section 9.10 Dispute Resolution. The dispute resolution provisions in Section
15.15 of the Separation Agreement shall apply to this Agreement.

     Section 9.11 Titles 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 9.12 Counterparts. This Agreement may be executed in more than one
counterpart, each of which shall be deemed an original instrument and all of which together shall
be considered one and the same agreement, and shall become effective when one or more such
counterparts have been signed by each of the Parties and delivered to the other Parties.

24

 

     Section 9.13 Assignment. Neither of the Parties hereto may assign its rights or delegate
any of its duties under this Agreement without the prior written consent of the other Party or as
otherwise provided in the Separation Agreement. This Agreement shall be binding upon, and shall
inure to the benefit of, the Parties and their respective successors and permitted assigns.
Nothing contained in this Agreement, express or implied, is intended to confer any benefits, rights
or remedies upon any Person other than members of the PEC Group and the Patriot Group.

     Section 9.14 Severability. In the event that any one or more of the provisions contained in this Agreement is 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.

     Section 9.15 Exhibits and Schedules. The Exhibits and Schedules 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 9.16 Specific Performance. The Parties agree that irreparable damage would
occur in the event that the provisions of this Agreement were not performed in accordance with
their specific terms. Accordingly, it is hereby agreed that the Parties shall be entitled to (a) an
injunction or injunctions to enforce specifically the terms and provisions hereof in any
arbitration in accordance with Section 9.10 of this Agreement, (b) provisional or temporary
injunctive relief in accordance therewith in any court of the United States, and (c) enforcement of
any such award of an arbitral tribunal or any court of the United States, or any other any other
tribunal sitting in any state of the United States or in any foreign country that has jurisdiction,
this being in addition to any other remedy or relief to which they may be entitled.

     Section 9.17 Waiver of Jury Trial. SUBJECT TO SECTION 9.10 AND SECTION 9.16 OF THIS
AGREEMENT, EACH OF THE PARTIES HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY COURT PROCEEDING DIRECTLY OR INDIRECTLY
ARISING OUT OF AND PERMITTED UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT. EACH OF THE PARTIES HEREBY (a) CERTIFIES THAT NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (b) ACKNOWLEDGES
THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 9.17.

     Section 9.18 Authorization. Each of the Parties hereby represents and warrants that
it has the power and authority to execute, deliver and perform this Agreement, that this Agreement
has been duly authorized by all necessary corporate action on the part of such Party, that this
Agreement constitutes a legal, valid and binding obligation of each such Party and that the
execution, delivery and performance of this Agreement by such Party does not contravene or

25

 

conflict
with any provision of law or of its charter or bylaws or any material agreement, instrument or
order binding on such Party.

     Section 9.19 No Third-Party Beneficiaries. This Agreement is solely for the benefit
of the Parties and should not be deemed to confer upon third parties any remedy, claim, liability,
reimbursement, cause of action or other right in excess of those existing without reference to this
Agreement.

     Section 9.20 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. This Agreement shall be construed without regard to any presumption
or rule requiring construction or interpretation against the party drafting or causing any
instrument to be drafted.

[SIGNATURE PAGE FOLLOWS]

26

 

     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:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Name:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Title:
	 	President and Chief Executive Officer
	 
	 	 	 	 
	 	 	PATRIOT COAL CORPORATION
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Name:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Title:
	 	President and Chief Executive Officer

27

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