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                                                                   EXHIBIT 10.29

                     SETTLEMENT AGREEMENT AND MUTUAL RELEASE

         This Settlement Agreement and Mutual Release ("Agreement") is made and
entered into this 16th day of October 2002, by and among Peabody Western Coal
Company ("Peabody"), on the one hand, and Southern California Edison Company
("Edison"), Salt River Project Agricultural Improvement and Power District
("SRP"), the City of Los Angeles by and through the Department of Water and
Power ("LADWP"), and Nevada Power Company ("NPC"), on the other hand
(collectively referred to in this Agreement as the "Participants"). Peabody and
the Participants are hereinafter sometimes individually referred to in this
Agreement as a "Party" and collectively as the "Parties."

I. RECITALS

         A. Peabody owns and operates the Black Mesa Mine ("BMM"), a surface
coal mine located in Northeastern Arizona, under leases between Peabody and the
Navajo and Hopi Tribes ("Indian Leases"). BMM includes an undivided forty
percent (40%) share of all facilities used jointly with the Kayenta Mine ("Joint
Facilities").

         B. The Participants own and operate the Mohave Generating Station
("MGS"), a coal-fired electric power plant located in Clark County, Nevada.

         C. Peabody, through its predecessor in interest, Peabody Coal Company
("PCC") and the Participants entered into the Amended Mohave Project Coal Supply
Agreement ("CSA") on May 26, 1976, in which Peabody agreed to sell and deliver
and the Participants agreed to purchase and receive, the coal requirements of
the MGS as provided for in the CSA.

         D. By document dated March 26, 1985, PCC and the Participants entered
into a Memorandum of Administrative Guidelines ("MOAG") setting forth certain
procedures to be employed in the administration of the CSA.

         E. Effective as of December 31, 1995, PCC assigned all of its rights,
obligations and interests in the Indian Leases, the CSA, and the MOAG to
Peabody.

         F. Pursuant to the CSA, PCC and later Peabody has mined, and Peabody
continues to mine, coal from the BMM and ships it to the MGS by means of a
slurry pipeline. The MGS is BMM's only customer, and BMM is the sole source of
coal for the MGS.

         G. Pursuant to Section 1.01 of the CSA, the Initial Term of the CSA
ends on December 31, 2005. The Participants have the right to extend the

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Initial Term for a period or periods of time not exceeding fifteen (15) years,
as provided in Sections 1.02 and 1.03 of the CSA. As of the date of this
Agreement, however, the Participants have not elected to exercise their
extension right.

         H. Beginning in 1994, certain disputes arose between PCC and the
Participants about the financial responsibility for two categories of mining
costs: (1) Retiree Health Care Costs ("RHCC") and (2) Final Reclamation Costs
("FRC"). RHCC refers to the costs alleged to be recoverable from the
Participants under the CSA, whether accounted for on a cash, accrual or other
basis, of health care benefits (including, but not limited to, any medical,
dental, vision or mental health care), and life insurance Peabody will or may
provide after 2005 for retired Peabody employees at the BMM who, upon satisfying
certain vesting requirements, are or would be entitled to receive such benefits
from Peabody for themselves and/or their dependents, including forty percent
(40%) of all such costs relating to the Joint Facilities. FRC refers to the
costs alleged to be recoverable from the Participants under the CSA, whether
accounted for on a cash, accrual or other basis, of closing, decommissioning and
reclaiming the BMM after 2005, including environmental monitoring, to comply
with Peabody's reclamation obligations under applicable requirements, including
forty percent (40%) of all such costs relating to the Joint Facilities and also
including costs for bonding, insurance, security, administration, taxes and
other items as described in Donald Schaible's June 2000 report in the Action (as
defined in recital I below). RHCC and FRC are sometimes jointly referred to in
this Agreement as "the Disputed Costs." The Parties' respective estimates of the
Disputed Costs prepared before the mediation referenced below in recital K were
based upon the CSA expiring December 31, 2005, and do not represent the amount
of costs Peabody may experience if the CSA is extended beyond December 31, 2005.
The assignment referenced above in recital E included all of PCC's claims and
rights against the Participants with respect to the Disputed Costs. Accordingly,
references in this Agreement to RHCC, FRC or the Disputed Costs include the
subject costs in dispute regardless of whether they concern the period before or
after PCC's assignment to Peabody. The Participants disputed PCC's claim for
recovery of RHCC and FRC.

         I. While attempting to negotiate a resolution of the foregoing dispute,
Peabody and the Participants entered into a "Non-Waiver Agreement," which had an
effective date of December 12, 1994. On June 20, 1996, after the Parties were
unable to negotiate a resolution of their dispute, the Participants filed an
action against Peabody in the Superior Court of Maricopa County, Arizona (the
"Court"), entitled "Southern California Edison Company, et al. vs. Peabody
Western Coal Company," Case No. CV 96-10844 (the "Action"), seeking a
declaratory judgment that the Participants do not owe the Disputed Costs.
Peabody filed a counterclaim in the Action seeking both a declaratory judgment
on that question and damages. After the Court

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realigned the parties, the Participants asserted a counterclaim for damages for
alleged overpayments to Peabody under the CSA for certain reclamation costs. The
Participants and Peabody each asserted numerous affirmative defenses to the
others' claims.

         J. For several years, the Parties have engaged in extensive discovery
and motion practice regarding the claims in the Action and the Disputed Costs.
Additionally, the Court has issued several interlocutory opinions or rulings
regarding various issues, including without limitation, liability for FRC and
RHCC and several defenses to liability asserted by the Participants.

         K. The Parties engaged in settlement discussions and, on June 17, 2002,
participated in a full-day mediation conducted by Antonio Piazza, at which time
the Parties reached a tentative settlement agreement in principle to resolve all
claims and counterclaims that were asserted, or could have been asserted, in the
Action pertaining to the Disputed Costs.

         L. Without admitting any liability for the various disputes and claims
between and among them, the Parties have now jointly prepared this Agreement to
fully and finally resolve all claims and counterclaims that were asserted, or
could have been asserted, in the Action pertaining to the Disputed Costs.

NOW THEREFORE, the Parties agree as follows:

II. COVENANTS

         1.       Settlement Payments By the Participants.

         1.1      Principal Payment. In consideration of the covenants,
                  undertakings, releases and other consideration provided for
                  herein, the Participants shall, subject to the provisions of
                  paragraph 2, pay Peabody the principal amount of Thirty-One
                  Million Dollars ($31,000,000.00) (the "Principal") in the
                  manner specified below.

         1.2      Interest. The Participants shall further pay to Peabody
                  interest on the unpaid balance of the Principal at the annual
                  rate of eight percent (8%), with interest accruing beginning
                  on September 1, 2002 (the "Interest").

         1.3      Installments. Subject to paragraphs 1.4 and 1.5, the
                  Participants shall pay the Principal and Interest in
                  thirty-six (36) equal monthly installments of Nine Hundred and
                  Ninety-Four Thousand Six Hundred and Thirty-Five Dollars and

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                  Thirteen Cents ($994,635.13) commencing in January 2003 (the
                  "Installments"). Each monthly Installment shall be due
                  concurrently with the date on which payment is due under the
                  CSA for coal delivered in the previous month. For example, if
                  the payment for coal delivered in December 2002 is due on
                  January 19, 2003, then the first Installment payment required
                  under this paragraph shall likewise be due on January 19,
                  2003. The amount of the Installments reflects the Interest
                  provided for in paragraph 1.2 but not royalties and taxes
                  provided for in paragraph 1.5. Except as provided for in
                  paragraph 1.4 with respect to advance payments of Installments
                  due in future months (as to which interest shall be adjusted
                  as specified in paragraph 1.4 and Exhibit A to this
                  Agreement), if the Participants pay each currently due
                  Installment concurrently with a timely payment of the regular
                  monthly coal payment due under the CSA for deliveries by
                  Peabody in the preceding month, no adjustment for the Interest
                  component of the Installment shall be required regardless of
                  whether the date of each actual Installment payment
                  corresponds to the date (the 18th day of each payment month)
                  that was assumed by the Parties in Exhibit A for the purpose
                  of calculating the amount of the monthly Installments. If the
                  Participants fail to timely pay any Installment for reasons
                  other than those provided for below in paragraph 2, interest
                  shall accrue on the overdue Installment at the annual rate of
                  eight percent (8%) from the date that the Installment was due
                  until the date the Installment is paid.

         1.4      Prepayment. Any or all of the Participants may, concurrently
                  with the making of any regular monthly coal payment under the
                  CSA, pay, without penalty, any or all of the Installments or
                  portion thereof prior to the due date that would otherwise
                  apply under paragraph 1.3. If, in accordance with the
                  preceding sentence, any or all of the Participants pay any
                  Installment or portion thereof prior to the due date described
                  in paragraph 1.3, the amount of such Installment payment shall
                  be discounted by the amount of Interest, calculated at the
                  annual rate of eight percent (8%), avoided as a result of
                  paying the Installment or portion thereof prior to the due
                  date. For convenience, the Parties have attached hereto as
                  Exhibit A a table that shows, on a monthly basis beginning
                  with September 2002, and on both a collective and individual
                  Participant basis, the agreed to net present value at such
                  eight percent (8%) discount rate of all remaining unpaid
                  Installments (including, for the months beginning January
                  2003, the Installment that is scheduled to be paid to Peabody
                  in that month) based on an assumed payment date of the 18th
                  day of each of the months shown in the table

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                  (recognizing that the actual payment date may vary from the
                  18th of the month as provided for in paragraph 1.3 and in this
                  paragraph 1.4) and assuming also that all prior required
                  Installments have been paid when due and no advance payment of
                  any Installment under the provisions of this paragraph 1.4 has
                  previously been made by a Participant. Unless a particular
                  advance payment (either by an individual Participant or
                  jointly by two or more Participants) leaves no balance owing
                  to Peabody by any of the Participants, the Parties shall,
                  within ten (10) business days after the making of any advance
                  payment(s), recalculate the monthly amount of the remaining
                  Installments that are due from the Participants as to which a
                  balance is still owing. Exhibits A and A-1 hereto illustrate
                  an example prepayment scenario under this paragraph 1.4.

         1.5      Royalties and Taxes. Consistent with and pursuant to the
                  provisions of the CSA pertaining to royalties and taxes,
                  including but not limited to the provisions in section 6.02
                  regarding protests and refunds, the Participants shall pay to
                  Peabody the royalties and taxes associated with the payments
                  made by the Participants under this Agreement. In accordance
                  with the historical billing practice under the CSA with
                  respect to payments for coal delivered, the royalties and
                  taxes associated with each Installment shall be paid by the
                  Participants to Peabody concurrently with the payment of the
                  Installment and at the same royalty and tax rates as apply to
                  coal delivered by Peabody in the month preceding the
                  Installment payment (which rates shall be identified by
                  Peabody in its coal invoices to the Participants under the
                  CSA). Royalties and taxes associated with an advance payment
                  made by a Participant as provided in paragraph 1.4 shall be
                  the responsibility of the Participant which makes such advance
                  payment and shall be paid to Peabody concurrently with the
                  advance payment at the same royalty and tax rates as apply to
                  coal delivered by Peabody in the month preceding the advance
                  payment (which rates shall be identified by Peabody in its
                  coal invoices to the Participants under the CSA). If Peabody
                  subsequently receives a refund or credit of all or any portion
                  of a royalty or tax reimbursement payment made by the
                  Participants, or any of them, in connection with the payment
                  of any Installment, Peabody shall promptly transmit or credit
                  to the appropriate Participant(s) the full amount of the
                  refund or credit, including any interest paid or credited to
                  Peabody by the entity making the refund or giving the credit.

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         1.6      No Joint and Several Liability. All payment obligations of the
                  Participants under this Agreement shall be several and not
                  joint and shall be in the proportion of their respective
                  interests in the Mohave Project, which are as follows: Edison:
                  56%; SRP: 20%; LADWP: 10%; NPC: 14%.

         1.7      Default in Payment. If a Participant defaults in payment of
                  its proportionate share of any Installment required under
                  paragraph 1 of this Agreement, such default shall constitute,
                  as to that Participant only, a breach of both this Agreement
                  and the CSA. Such default by a particular Participant shall
                  not, however, be deemed a breach of either this Agreement or
                  the CSA by any Participant who is not in default of its
                  obligations under paragraph 1 of this Agreement.

         2.       Effect of Subsequent Events on Participants' Settlement
                  Payment Obligation.

         2.1      Cessation of Coal Purchases. If the Participants terminate the
                  CSA prior to December 31, 2005, or if they otherwise stop
                  accepting coal deliveries from Peabody before that date (other
                  than as a result of the circumstances described in the first
                  sentence of paragraph 2.2), the Participants shall not, by
                  virtue of such early termination or cessation of coal
                  purchases, be entitled to any offset or reduction in the
                  payments specified in paragraphs 1.3 and 1.5 above (other than
                  those that result from advance payments as provided for in
                  paragraph 1.4).

         2.2      Offset for Deficiency in Coal Delivery. If during any month
                  from September 2002 through November 2005 Peabody fails, for a
                  reason other than a force majeure (as defined in Section 14 of
                  the CSA), to deliver coal to the Black Mesa Pipeline in the
                  quantities required by the CSA (a "Deficient Delivery"), the
                  Participants shall be entitled to a prorated offset against
                  the payments specified in paragraph 1 above. For purposes of
                  the preceding sentence, any coal that is properly rejected by
                  the Participants under Section 5.04 of the CSA that is in
                  excess of the first 100,000 tons of coal that has been so
                  rejected following the date of this Agreement shall not be
                  included in determining the quantity of coal delivered by
                  Peabody in a particular month. If a Deficient Delivery occurs
                  during the months of September, October or November of 2002,
                  the prorated offset for each such month in which the
                  deliveries are deficient shall be computed by multiplying
                  $203, 835.62 for September, $210,630.14 for October, and
                  $203,835.62 for November (i.e. the amount of interest which
                  will accrue each such month on the $31,000,000

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                  Principal) times the percentage by which Peabody's delivery of
                  coal for such month was deficient, and the offset shall be
                  applied against the Installment due in January 2003. If a
                  Deficient Delivery occurs during any month from December 2002
                  through November 2005, the prorated offset for each such month
                  in which the deliveries are deficient shall be computed by
                  multiplying $994,635.13 times the percentage by which
                  Peabody's delivery of coal for such month was deficient, and
                  each such offset shall be applied against the Installment that
                  is due the following month, or, if the balance owed by the
                  Participants under this Agreement at that time is insufficient
                  to permit the offset in full, any excess over the amount
                  offset shall be refunded by Peabody to the Participants within
                  twenty (20) days after the end of the month in which the
                  deliveries were deficient. The provisions of this paragraph
                  2.2 are for the purposes of this Agreement only and, as
                  provided for in paragraph 5.4, shall not be construed as
                  modifying or otherwise affecting Peabody's delivery
                  obligations under the CSA.

         2.3      No Release of Other Claims. Other than with respect to the
                  Parties' respective claims and defenses related to the
                  Disputed Costs, which are resolved by this Agreement, nothing
                  in this paragraph or this Agreement shall be read as limiting
                  or otherwise restricting the damages or other remedies that
                  either the Participants or Peabody may seek for any alleged
                  breach of the CSA.

3.       Claims by Third Parties.

         3.1      Position of the Parties and Cooperation. The Parties agree and
                  believe that the payments and other undertakings in this
                  Agreement should not cause or result in any claims by third
                  parties. Specifically, but without limitation, the Parties do
                  not believe that interest, penalties or late payment charges
                  can or should be assessed on any royalty or tax payments
                  associated with the payments made by the Participants as
                  provided for herein. In the event this position of the Parties
                  is challenged by the Navajo Nation, the Hopi Tribe, the United
                  States on behalf of the Tribe(s), the State of Arizona, and/or
                  any agencies, departments, courts, tribunals, or political
                  subdivisions of the foregoing, or by any other third parties
                  (collectively, "Governmental Entities"), then the Parties
                  agree to cooperate with one another in good faith to defend
                  against such a challenge. Notwithstanding the foregoing,
                  neither Party shall be responsible to the other for such
                  claims by third parties except as expressly provided for
                  herein.

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         3.2      Post-12/11/94 Governmental Claims.

         3.2.1    Included Claims. If any Governmental Entity asserts a claim or
                  challenge to the Parties' position mentioned in paragraph 3.1
                  above in connection with the payments provided for in this
                  Agreement, which claim or challenge relates, in whole or in
                  part, to additional liabilities (including, but not limited
                  to, interest, penalties, late payment charges, legal fees and
                  other litigation costs) Peabody is alleged to have to any such
                  Governmental Entity based on a claim or determination by a
                  Governmental Entity that royalties or taxes that are the
                  responsibility of the Participants under paragraph 1.5 of this
                  Agreement became due earlier than the dates of associated
                  payments made by the Participants pursuant to paragraphs 1.1
                  through 1.4 of this Agreement but after December 11, 1994
                  ("Post-12/11/94 Governmental Claims"), then the Parties agree
                  to the following procedure, and the Participants agree to
                  indemnify Peabody, in accordance with the provisions of
                  paragraphs 3.2.2 through 3.2.5 of this Agreement.

         3.2.2    Notice and Defense Procedures. Within seven (7) business days
                  after receipt of a Post-12/11/94 Governmental Claim, Peabody
                  shall provide written notification of such claim to the
                  Participants. Within twelve (12) business days after their
                  receipt of Peabody's notice, the Participants shall provide
                  written instructions to Peabody as to whether it should resist
                  the Post-12/11/94 Governmental Claim or acquiesce to it. If
                  the Participants instruct Peabody to defend against the
                  Post-12/11/94 Governmental Claim, Peabody shall do so until
                  instructed otherwise by the Participants. If no such written
                  instructions are provided by the Participants within such
                  twelve (12) business days period following receipt of
                  Peabody's written notification of such a Post-12/11/94
                  Governmental Claim, then Peabody may acquiesce to such claim;
                  provided, however, if Peabody determines to defend against
                  such a claim in the absence of any instruction to do so by the
                  Participants, Peabody shall be solely responsible for all
                  associated legal fees and other litigation costs.

         3.2.3    Participation by the Participants. If the Participants
                  instruct Peabody to defend against a Post-12/11/94
                  Governmental Claim as provided for in paragraph 3.2.2, then
                  the Participants, or any of them, may elect by written notice
                  to Peabody to participate directly with Peabody (a) in any
                  proceeding involving such a claim, and (b) in any
                  communications with other parties to such

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                  a proceeding regarding the merits of the claim or claims.
                  Whether or not such direct participation is sought by the
                  Participants, the Participants shall be entitled (i) to a
                  reasonable opportunity, upon request, to review and comment on
                  any drafts of pleadings or other documents prepared by or on
                  behalf of Peabody prior to the time such pleadings or other
                  documents are filed or otherwise submitted in connection with
                  any proceeding involving a Post-12/11/94 Governmental Claim
                  and (ii) to prompt receipt of copies of all filings in the
                  proceeding and of Peabody's communications to or from other
                  parties in the proceeding. Peabody shall not be entitled to
                  include in invoices to the Participants, or attempt to
                  otherwise pass through to them via any price adjustment
                  mechanism in the CSA, any litigation costs or payments arising
                  from any settlement entered into by Peabody that would
                  resolve, in whole or in part, a Post-12/11/94 Governmental
                  Claim, unless the settlement has been approved in writing by
                  the Participants.

         3.2.4    Indemnity by the Participants. The Participants agree, subject
                  to the provisions of paragraphs 3.2.2, 3.2.3 and 3.2.5, that
                  they shall indemnify, defend and save Peabody harmless from
                  and against any and all Post-12/11/94 Governmental Claims,
                  including, but not limited to, interest, penalties, late
                  payment charges, additional royalties and taxes payable with
                  respect to any interest, penalties or late payment charges as
                  may be imposed, reasonable legal fees and other litigation
                  costs incurred by Peabody as a result of its compliance with
                  instructions from the Participants. If Peabody acquiesces to
                  any Post-12/11/94 Governmental Claim with written approval by
                  the Participants or in the absence of written instructions
                  from the Participants in accordance with paragraph 3.2.2, or
                  if a final non-appealable order is issued by an appropriate
                  legal authority which sustains such Post-12/11/94 Governmental
                  Claim, and Peabody is thereby obligated to pay interest,
                  penalties, late payment charges, additional royalties and
                  taxes payable with respect to any interest, penalties or late
                  payment charges as may be imposed, or other charges to a
                  Governmental Entity, the Participants shall, subject to
                  paragraph 3.2.5, reimburse Peabody for such additional
                  amounts. The Participants shall not be liable to Peabody for
                  any interest, penalties or other charges imposed by a
                  Governmental Entity as a result of any filing errors by
                  Peabody or any delay by Peabody in remitting royalties or
                  taxes received by Peabody from the Participants under
                  paragraph 1.5 of this Agreement. Notwithstanding the
                  foregoing, if a Governmental Entity asserts a Post-12/11/94
                  Governmental Claim but an Award Regarding Pre-12/12/94 Claims
                  (as defined

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                  in subparagraph 3.2.5(b) below) is made in the same
                  proceeding, then paragraphs 3.2.5 and 3.3.2 shall apply
                  instead of this paragraph for the purpose of allocating the
                  indemnity obligations of the Parties.

         3.2.5    Overlapping Claims. To the extent a claim or challenge
                  concerns both Pre-12/12/94 Governmental Claims (as defined in
                  paragraph 3.3.1) and Post-12/11/94 Governmental Claims, then:

                  (a) The Participants shall only be obligated to indemnify
                  Peabody for interest, penalties, late payment charges,
                  additional royalties and taxes payable with respect to any
                  interest, penalties or late payment charges as may be imposed,
                  and other charges, if any, awarded against Peabody or its
                  predecessors with respect to the Post-12/11/94 Governmental
                  Claims ("Award Regarding Post-12/11/94 Claims"); and

                  (b) If the Participants instruct Peabody to defend against the
                  Post-12/11/94 Governmental Claim, the Participants shall only
                  be obligated to indemnify Peabody for reasonable legal fees
                  and other litigation costs in the proportion that the Award
                  Regarding Post-12/11/94 Claims bears to the sum of that award
                  and the amount of interest, penalties, late payment charges,
                  additional royalties and taxes payable with respect to any
                  interest, penalties or late payment charges as may be imposed,
                  and other charges, if any, awarded against Peabody or its
                  predecessors with respect to the Pre-12/12/94 Governmental
                  Claims ("Award Regarding Pre-12/12/94 Claims").

         3.3      Pre-12/12/94 Governmental Claims.

         3.3.1    Indemnity by Peabody. Peabody agrees, subject to the
                  provisions of paragraph 3.3.2, that it shall defend, indemnify
                  and hold the Participants harmless from and against any and
                  all additional liabilities (including, but not limited to,
                  interest, penalties, late payment charges, additional
                  royalties and taxes payable with respect to any interest,
                  penalties or late payment charges as may be imposed, legal
                  fees and other litigation costs) Peabody may have or incur to
                  any Governmental Entity based on a claim by a Governmental
                  Entity that royalties or taxes that are the responsibility of
                  the Participants under paragraph 1.5 of this Agreement became
                  due on a date or dates before December 12, 1994 ("Pre-12/12/94
                  Governmental Claims"). Notwithstanding the foregoing, if a
                  Governmental Entity asserts a Pre-12/12/94 Governmental Claim
                  but an Award Regarding Post-12/11/94 Claims (as defined in
                  subparagraph 3.2.5(a)

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                  above) is made in the same proceeding, then paragraphs 3.2.5
                  and 3.3.2 shall apply instead of this paragraph for the
                  purpose of allocating the indemnity obligations of the
                  Parties.

         3.3.2    Overlapping Claims. To the extent a claim or challenge
                  concerns both Pre-12/12/94 Governmental Claims and
                  Post-12/11/94 Governmental Claims, Peabody shall only be
                  obligated to indemnify the Participants for any Award
                  Regarding Pre-12/12/94 Claims. Peabody's reasonable legal fees
                  and other litigation costs shall, in this situation, be shared
                  pro rata by the Participants (considered as a single party for
                  this purpose) and Peabody in accordance with their respective
                  shares of the liability for interest, penalties or other
                  charges that is assessed against Peabody or its predecessors
                  in the relevant proceeding or proceedings (i.e., in the same
                  manner described in subparagraph 3.2.5(b)); provided, however,
                  that such sharing shall not apply to legal fees and other
                  litigation costs for which Peabody is solely responsible under
                  paragraph 3.2.2.

         3.4      Definition of Litigation Costs. As used in this paragraph 3,
                  the term "litigation costs" means reasonable charges by
                  courts, court reporters, outside legal counsel, outside
                  experts, and mediators, and reasonable charges of a similar
                  nature, and does not include any internal costs of the
                  Parties.

         4.       Mutual Releases and Dismissal of Action.

         4.1      Release of the Participants by Peabody. For and in
                  consideration of the covenants, undertakings, payments,
                  release and other consideration set forth in this Agreement,
                  and subject to the provisions of paragraph 4.3 below, Peabody,
                  on behalf of itself and each of its predecessors (including,
                  but not limited to, PCC), successors and assigns, by operation
                  of law or otherwise, hereby releases and forever discharges
                  the Participants, their predecessors in interest, and each of
                  their respective past, present and future shareholders,
                  related and affiliated business entities, officers, directors,
                  employees, attorneys, legal representatives, agents, and
                  insurers (all such persons and entities hereinafter
                  collectively referred to as the "Participants Released") from
                  any and all claims, counterclaims, actions or causes of
                  action, demands of any nature whatsoever, past, or present,
                  whether arising out of any alleged violation of any federal or
                  state statute, negligence, breach of contract, fraud, warranty
                  or any other theory, whether legal or equitable, and the
                  consequences thereof, including any claims, losses, costs or
                  damages, including compensatory and punitive damages, in

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                  each case whether known or unknown, liquidated or
                  unliquidated, fixed or contingent, direct or indirect, which
                  Peabody and its related or affiliated business entities, or
                  its predecessors, successors, and assigns ever had, now have,
                  or may in the future claim to have against any of the
                  Participants Released arising from, concerning or pertaining
                  to (i) the Disputed Costs as defined herein, (ii) the Action
                  and/or (iii) any of the claims in the Action, including, but
                  not limited to, all counterclaims in the Action.

         4.2      Release of Peabody by the Participants. For and in
                  consideration of the covenants, undertakings, release and
                  other consideration set forth in this Agreement, and subject
                  to the provisions of paragraph 4.3 below, the Participants, on
                  behalf of themselves and each of their respective
                  predecessors, successors and assigns, by operation of law or
                  otherwise, hereby release and forever discharge Peabody, its
                  predecessors in interest (including, but not limited to, PCC),
                  and each of their respective past, present and future
                  shareholders, related and affiliated business entities,
                  officers, directors, employees, attorneys, legal
                  representatives, agents, and insurers (all such persons and
                  entities hereinafter collectively referred to as the "Peabody
                  Parties Released") from any and all claims, counterclaims,
                  actions or causes of action, demands of any nature whatsoever,
                  past or present, whether arising out of any alleged violation
                  of any federal or state statute, negligence, breach of
                  contract, fraud, warranty or any other legal theory, whether
                  legal or equitable, and the consequences thereof, including
                  any claims, losses, costs or damages, including compensatory
                  and punitive damages, in each case whether known or unknown,
                  liquidated or unliquidated, fixed or contingent, direct or
                  indirect, which the Participants and their respective related
                  or affiliated business entities, or their predecessors,
                  successors, and assigns ever had, now have, or may in the
                  future claim to have against any of the Peabody Parties
                  Released arising from, concerning or pertaining to (i) the
                  Disputed Costs as defined herein, (ii) the Action and/or (iii)
                  any of the claims in the Action, including, but not limited
                  to, all counterclaims in the Action.

         4.3      Release Limitation. The releases set forth in paragraphs 4.1
                  and 4.2 assume that the CSA will terminate on or before
                  December 31, 2005. If the CSA should, instead, be extended
                  beyond that date or replaced by another coal supply agreement
                  whose term ends after December 31, 2005, the provisions of
                  paragraph 6.2 shall apply and such releases shall not apply to
                  the Disputed Costs or be construed to apply to the final

                                       12

<PAGE>

                  reclamation costs or retiree health care costs associated with
                  such extended or replacement agreement.

         4.4      Dismissal of Action. No later than ten (10) business days
                  after the execution of this Agreement, the Parties' respective
                  counsel will execute and file a stipulation for dismissal with
                  prejudice of the Action, with each Party to bear its own
                  respective attorneys' fees and costs, in the form attached as
                  Exhibit B. The Participants may conduct a reasonable audit of
                  Peabody's books and records, to be completed no later than
                  one-hundred eighty (180) days from the effective date of this
                  Agreement, for the purpose of confirming that none of
                  Peabody's attorneys' fees and litigation costs (as defined in
                  paragraph 3.4) incurred in connection with the disputes that
                  are resolved in this Agreement have previously been included
                  in invoices to the Participants under the CSA. If such audit
                  discloses, or Peabody independently learns, that such
                  attorneys' fees and/or litigation costs of Peabody were, in
                  fact, included in any invoices that the Participants have
                  paid, the amount of such attorneys' fees and/ or litigation
                  costs shall be promptly refunded by Peabody to the
                  Participants, without interest. Peabody shall not be obligated
                  to conduct its own investigation of whether any such fees or
                  litigation costs were invoiced to the Participants.

         4.5      Representations and Warranties of the Parties. The
                  Participants represent and warrant, and it is a condition of
                  this mutual release, that they are the sole owners of the
                  claims released by the Participants; that they collectively
                  represent one-hundred percent (100%) of the interests in the
                  MGS; and that the undersigned are duly authorized by their
                  respective governing boards or bodies to execute this
                  Agreement. Peabody represents and warrants, and it is a
                  condition of this mutual release, that it is the sole owner of
                  the claims released by Peabody herein, and that the
                  undersigned is duly authorized by Peabody's board to execute
                  this Agreement.

         4.6      Claims Under this Agreement. It is specifically understood and
                  agreed that the foregoing releases shall not constitute a
                  waiver, release or abandonment of any claim by any Party for
                  breach by any other Party of any term, condition, or provision
                  of this Agreement.

         5.       Effect of Settlement.

         5.1      No Admission of Liability. The Parties, and each of them,
                  acknowledge that this Agreement constitutes the settlement of

                                       13

<PAGE>

                  disputed claims. Nothing herein shall constitute or be deemed
                  to constitute any admission of liability by the Participants
                  or Peabody. The Participants and Peabody expressly deny any
                  and all liability for the claims and/or counterclaims asserted
                  in the Action.

         5.2      The Settlement is Not a Precedent. The Parties agree that this
                  settlement shall not establish a precedent with respect to any
                  other existing or potential dispute under the CSA or under any
                  other coal supply agreement.

         5.3      No Res Judicata or Collateral Estoppel Effect to Court Orders.
                  The Parties agree that the Court orders and rulings in the
                  Action shall not have res judicata or collateral estoppel
                  effect against any of the Participants or Peabody. The Parties
                  agree and recognize that all such orders and rulings were not
                  final and were subject to reconsideration and/or appeal, and
                  that, as a result of this settlement, both Peabody and the
                  Participants have foregone whatever rights they may have had
                  to pursue reconsideration and/or eventual appeal of any such
                  orders and rulings. No Party has waived its rights, if any,
                  (i) to offer or otherwise use such orders and rulings in other
                  proceedings or (ii) to object to such use.

         5.4      Relationship to the CSA and Other Agreements. Except to the
                  extent specifically set forth herein, nothing contained in
                  this Agreement shall be interpreted to amend, supersede or
                  otherwise impact or affect the obligations of or release any
                  claim of any Party under the terms of the CSA, any extension
                  thereof, the MOAG, or any other agreements and memoranda
                  between the Parties regarding or pertaining to the CSA,
                  including, but not limited to, any provision in the CSA, the
                  MOAG or otherwise that provides the Participants with the
                  right to periodically audit Peabody's accounts and records
                  pertaining to its billings to the Participants under the CSA.

         6.       No Double Recovery by Peabody.

         6.1      Absent Post-2005 Coal Deliveries. Peabody acknowledges that
                  unless it supplies coal to MGS after December 31, 2005,
                  pursuant to an extension of the CSA or a new coal supply
                  agreement, the payments required by paragraph 1, as they may
                  be adjusted pursuant to paragraph 2, constitute full
                  satisfaction of any obligation the Participants may have to
                  reimburse Peabody for the Disputed Costs and that, except as
                  provided for in paragraph 3 of this Agreement, no price
                  increases, additional

                                       14

<PAGE>

                  charges or other obligations shall be imposed on the
                  Participants for or as a result of either RHCC or FRC,
                  regardless of any change in the nature or the scope of those
                  costs, including, but not limited to, those that result from
                  changes in accounting or invoicing practices or in either the
                  assumed facts or applicable law. In accordance with the
                  preceding sentence, the price of coal under the CSA for
                  deliveries of coal on or before December 31, 2005 shall not be
                  affected, directly or indirectly, by any payment made or cost
                  incurred pursuant to this Agreement. In addition to the RHCC
                  and FRC that are the subject of the Action and which are
                  addressed in this Agreement, it is expected that during the
                  current remaining term of the CSA Peabody will pay, or will
                  accrue on a short term basis in accordance with Peabody's
                  historical practice relating to BMM, additional amounts in
                  respect of (i) the costs of providing, on or before December
                  31, 2005, health care, life insurance and related benefits to
                  current retirees and those who will hereafter retire through
                  and including December 31, 2005 and (ii) costs associated with
                  the normal, on-going reclamation of the BMM prior to January
                  1, 2006 (both categories of such additional amounts,
                  regardless of the manner in which they are accounted for by
                  Peabody, being collectively referred to in this Agreement as
                  "On-Going Costs"). Peabody warrants and represents that it
                  will not attempt to re-categorize or accelerate any RHCC or
                  FRC as On-Going Costs so as to be able to charge the
                  Participants for such costs under the invoicing provisions of
                  the CSA. In order to implement the foregoing, the Parties have
                  further agreed that the following post-CSA procedures and
                  remedies, together with such remedies as may be afforded to
                  the Participants through periodic audits under the CSA of the
                  type referenced in paragraph 5.4 above, shall constitute the
                  sole procedures and remedies for determining whether there has
                  been a double recovery by Peabody and for adjusting therefor.

         6.1.1    Final Reclamation Costs. Subject to paragraph 6.2, Peabody
                  shall not be entitled to bill and recover FRC from the
                  Participants as On-Going Costs. To ensure no such
                  double-recovery with respect to FRC, the Parties have prepared
                  and approved Exhibit C hereto, which summarizes various
                  categories of post-CSA reclamation work, rates for such work,
                  volumes for such work, and related estimated costs for such
                  work. Beginning on January 2, 2006, the Participants shall be
                  permitted to make one or more inspections of the BMM, arrange
                  for aerial photographs to be taken of the BMM, and conduct
                  such reasonable examination and audit of Peabody's books and
                  records (including but not limited to contracts, invoices,
                  ledgers,

                                       15

<PAGE>

                  evidence of payment, other accounting records, aerial
                  photographs, maps and other engineering materials) as are
                  necessary and sufficient (i) to make a meaningful comparison
                  between the post-CSA reclamation work that is expected at that
                  time and the post-CSA reclamation work that was assumed in the
                  preparation of Exhibit C and (ii) to make a meaningful
                  determination as to whether any FRC-related costs not listed
                  directly on Exhibit C (such as bonding expenses, insurance
                  premiums, security and administration costs, and taxes) have
                  been accelerated and billed to the Participants as On-Going
                  Costs. Peabody shall be responsible for maintaining its books
                  and records in a form that will permit the Participants to
                  meaningfully conduct the post-2005 audit referenced above in
                  this paragraph. Upon reasonable request, Peabody shall also
                  cooperate fully in making available to the Participants'
                  inside and outside auditors its relevant books and records, as
                  well as such Peabody personnel as may be required to explain
                  such books and records. The Participants' comparison analysis
                  and audit findings shall be completed and provided to Peabody
                  in writing by June 30, 2006. Peabody shall have thirty (30)
                  days to review the analysis and audit findings. If Peabody
                  objects to all or a portion of the comparison analysis and/or
                  audit findings, the Parties shall attempt to resolve the
                  dispute through good faith negotiations. If the Parties are
                  unable to resolve the dispute through such negotiations, the
                  dispute shall be resolved in a manner to be determined at that
                  time. If Peabody does not object within thirty (30) days and
                  if the comparison analysis and/or audit findings conclude that
                  work that was assumed in Exhibit C to occur post-CSA has
                  already been performed and/or that costs that were assumed to
                  occur post-CSA have already been paid by the Participants
                  (collectively, "Accelerated Work/Costs"), then Peabody shall,
                  except as provided below, refund to the Participants within
                  forty (40) days of its receipt of the comparison analysis
                  and/or audit findings, as applicable, all base refund amounts
                  as determined in accordance with Exhibit C and Schedules 1-4
                  attached thereto or, in the case of FRC-related costs not
                  directly listed in Exhibit C or its schedules, the amounts
                  paid by the Participants as On-Going Costs, plus the
                  additional amounts specified in paragraph 6.1.3 below. If
                  Peabody objects to the comparison analysis and/or audit
                  findings, then any refund owing to the Participants under this
                  paragraph shall, as to any disputed amounts only, be due and
                  payable ten (10) days following a final determination, either
                  through agreement or another dispute resolution process, of
                  the amount, if any, that is owed by Peabody to the
                  Participants with respect to Accelerated Work/Costs. Refund
                  amounts that are

                                       16

<PAGE>

                  not in dispute shall be due and payable within the forty (40)
                  day period specified above. Notwithstanding the foregoing, no
                  refund shall be due from Peabody to the Participants based on
                  the above-described comparison analysis or audit with respect
                  to a particular item of work or costs if Peabody establishes,
                  to the reasonable satisfaction of the Participants, that the
                  Participants have not been invoiced for such item as an
                  On-Going Cost under the terms of the CSA. Except as provided
                  in Paragraph 6.2, under no circumstances shall the provisions
                  of this Agreement, including this Paragraph 6.1.1, be
                  construed as requiring (a) the Participants to compensate or
                  reimburse Peabody for its actual FRC except through the
                  payments that are provided for in paragraph 1, as they may be
                  adjusted under the provisions of paragraph 2, or (b) Peabody
                  to refund or credit to the Participants any amounts with
                  respect to FRC other than as provided for in this paragraph
                  6.1.1 or as may be determined to be owing to the Participants
                  as a result of an audit under the CSA of the type referenced
                  in paragraph 5.4 (but in no event shall the Participants be
                  entitled to recover the same costs as a refund under this
                  paragraph 6.1.1 and as a refund or credit pursuant to the
                  Participants' audit rights under the CSA).

         6.1.2    Retiree Health Care Costs. Subject to paragraph 6.2, Peabody
                  shall not be entitled to bill and recover RHCC from the
                  Participants as On-Going Costs. To ensure no double-recovery
                  with respect to RHCC, Peabody shall, in all further invoices
                  for coal delivered to MGS through December 31, 2005, continue
                  to invoice the Participants on the historical pay-as-you-go
                  basis for its current costs for retiree health care provided
                  on or before December 31, 2005. To the extent consistent with
                  Peabody's historic practice relating to BMM, such invoices may
                  also include accruals of the estimated amounts of the payments
                  to be made by Peabody within one-hundred eighty (180) days
                  thereafter for medical care provided to eligible retirees and
                  their eligible dependents by the end of the month covered by
                  the coal invoice but not reported to Peabody by that date
                  ("IBNR Accruals"). IBNR Accruals shall be limited to health
                  care provided on or before December 31, 2005. The Participants
                  shall pay such invoiced costs (both actual retiree health care
                  costs and IBNR Accruals) in the same fashion they have paid
                  them historically on a pay-as-you-go basis. Accordingly,
                  except with respect to the payments that are provided for in
                  paragraph 1, as they may be adjusted under the provisions of
                  paragraph 2, Peabody shall not bill the Participants or
                  otherwise seek reimbursement from them under the CSA or
                  otherwise for any RHCC, whether under Financial Accounting
                  Standard ("FAS")

                                       17

<PAGE>

                  106 or any other mechanism, and shall not seek to recover RHCC
                  as On-Going Costs. The IBNR Accruals billed by Peabody in
                  accordance with this paragraph 6.1.2 shall be subject to the
                  same accounting, adjustment and audit procedures currently and
                  historically employed by the Parties or authorized by the CSA.
                  The Parties agree that the IBNR Accruals will be adjusted to
                  actual costs as soon as practicable but no later than
                  one-hundred eighty (180) days after billing. In order to
                  confirm Peabody's compliance with the foregoing provisions,
                  the Participants shall, commencing January 2, 2006, be
                  entitled to conduct a final audit of Peabody's books and
                  records as they apply to retiree health care costs, which
                  audit shall be completed no later than October 31, 2006.
                  Peabody shall be responsible for maintaining its books and
                  records in a form that will permit the Participants to
                  meaningfully conduct the final post-2005 audit referenced
                  above in this paragraph. Upon reasonable request, Peabody
                  shall also cooperate fully in making available to the
                  Participants' inside and outside auditors its relevant books
                  and records, as well as such Peabody personnel as may be
                  required to explain such books and records. Peabody shall have
                  thirty (30) days to review the audit report. If Peabody
                  objects to all or a portion of the audit report, the Parties
                  shall attempt to resolve the dispute through good faith
                  negotiations. If the Parties are unable to resolve the dispute
                  through such negotiations, the dispute shall be resolved in a
                  manner to be determined at that time. If Peabody does not
                  object within thirty (30) days and if such audit concludes
                  that any RHCC was billed to and paid for by the Participants
                  as an item of On-Going Costs, Peabody shall, within forty (40)
                  days of Peabody's receipt of the audit findings, refund to the
                  Participants the amount of the RHCC they paid as On-Going
                  Costs, plus the additional amounts specified in paragraph
                  6.1.3 below. If Peabody objects to the audit findings, then
                  any refund owing to the Participants under this paragraph
                  shall, as to the disputed amounts only, be due and payable ten
                  (10) days following a final determination, either through
                  agreement or another dispute resolution process, of the
                  amount, if any, that is owed by Peabody to the Participants
                  with respect to RHCC improperly billed to the Participants as
                  On-Going Costs. Refund amounts that are not in dispute shall
                  be due and payable within the forty (40) day period specified
                  above. Except as provided for in paragraph 6.2, under no
                  circumstances shall the provisions of this Agreement,
                  including this Paragraph 6.1.2, be construed as requiring (a)
                  the Participants to compensate or reimburse Peabody for its
                  actual RHCC except through the payments that are provided for
                  in Paragraph 1, as they may be adjusted under the provisions
                  of Paragraph 2, or (b) Peabody to

                                       18

<PAGE>

                  refund or credit to the Participants any amounts with respect
                  to RHCC other than as provided for in this paragraph 6.1.2 or
                  as may be determined to be owing to the Participants as a
                  result of an audit under the CSA of the type referenced in
                  paragraph 5.4 (but in no event shall the Participants be
                  entitled to recover the same costs as a refund under this
                  paragraph 6.1.2 and as a refund or credit pursuant to the
                  Participants' audit rights under the CSA).

         6.1.3    Calculation of Double Recovery Refunds. Refunds to the
                  Participants under paragraphs 6.1.1 and 6.1.2 of FRC or RHCC
                  improperly billed as On-Going Costs shall consist of a base
                  amount or amounts, a royalties and taxes adjustment and an
                  accrued interest component, each of which shall be paid
                  concurrently within the period specified for refunds in
                  paragraphs 6.1.1 and 6.1.2. In the case of FRC, the base
                  amount(s) shall be calculated as specified in Exhibit C to
                  this Agreement and Schedules 1-4 to Exhibit C or, in the case
                  of FRC-related costs not directly listed in Exhibit C or its
                  schedules, shall be equal to the amounts paid by the
                  Participants as On-Going Costs. In the case of RHCC, the base
                  amount(s) shall be equal to the amount of accelerated RHCC
                  that was invoiced to and paid by the Participants. The
                  royalties and taxes adjustment shall be calculated by applying
                  to each base amount subject to refund the royalty and tax
                  rates that were applicable at the time the accelerated FRC or
                  RHCC, as the case may be, was paid by the Participants and
                  shall include any additional royalties and taxes paid in
                  respect of such associated royalties and taxes. If, however,
                  the actual date of payment of the base amount cannot be
                  determined with reasonable certainty, then the royalty and tax
                  rates applicable to Peabody's January 2004 invoice under the
                  CSA for coal delivered in December 2003 shall be applied.
                  Simple interest at eight percent (8%) per annum shall be added
                  to both the base refund amount(s) and the royalties and taxes
                  adjustment. Such interest component shall be calculated for
                  the period beginning when the accelerated FRC or RHCC, as the
                  case may be, was paid by the Participants and extending
                  through and including the date of Peabody's refund payment. If
                  the date of payment by the Participants of accelerated FRC or
                  RHCC cannot be determined with reasonable certainty, then
                  interest on both the base amount and the royalties and taxes
                  adjustment shall be calculated beginning January 1, 2004.

         6.2      During an Extension or Replacement of the CSA. If the CSA is
                  extended pursuant to sections 1.02 and 1.03 of the CSA, or the

                                       19

<PAGE>

                  Parties enter into a replacement coal supply agreement, then
                  the Parties shall take such reasonable steps as are necessary
                  to ensure that: (1) the Participants receive full credit for
                  the payments made by them under this Agreement and for the
                  associated time value of money, with such full credit and
                  associated time value of money to be applied in a manner
                  mutually agreeable to the Parties and incorporated into the
                  extended CSA or replacement coal supply agreement; and (2) the
                  extended CSA or the replacement coal supply agreement shall
                  include provisions that resolve the issue of cost
                  responsibility of the Participants for retiree health care
                  costs and final reclamation costs.

         7.       Miscellaneous Provisions.

         7.1      Calculation of Interest. All interest imposed or deducted
                  pursuant to this Agreement shall be calculated as simple
                  interest, with no compounding.

         7.2      Cooperation of the Parties. The Parties will cooperate with
                  one another in good faith by providing information, allowing
                  access to BMM, and preparing and executing such additional
                  documents as may be reasonably required to effectuate and
                  carry out the purposes of this Agreement. The Participants
                  shall be permitted to make inspections of the BMM, arrange for
                  aerial photographs to be taken of the BMM, and conduct such
                  reasonable examination and audit of Peabody's books and
                  records (including but not limited to accounting records,
                  aerial photographs, maps and other engineering materials) as
                  is necessary and sufficient to effectuate and carry out the
                  purposes of this Agreement and/or to enforce the provisions of
                  this Agreement.

         7.3      Survival of Obligations; Indemnity. Notwithstanding any
                  provisions of this Agreement to the contrary, the warranties,
                  representations and undertakings of this Agreement shall
                  survive the mutual releases herein. Each of the Parties shall
                  indemnify and hold the other Parties harmless from and against
                  any claim, demand, damage, debt, account, liability,
                  obligation, cost, expense, lien, action or cause of action of
                  any nature suffered or incurred as a result of any breach by
                  that Party of a covenant, representation or warranty set forth
                  in this Agreement.

         7.4      Arms-Length Agreement. This Agreement represents a compromise
                  and settlement of certain pending disputes between

                                       20

<PAGE>

                  the Parties and is entered into following arms-length
                  negotiations and mediation. The Parties have read this
                  Agreement carefully and completely, have had the advice and
                  assistance of legal counsel, and have not been influenced to
                  any extent whatsoever by any representations or statements
                  made by any Party other than those in this Agreement. No
                  promises, inducements or considerations have been offered and
                  accepted or given, except as herein set forth.

         7.5      Ambiguities. This Agreement was jointly drafted by the Parties
                  and therefore ambiguities in this Agreement are not to be
                  construed against any Party on the basis that it was the
                  drafter.

         7.6      Amendment. This Agreement may be amended or modified, in whole
                  or in part, only by an agreement in writing executed by all
                  Parties hereto and making specific reference to this
                  Agreement.

         7.7      Waiver. None of the provisions of this Agreement shall be
                  considered waived by a Party unless such waiver is given in
                  writing. The failure of a Party to insist in any one or more
                  instances upon strict performance of any of the provisions of
                  this Agreement or to take advantage of any of its rights under
                  this Agreement shall not be construed as a waiver of any such
                  provisions or the relinquishment of any such rights for the
                  future, but the same shall continue and remain in full force
                  and effect.

         7.8      Counterparts. This Agreement may be executed in one or more
                  counterparts, all of which taken together shall constitute one
                  instrument.

         7.9      Headings. The headings of the paragraphs of this Agreement are
                  for convenience only and in no way alter, amend, modify, limit
                  or restrict the contractual obligations of the Parties.

         7.10     Binding on Successors and Assigns. This Agreement shall be
                  binding upon, inure to the benefit of, and be enforceable by
                  and against the Parties hereto and their respective successors
                  and assigns.

         7.11     Entire Agreement. This Agreement, together with the attached
                  exhibits, contains the full and integrated statement of each
                  and every term and provision agreed to by the Parties for
                  purposes of settling the Action. All prior negotiations and
                  agreements between the Parties hereto with respect to the
                  settlement of the Action are superseded by this Agreement, and
                  there are no

                                       21

<PAGE>

                  representations, warranties, understandings or agreements of
                  the Parties relating to the settlement of the Action other
                  than those expressly set forth herein or in an attached
                  exhibit, except as subsequently modified in writing, executed
                  by all parties.

         7.12     Governing Law. This Agreement shall be governed by and
                  construed and interpreted according to the laws of the State
                  of Nevada, determined without reference to conflicts of law
                  principles.

         7.13     Return of Confidential Documents. Within sixty (60) days after
                  the execution of this Agreement by all of the Parties, the
                  Parties, and each of them, shall comply with the provisions of
                  the Stipulation of Confidentiality executed by counsel for the
                  Parties on or about January 30, 1998, and the subsequent
                  letter agreement executed by counsel for the Parties on or
                  about March 2, 2001, requiring the return or destruction of
                  Confidential Materials (and all copies of such documents),
                  including all documents stamped "confidential" pursuant to the
                  Stipulation or letter agreement.

         7.14     Limited Waiver of Mediation Privilege. Notwithstanding any
                  provision of law to the contrary and any confidentiality
                  agreement previously entered into by the Parties, including,
                  but not limited to, the confidentiality agreement executed by
                  the Parties at the time of the mediation referenced in recital
                  K, any of the Parties may, for the limited purpose of
                  demonstrating the reasonableness of this settlement to any
                  regulatory or other governmental authority having jurisdiction
                  over the Party, disclose to such regulatory body or other
                  governmental authority the content of the Parties'
                  negotiations that resulted in this settlement, including, but
                  not limited to, the statements of the Parties' representatives
                  and the mediator at or in connection with the mediation. In
                  making any disclosure as permitted in this paragraph 7.14, the
                  Party making the disclosure shall use reasonable best efforts
                  to seek to have the disclosed information maintained by the
                  regulatory body or other governmental authority as
                  confidential information.

         7.15     No Third Party Rights. This Agreement shall not be interpreted
                  as creating any right or benefits of any kind or nature
                  whatsoever in any third party or class of persons not parties
                  to it.

         7.16     Notices. Notices under this Agreement shall be in writing and
                  shall be deemed properly given if delivered by hand or sent by

                                       22

<PAGE>

                  facsimile (receipt verified), by overnight courier, or by
                  first class mail, postage prepaid to the person specified
                  below:

                  Peabody: PEABODY WESTERN COAL COMPANY
                           Attention: President
                           701 Market Street
                           St. Louis, MO 63101
                           Telephone: 314-342-3400
                           Facsimile: 314-342-3419

                  Edison:  SOUTHERN CALIFORNIA EDISON COMPANY
                           Attention: Manager, Energy Supply & Management
                           2244 Walnut Grove Avenue
                           Rosemead, California  91770
                           Telephone: 626-302-3241
                           Facsimile: 626-302-3254

                  SRP:     SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND
                           POWER DISTRICT
                           Attention: Manager, Fuels Department
                           P.O. Box 52025
                           Mail Stop POB 001
                           Phoenix, Arizona  85072
                           Telephone: 602-236-4311
                           Facsimile: 602-236-4322

                  LADWP:   DEPARTMENT OF WATER AND POWER
                           CITY OF LOS ANGELES
                           Attention: Assistant General Manager, Power
                           Generation
                           Department of Water and Power
                           City of Los Angeles
                           111 North Hope Street, Room 1522
                           Los Angeles, CA 90012
                           Telephone: 213-367-4435
                           Facsimile: 213-367-0313

                  NPC:     NEVADA POWER COMPANY
                           Attention: Manager of Fuels
                           6226 West Sahara Avenue
                           Las Vegas, Nevada  89146
                           Telephone: 702-367-5996
                           Facsimile: 702-227-2455

                                       23

<PAGE>

                  Written notices shall be deemed delivered on the fifth
                  business day after deposit in the United States mail, or when
                  received if sent by facsimile or overnight courier or
                  delivered by hand. The designated address of a Party set forth
                  above may be changed at any time upon written notice by the
                  Party given in accordance with this paragraph 7.16.

         7.17     When Effective. This Agreement shall become effective and
                  binding when it has been executed by all of the Parties.

         IN WITNESS WHEREOF, the Parties hereto have caused this Settlement
Agreement and Mutual Release to be executed by their duly authorized officers as
of the dates set forth under their respective signatures.

PEABODY WESTERN COAL COMPANY

By:
       -----------------------------------
Name:  John L. Wasik
       -----------------------------------
Title: President
       -----------------------------------
Date:
       -----------------------------------

SOUTHERN CALIFORNIA EDISON COMPANY

By:
       -----------------------------------
Name:  Harold B. Ray
       -----------------------------------
Title: Executive Vice President
       -----------------------------------
Date:
       -----------------------------------

                                       24

<PAGE>

SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT

By:
       -----------------------------------
Name:  David G. Areghini
       -----------------------------------
Title: Associate General Manager Power,
       Construction and Engineering
       Services
       -----------------------------------
Date:
       -----------------------------------

NEVADA POWER COMPANY

By:
       -----------------------------------
Name:
       -----------------------------------
Title:
       -----------------------------------
Date:
       -----------------------------------

DEPARTMENT OF WATER AND POWER
THE CITY OF LOS ANGELES
           BY
BOARD OF WATER AND POWER
COMMISSIONERS OF THE CITY OF LOS
ANGELES

By:
       -----------------------------------
Name:  Enrique Martinez
       -----------------------------------
Title: Assistant General Manager
       -----------------------------------
Date:
       -----------------------------------

And

By:
       -----------------------------------
Name:  John C. Burmahln
       -----------------------------------
Title: Secretary
       -----------------------------------
Date:
       -----------------------------------

                                       25<PAGE>

                                                                    EXHIBIT 10.1

================================================================================

                               SERVICES AGREEMENT

                                      AMONG

                                 WILLIAMS GP LLC

                          WILLIAMS ENERGY PARTNERS L.P.

                       WILLIAMS PETROLEUM SERVICES, L.L.C.

                                       AND

                        WILLIAMS ENERGY SERVICES, L.L.C.

================================================================================

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                          <C>
                                    ARTICLE I
                                   DEFINITIONS

1.01  Definitions........................................................     1
1.02  Construction.......................................................     3

                                ARTICLE II
                 RETENTION OF WILLIAMS; SCOPE OF SERVICES

2.01  Retention of Williams..............................................     3
2.02  Scope of Services..................................................     3
2.03  Exclusion of Services..............................................     3
2.04  Performance of Services by Affiliates..............................     4
2.05  Representations and Warranties of WES and WPS......................     4
2.06  Representations and Warranties of GP and WEG.......................     4
2.07  Intellectual Property..............................................     5

                                ARTICLE III
                       BOOKS, RECORDS AND REPORTING

3.01  Books and Records..................................................     5
3.02  Audits.............................................................     5
3.03  Reports............................................................     5

                                ARTICLE IV
                           REIMBURSEMENT AMOUNT

4.01  Reimbursement Amount...............................................     6
4.02  Payment of Reimbursement Amount....................................     6
4.03  Disputed Charges...................................................     6
4.04  Set Off............................................................     6

                                 ARTICLE V
                               FORCE MAJEURE

5.01  Force Majeure......................................................     6

                                ARTICLE VI
                       ASSIGNMENTS AND SUBCONTRACTS

6.01  Assignments........................................................     7
6.02  Williams's Employees...............................................     7
6.03  Other Requirements.................................................     7

                                ARTICLE VII
                            DISPUTE RESOLUTION

7.01  Disputes...........................................................     7
7.02  Negotiation to Resolve Disputes....................................     8
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                          <C>
7.03  Selection of Arbitrator............................................     8
7.04  Conduct of Arbitration.............................................     8

                               ARTICLE VIII
                                TERMINATION

8.01  Termination by GP..................................................     9
8.02  Termination by Williams............................................    10
8.03  Effect of Termination..............................................    10

                                ARTICLE IX
                            GENERAL PROVISIONSW

9.01  Notices............................................................    10
9.02  Entire Agreement; Superseding Effect...............................    11
9.03  Effect of Waiver or Consent........................................    11
9.04  Amendment or Restatement...........................................    11
9.05  Restriction on Assignment; Binding Effect..........................    11
9.06  Governing Law; Severability........................................    11
9.07  Further Assurances.................................................    11
9.08  Directly or Indirectly.............................................    12
9.09  Counterparts.......................................................    12
</TABLE>

                                       ii
<PAGE>

                               SERVICES AGREEMENT

      This Services Agreement (this "Agreement") is entered into as of the [   ]
day of [   ], 2002 (the "Effective Date"), among Williams Energy Partners L.P.,
a Delaware limited partnership ("WEG"), Williams GP LLC, a Delaware limited
liability company ("GP"), Williams Petroleum Services, L.L.C., a Delaware
limited liability company ("WPS"), and Williams Energy Services, L.L.C., a
Delaware limited liability company ("WES", and collectively with WEG, GP and
WPS, the "Parties").

                                    RECITALS

      A.    WEG is the owner of interests in certain pipelines and terminals
            (the "Assets," as hereinafter defined);

      B.    GP, in its capacity as the general partner of WEG, desires to engage
            WES and WPS, Affiliates of GP, on its own behalf and for the benefit
            of WEG, to provide the services necessary to operate the Assets in
            accordance with the direction of GP; and

      C.    WPS and WES (collectively, "Williams") are willing to undertake such
            engagement, subject to the terms and conditions of this Agreement;

      NOW, THEREFORE, WEG, GP, for itself and in its capacity as the general
partner of WEG, and WILLIAMS agree as follows:

                                   ARTICLE I
                                   DEFINITIONS

      1.01 DEFINITIONS. As used in this Agreement, the following terms have the
respective meanings set forth below or set forth in the Sections referred to
below:

      "AFFILIATE" shall mean with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person. For
purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, through the ownership of voting securities, by contract or
otherwise.

      "AGREEMENT" is defined in the introductory paragraph.

      "ASSETS" shall mean the assets of Williams Energy Partners L.P., Williams
OLP, L.P. and Williams Pipe Line Company, LLC and any Person controlled by any
of them.

      "ARBITRATION NOTICE" is defined in Section 7.02 (c).

      "ARBITRATOR" is defined in Section 7.03(a).

      "BANKRUPT" with respect to any Person shall mean such Person shall
generally not pay its debts as such debts become due, or shall admit in writing
its inability to pay its debts generally,

<PAGE>

or shall make a general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against such Person seeking to adjudicate
it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee, or other similar official for it or for any substantial part
of its property and, in the case of any such proceeding instituted against it
(but not instituted by it), shall remain undismissed or unstayed for a period of
30 days; or such Person shall take any action to authorize any of the actions
set forth above.

      "CHANGE OF CONTROL" is defined in the Omnibus Agreement.

      "WILLIAMS" is defined in the recitals hereof.

      "DEFAULT RATE" shall mean an interest rate (which shall in no event be
higher than the rate permitted by applicable law) equal to 300 basis points over
LIBOR.

      "DISPUTE" is defined in Section 7.01(a).

      "EFFECTIVE DATE" is defined in the introductory paragraph.

      "FORCE MAJEURE" shall mean any cause beyond the reasonable control of a
Party, including the following causes (unless they are within such Party's
reasonable control): including, without limitation, acts of God, strikes,
lockouts, acts of the public enemy, wars or warlike action (whether actual or
impending), arrests and other restraints of government (civil or military),
blockades, embargoes, insurrections, riots, epidemics, landslides, lightning,
earthquakes, fires, sabotage, tornadoes, named tropical storms and hurricanes,
and floods, civil disturbances, terrorism, mechanical breakdown of machinery or
equipment, explosions, confiscation or seizure by any government or other public
authority, any order of any court of competent jurisdiction, regulatory agency
or governmental body having jurisdiction.

      "GENERAL PARTNER INTEREST" shall have the meaning set forth in Article I
of the Partnership Agreement.

      "GP" is defined in the introductory paragraph.

      "OMNIBUS AGREEMENT" shall mean that Omnibus Agreement dated as of February
9, 2001 among WEG, GP, WES, The Williams Companies, Inc., Williams Natural Gas
Liquids, Inc., Williams Pipe Line Company, LLC, Williams Information Services
Corporation, and Williams OLP, L.P., as amended from time to time.

      "PARTICIPANTS" is defined in Section 7.01.

      "PARTIES" is defined in the introductory paragraph.

      "PARTNERSHIP AGREEMENT" shall mean that Amended and Restated Agreement of
Limited Partnership of Williams Energy Partners L.P. dated as of February 9,
2001, as amended from time to time.

                                       2
<PAGE>

      "PERSON" means an individual, corporation, partnership, joint venture,
trust, limited liability company, unincorporated organization or other entity.

      "REIMBURSEMENT AMOUNT" is defined in Section 4.01.

      "SERVICES" is defined in Section 2.02.

      "SETTLEMENT DATE" shall mean the 20th day of each calendar month for the
preceding month. In the event the 20th day falls on a Saturday or a bank holiday
other than a Monday, the "Settlement Date" shall be the immediately preceding
bank day. In the event the 20th day falls on a Sunday or Monday bank holiday,
the "Settlement Date" shall be the following bank day.

      "WEG" is defined in the introductory paragraph.

      "WES" is defined in the introductory paragraph.

      "WILLIAMS" is defined in the recitals hereof.

      "WPS" is defined in the introductory paragraph.

Other terms defined herein have the meanings so given them.

      1.02 CONSTRUCTION. Unless the context requires otherwise: (a) the gender
(or lack of gender) of all words used in this Agreement includes the masculine,
feminine, and neuter; (b) references to Articles and Sections refer to Articles
and Sections of this Agreement; (c) references to Exhibits refer to the Exhibits
attached to this Agreement, each of which is made a part hereof for all
purposes; and (d) references to money refer to legal currency of the United
States of America.

                                   ARTICLE II
                    RETENTION OF WILLIAMS; SCOPE OF SERVICES

      2.01 RETENTION OF WILLIAMS. (a) GP, on its own behalf for the benefit of
WEG, hereby engages Williams to perform the Services (as defined below) and to
provide all employees and any facilities and equipment not otherwise provided by
WEG necessary to perform the Services. Williams hereby accepts such engagement
and agrees to perform the Services and to provide any facilities and equipment
not otherwise provided by WEG, and to provide all employees necessary to perform
the Services.

      2.02 SCOPE OF SERVICES. The "Services" shall consist of any services
necessary to operate the Assets and the conduct of the business associated with
the Assets, including, without limitation, those services described on Exhibit 1
hereto. The Services shall be provided as directed by the officers of GP, and
the scope of the Services shall be provided consistent with the Services
provided as of July 31, 2002 unless agreed otherwise by GP and Williams.

      2.03 EXCLUSION OF SERVICES. At any time, either GP or Williams may
temporarily or permanently exclude any particular service from the scope of the
Services upon 90 days notice to

                                       3
<PAGE>

the other Party. GP may permanently exclude services from the scope of Services
related to Williams Ammonia Pipeline, L.P. upon reasonable notice to Williams.

      2.04 PERFORMANCE OF SERVICES BY AFFILIATES. The Parties hereby agree that
in discharging its obligations hereunder, Williams may engage any of its
Affiliates to perform the Services (or any part of the Services) on its behalf
and that the performance of the Services (or any part of the Services) by any
such Affiliate shall be treated as if Williams performed such Services itself.
Notwithstanding the foregoing, nothing contained herein shall relieve Williams
of its obligations hereunder.

      2.05 REPRESENTATIONS AND WARRANTIES OF WES AND WPS. Each of WES and WPS
hereby represents, warrants and covenants to WEG and to GP that the following
statements shall be true and correct as of the date hereof:

      (a) Each of WES and WPS is duly incorporated, validly existing, and in
good standing under the laws of the State of Delaware; each of WES and WPS is
duly qualified and in good standing in the States required in order to perform
the Services except where failure to be so qualified or in good standing could
not reasonably be expected to have a material adverse impact on GP or WEG; and
each of WES and WPS has full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder;

      (b) Each of WES and WPL has duly executed and delivered this Agreement,
and it constitutes the legal, valid and binding obligation of such Person,
enforceable against such Person in accordance with its terms (except as may be
limited by bankruptcy, insolvency or similar laws of general application and by
the effect of general principles of equity, regardless of whether considered at
law or in equity); and

      (c) The authorization, execution, delivery, and performance of this
Agreement by each of WES and WPS does not and will not (i) conflict with, or
result in a breach, default or violation of, (A) the certificate of
incorporation or bylaws of such Person, (B) any contract or agreement to which
such Person is a party or is otherwise subject, or (C) any law, order, judgment,
decree, writ, injunction or arbitral award to which such Person is subject; or
(ii) require any consent, approval or authorization from, filing or registration
with, or notice to, any governmental authority or other Person, unless such
requirement has already been satisfied.

      2.06 REPRESENTATIONS AND WARRANTIES OF GP AND WEG. Each of GP and WEG
hereby represents, warrants and covenants to Williams that the following
statements shall be true and correct as of the date hereof:

      (a) Each of GP and WEG is duly incorporated, validly existing, and in good
standing under the laws of the jurisdiction of its formation; each of GP and WEG
has full power and authority to execute and deliver this Agreement and to
perform its obligations hereunder;

      (b) Each of GP and WEG has duly executed and delivered this Agreement, and
it constitutes the legal, valid and binding obligation of such Person
enforceable against it in accordance with its terms (except as may be limited by
bankruptcy, insolvency or similar laws of general application and by the effect
of general principles of equity, regardless of whether considered at law or in
equity);

                                       4
<PAGE>

      (c) The authorization, execution, delivery, and performance of this
Agreement by each of GP and WEG does not and will not (i) conflict with, or
result in a breach, default or violation of, (A) the organizational documents of
such Person, (B) any contract or agreement to which such Person is a party or is
otherwise subject, or (C) any law, order, judgment, decree, writ, injunction or
arbitral award to which such Person is subject; or (ii) require any consent,
approval or authorization from, filing or registration with, or notice to, any
governmental authority or other Person, unless such requirement has already been
satisfied;

      2.07 INTELLECTUAL PROPERTY. (a) Any (i) inventions, whether patentable or
not, developed or invented, or (ii) copyrightable material (and the intangible
rights of copyright therein) developed, by Williams, its Affiliates or its or
their employees in connection with the performance of the Services shall be the
property of Williams; provided, however, that WEG shall be granted an
irrevocable, royalty-free, non-exclusive and non-transferable right and license
to use such inventions or material; and further provided, however, that WEG
shall only be granted such a right and license to the extent such grant does not
conflict with, or result in a breach, default, or violation of a right or
license to use such inventions or material granted to Williams by any Person
other than an Affiliate of Williams. Notwithstanding the foregoing, Williams
will use all commercially reasonable efforts to grant such right and license to
WEG.

      (b) WEG hereby grants to Williams and its Affiliates an irrevocable,
royalty-free, non-exclusive and non-transferable right and license to use,
during the term of this Agreement, any intellectual property provided by WEG to
Williams, but only to the extent such use is necessary for the performance of
the Services. Williams agrees that it and its Affiliates will utilize such
intellectual property solely in connection with the performance of the Services.

                                  ARTICLE III
                          BOOKS, RECORDS AND REPORTING

      3.01 BOOKS AND RECORDS. Williams shall maintain accurate books and records
regarding the performance of the Services and its calculation of the
Reimbursement Amount, and shall maintain such books and records for the period
required by applicable accounting practices or law.

      3.02 AUDITS. GP shall have the right, upon reasonable notice, and at all
reasonable times during usual business hours, to audit, examine and make copies
of the books and records referred to in Section 3.01. Such right may be
exercised through any agent or employee of GP designated in writing by it or by
an independent public accountant, engineer, attorney or other Williams so
designated. GP shall bear all costs and expenses incurred in any inspection,
examination or audit. Williams shall review and respond in a timely manner to
any claims or inquiries made by the GP regarding matters revealed by any such
inspection, examination or audit.

      3.03 REPORTS. Williams shall prepare and deliver to the GP any reports
provided for in this Agreement and such other reports as the GP may request from
time to time regarding the performance of the Services.

                                       5
<PAGE>

                                   ARTICLE IV
                              REIMBURSEMENT AMOUNT

      4.01 REIMBURSEMENT AMOUNT. Within 5 days after the end of each calendar
month, Williams shall charge via intercompany accounts to GP the amount equal to
the actual cost of all direct and indirect expenses incurred by Williams during
such calendar month in connection with its performance of the Services (the
"Reimbursement Amount"). Provided, however, that any portion of the Services
that were considered by the Parties to be general and administrative expenses as
of July 31, 2002 shall be subject to the reimbursement limitations set forth in
Article IV of the Omnibus Agreement.Payment of Reimbursement Amount. On or
before the Settlement Date, GP shall pay to Williams in immediately available
funds, the full Reimbursement Amount due by ACH debit.

      4.02 DISPUTED CHARGES. GP MAY, WITHIN 120 DAYS AFTER RECEIPT OF THE
INTERCOMPANY ACCOUNT CHARGE FROM WILLIAMS, TAKE WRITTEN EXCEPTION TO SUCH
CHARGE, ON THE GROUND THAT THE SAME WAS NOT A REASONABLE COST INCURRED BY
WILLIAMS IN CONNECTION WITH THE SERVICES. GP SHALL NEVERTHELESS PAY IN FULL WHEN
DUE THE FULL REIMBURSEMENT AMOUNT CHARGED TO GP BY WILLIAMS. SUCH PAYMENT SHALL
NOT BE DEEMED A WAIVER OF THE RIGHT OF GP TO RECOUP ANY CONTESTED PORTION OF ANY
AMOUNT SO CHARGED. HOWEVER, IF THE AMOUNT AS TO WHICH SUCH WRITTEN EXCEPTION IS
TAKEN, OR ANY PART THEREOF, IS ULTIMATELY DETERMINED IN ACCORDANCE WITH ARTICLE
7 NOT TO BE A REASONABLE COST INCURRED BY WILLIAMS IN CONNECTION WITH ITS
PROVIDING THE SERVICES HEREUNDER, SUCH AMOUNT OR PORTION THEREOF (AS THE CASE
MAY BE) SHALL BE REFUNDED BY WILLIAMS TO GP TOGETHER WITH INTEREST THEREON AT
THE DEFAULT RATE DURING THE PERIOD FROM THE DATE OF PAYMENT BY GP TO THE DATE OF
REFUND BY WILLIAMS.

      4.04 SET OFF. In the event that Williams owes GP an amount under any other
agreement, then any such amounts shall be aggregated and the GP and Williams
shall discharge their obligations by netting those amounts against any amounts
owed by GP to Williams under this Agreement. If GP or Williams owes the other
party a greater aggregate amount, that party shall pay to the other party the
difference between the amounts owed.

                                   ARTICLE V
                                  FORCE MAJEURE

      5.01 FORCE MAJEURE. A Party's obligation under this Agreement shall be
excused when and to the extent its performance of that obligation is prevented
due to Force Majeure; provided, however, that a Party shall not be excused by
Force Majeure from any obligation to pay money. The Party that is prevented from
performing its obligation by reason of Force Majeure shall promptly notify the
other Parties of that fact and shall exercise due diligence to end its inability
to perform as promptly as practicable. Notwithstanding the foregoing, a Party is
not required to settle any strike, lockout or other labor dispute in which it
may be involved; provided, however, that, in the event of a strike, lockout or
other labor dispute affecting

                                       6
<PAGE>

Williams, Williams shall use reasonable efforts to continue to perform all
obligations hereunder by utilizing its management personnel and that of its
Affiliates.

                                   ARTICLE VI
                          ASSIGNMENTS AND SUBCONTRACTS

      6.01 ASSIGNMENTS. (a) Without the prior consent of Williams, neither WEG
nor GP may sell, assign, transfer or convey any of its rights, or delegate any
of its obligations, under this Agreement to any Person. Provided, however, GP
may assign its right and delegate its obligations under this Agreement to a
transferee of its General Partner Interest pursuant to Section 4.6(a)(ii)(A) of
the Partnership Agreement.

      (b) Without the prior consent of GP, Williams may not sell, assign,
transfer or convey of any of its rights, or delegate any of its obligations,
under this Agreement to any Person, other than the delegation of performance of
Services to an Affiliate of Williams as permitted by Section 2.04.

      6.02 WILLIAMS'S EMPLOYEES. The obligations under Sections 4.01 and 4.02
shall be limited to reimbursement of Williams for expenses in connection with
its employees engaged in the provision of Services hereunder, and GP shall not
be obligated to pay to Williams's employees directly any compensation, salaries,
wages, bonuses, benefits, social security taxes, workers' compensation
insurance, retirement and insurance benefits, training and other such expenses.

      6.03 OTHER REQUIREMENTS. Subject to the other provisions hereof:

      (a) All materials and workmanship used or provided in performing the
Services shall be in accordance with applicable drawings, specifications, and
standards.

      (b) Williams shall exercise reasonable diligence to obtain the most
favorable terms or warranties available from vendors, suppliers and other third
parties, and where appropriate, Williams shall assign such warranties to WEG.

      (c) In rendering the Services, Williams shall not discriminate against any
employee or applicant for employment because of race, creed, color, religion,
sex, national origin, age or handicap, and shall comply with all applicable
provisions of Executive Order 11246 of September 24, 1965, and any successor
order thereto. Subject to the above, Williams shall, to the extent practicable,
engage employees who reside in or whose businesses are located in the local area
or state where the Services are performed.

      (d) Williams covenants and agrees to exercise reasonable diligence to
ensure that, during the term of this Agreement, it shall not employ unauthorized
aliens as defined in the Immigration Reform and Control Act of 1986, or any
successor law.

                                       7
<PAGE>

                                  ARTICLE VII
                               DISPUTE RESOLUTION

      7.01 DISPUTES. This Article 7 shall apply to any dispute arising under or
related to this Agreement (whether arising in contract, tort or otherwise, and
whether arising at law or in equity), including (a) any dispute regarding the
construction, interpretation, performance, validity or enforceability of any
provision of this Agreement or whether any Person is in compliance with, or
breach of, any provisions of this Agreement, and (b) the applicability of this
Article 7 to a particular dispute (collectively, a "Dispute"). The provisions of
this Article 7 shall be the exclusive method of resolving Disputes. For purposes
of this Article , each of WES, WPS and GP, acting for itself and on behalf of
WEG, shall be a "Participant".

      7.02 NEGOTIATION TO RESOLVE DISPUTES. If a Dispute arises, the
Participants shall attempt to resolve such Dispute through the following
procedure:

      (a) first, an executive officer of WES, an executive officer of WPS, and
an executive officer of GP shall promptly meet (whether by phone or in person)
in a good faith attempt to resolve the Dispute;

      (b) second, if the Dispute is still unresolved after 20 days following the
commencement of the negotiations described in Section 7.02(a), then the chief
executive officers of WES, WPS and GP will promptly meet (whether by phone or in
person) in a good faith attempt to resolve the Dispute; and

      (c) third, if the Dispute is still unresolved after 10 days following the
commencement of the negotiations described in Section 7.02(b), then any
Participant may submit such Dispute to binding arbitration under this Article 7
by notifying the other Participants (an "Arbitration Notice").

      7.03 SELECTION OF ARBITRATOR. (a) Any arbitration conducted under this
Article 7 shall be heard by a sole arbitrator (the "Arbitrator") selected in
accordance with this Section 7.03. Each Participant and each proposed Arbitrator
shall disclose to the other Participants any business, personal or other
relationship or affiliation that may exist between such Participant and such
proposed Arbitrator, and any Participant may disapprove of such proposed
Arbitrator on the basis of such relationship or affiliation.

      (b) The Participant that submits a Dispute to arbitration shall designate
a proposed Arbitrator in its Arbitration Notice. If any other Participant
objects to such proposed Arbitrator, it may, on or before the tenth day
following delivery of the Arbitration Notice, notify the other Participants of
such objection. The Participants shall attempt to agree upon a
mutually-acceptable Arbitrator. If they are unable to do so within 20 days
following delivery of the notice described in the immediately-preceding
sentence, any Participant may request the AAA to designate the Arbitrator. If
the Arbitrator so chosen shall die, resign or otherwise fail or becomes unable
to serve as Arbitrator, a replacement Arbitrator shall be chosen in accordance
with this Section 7.03.

      7.04 CONDUCT OF ARBITRATION. The Arbitrator shall expeditiously (and, if
possible, within 90 days after the Arbitrator's selection) hear and decide all
matters concerning the

                                       8
<PAGE>

Dispute. Except as the Participants agree otherwise, arbitration hearing shall
be held in the City of Tulsa, Oklahoma. Except as the Participants agree
otherwise, the arbitration shall be conducted in accordance with the
then-current Commercial Arbitration Rules of the AAA (excluding rules governing
the payment of arbitration, administrative or other fees or expenses to the
Arbitrator or the AAA), to the extent that such rules do not conflict with the
terms of this Agreement. Except as expressly provided to the contrary in this
Agreement, the Arbitrator shall have the power (a) to gather such materials,
information, testimony and evidence in the manner as it deems appropriate
relevant to the dispute before it (and each Participant will provide such
materials, information, testimony and evidence requested by the Arbitrator,
except to the extent any information so requested is proprietary, subject to a
third-party confidentiality restriction or to an attorney-client or other
privilege) and (b) to grant injunctive relief and enforce specific performance.
If it deems necessary, the Arbitrator may propose to the Participants that one
or more other experts be retained to assist it in resolving the Dispute. The
retention of such other experts shall require the unanimous consent of the
Participants, which shall not be unreasonably withheld. Each Participant, the
Arbitrator and any proposed expert shall disclose to each other any business,
personal or other relationship or affiliation that may exist between such
Participant (or the Arbitrator) and such proposed expert; and any Participant
may disapprove of such proposed expert on the basis of such relationship or
affiliation. The decision of the Arbitrator (which shall be rendered in writing)
shall be final, nonappealable and binding upon the Participants and may be
enforced in any court of competent jurisdiction; provided that the Participants
agree that the Arbitrator and any court enforcing the award of the Arbitrator
shall not have the right or authority to award punitive or exemplary damages to
any Participant. The responsibility for paying the costs and expenses of the
arbitration, including compensation to the Arbitrator and any experts retained
by the Arbitrator, shall be allocated between the Participants in a manner
determined by the Arbitrator to be fair and reasonable under the circumstances.
Each Participant shall be responsible for the fees and expenses of its
respective counsel, consultants and witnesses, unless the Arbitrator determines
that compelling reasons exist for allocating all or a portion of such costs and
expenses in another manner. Any costs or expenses incurred by a Participant(s)
in enforcing any Award of the Arbitrator shall be borne by the Participant
challenging the enforcement.

                                  ARTICLE VIII
                                   TERMINATION

      8.01 TERMINATION BY GP. (a) Upon the occurrence of any of the following
events, GP may terminate this Agreement by giving notice of such termination to
Williams:

            (i) Williams or The Williams Companies, Inc. becomes Bankrupt;

            (ii) Williams or The Williams Companies, Inc. dissolves and
      commences liquidation or winding-up; or

            (iii) Change of Control of GP.

Any termination under this Section 8.01(a) shall become effective immediately
upon delivery of the notice first described in this Section 8.01(a), or such
later time (not to exceed the first anniversary of the delivery of such notice)
as may be specified by GP.

                                       9
<PAGE>

      (b) In addition to its rights under Section 8.01(a), GP may terminate this
Agreement at any time by giving notice of such termination to Williams. Any
termination under this Section 8.01(b) shall become effective 90 days after
delivery of such notice, or such later time (not to exceed the first anniversary
of the delivery of such notice) as may be specified by GP.

      8.02 TERMINATION BY WILLIAMS. (a) Upon the occurrence of any of the
following events, Williams may terminate this Agreement by giving notice of such
termination to GP (with copies to the WEG):

            (i) Change of Control of GP.

Any termination under this Section 8.02(a) shall become effective immediately
upon delivery of the notice first described in this Section 8.02(a).

      (b) In addition to its rights under Section 8.02(a), Williams may
terminate this Agreement at any time by giving notice of such termination to GP
(with copies to WEG). Any termination under this Section 8.02(b) shall become
effective 90 days after delivery of such notice, or such later time (not to
exceed the first anniversary of the delivery of such notice) as may be specified
by either GP or Williams.

      8.03 EFFECT OF TERMINATION. If this Agreement is terminated in accordance
with Section 8.01 or 8.02, all rights and obligations under this Agreement shall
cease except for (a) obligations that expressly survive termination of this
Agreement; (b) liabilities and obligations that have accrued prior to such
termination, including the obligation to pay any amounts that have become due
and payable prior to such termination, and (c) the obligation to pay any portion
of the Reimbursement Amount that has accrued prior to such termination, even if
such portion has not become due and payable at that time.

                                   ARTICLE IX
                               GENERAL PROVISIONS

      9.01 NOTICES. Except as expressly set forth to the contrary in this
Agreement, all notices, requests or consents provided for or permitted to be
given under this Agreement must be in writing and must be delivered to the
recipient in person, by courier or mail or by facsimile, telegram, telex,
cablegram or similar transmission; and a notice, request or consent given under
this Agreement is effective on receipt by the Party to receive it; provided,
however, that a facsimile or other electronic transmission that is transmitted
after the normal business hours of the recipient shall be deemed effective on
the next Business Day. All notices, requests and consents to be sent to Williams
must be sent to or made at the address given below for Williams, or such other
address as Williams may specify by notice to WEG and GP. All notices, requests
and consents to be sent to WEG must be sent to GP. All notices, requests and
consents (including copies thereof) to be sent to GP must be sent to or made at
the address given below for GP.

                                       10
<PAGE>

Address for Notices:    WES:                     WPS:

                        GP:                      WEG:

                        Attn: President          Attn: President

      9.02 ENTIRE AGREEMENT; SUPERSEDING EFFECT. This Agreement constitutes the
entire agreement of the Parties relating to the matters contained herein,
superseding all prior contracts or agreements, whether oral or written, relating
to the matters contained herein.

      9.03 EFFECT OF WAIVER OR CONSENT. Except as otherwise provided in this
Agreement, a waiver or consent, express or implied, to or of any breach or
default by any Party in the performance by that Party of its obligations under
this Agreement is not a consent or waiver to or of any other breach or default
in the performance by that Party of the same or any other obligations of that
Party under this Agreement. Except as otherwise provided in this Agreement,
failure on the part of a Party to complain of any act of another Party or to
declare another Party in default under this Agreement, irrespective of how long
that failure continues, does not constitute a waiver by that Party of its rights
with respect to that default until the applicable statute-of-limitations period
has run.

      9.04 AMENDMENT OR RESTATEMENT. This Agreement may be amended or restated
only by a written instrument executed by each of the Parties.

      9.05 RESTRICTION ON ASSIGNMENT; BINDING EFFECT. Subject to Article 6, this
Agreement is binding on and shall inure to the benefit of the Parties and their
respective successors and permitted assigns.

      9.06 GOVERNING LAW; SEVERABILITY. THIS AGREEMENT IS GOVERNED BY AND SHALL
BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OKLAHOMA, EXCLUDING ANY
CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE CONSTRUCTION OR THE
INTERPRETATION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION. If any
provision of this Agreement or the application thereof to any Person or any
circumstance is held invalid or unenforceable to any extent, the remainder of
this Agreement and the application of such provision to other Persons or
circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.

      9.07 FURTHER ASSURANCES. In connection with this Agreement and the
transactions contemplated hereby, each Party shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.

                                       11
<PAGE>

      9.08 DIRECTLY OR INDIRECTLY. Where any provision of this Agreement refers
to action to be taken by any Party, or which such Party is prohibited from
taking, such provision shall be applicable whether such action is taken directly
or indirectly by such Party, including actions taken by or on behalf of any
Affiliate of such Party.

      9.09 COUNTERPARTS. This Agreement may be executed in counterparts with the
same effect as if each signing party had signed the same document. All
counterparts shall be construed together and shall constitute one and the same
instrument.

                                       12
<PAGE>

      IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first set forth above.

                                    WILLIAMS GP LLC

                                    By:
                                    Name: ______________________________________
                                    Title: _____________________________________

                                    WILLIAMS ENERGY PARTNERS L.P.

                                    By: WILLIAMS GP LLC, its general partner

                                    By:_________________________________________
                                    Name: ______________________________________
                                    Title: _____________________________________

                                    WILLIAMS ENERGY SERVICES, L.L.C.

                                    By:_________________________________________
                                    Name: ______________________________________
                                    Title: _____________________________________

                                    WILLIAMS PETROLEUM SERVICES, L.L.C.

                                    By:_________________________________________
                                    Name: ______________________________________
                                    Title: _____________________________________

                                       13
<PAGE>

                                    EXHIBIT 1

      The Services shall include any services necessary for the operation of the
Assets and shall include, without limitation the following services for the
following named entities:

1.    Williams Terminals Holdings, L.P.

      (a) facility maintenance services, including preventative maintenance
      activities and equipment repairs

      (b)operations services, including loading rack operations, internal
      product quality control, sampling, blending, general maintenance, building
      and grounds maintenance, and routine inspection

      (c) terminal marketing services

      (d) technical services, including engineering, safety, environmental and
      real estate services

      (e) professional services, including legal accounting, insurance, tax,
      credit, finance, government affairs, and regulatory affairs.

2.    Williams Pipe Line Company LLC

      (a) facility maintenance services, including preventative maintenance
      activities and equipment repairs

      (b) operations services, including loading rack operations, internal
      product quality control, sampling, blending, engineering, manifold
      operations, filter vessels, ethanol unloading, rail loadings, general
      maintenance, building and grounds maintenance, routine inspection, lab
      services, mainline maintenance, right of way patrol, right of way
      clearing, line depth issues, damage prevention program, emergency
      response, scheduling services, and pipeline control services.

      (c) terminal and pipeline marketing services

      (d) technical services, including engineering, safety, environmental and
      real estate services

      (e) professional services, including legal, accounting, insurance, tax,
      credit, finance, government affairs, and regulatory affairs.

3.    Williams Ammonia Pipeline, L.P.

                                       14
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      (a) facility maintenance services, including preventative maintenance
      activities and equipment repairs

      (b) operations services, including loading rack operations, internal
      product quality control, manifold operations, engineering, general
      maintenance, building and grounds maintenance, routine inspection,
      scheduling services, mainline maintenance, including right of way patrol,
      right of way clearing, line depth issues, damage prevention program,
      emergency response and pipeline control services

      (c) pipeline marketing services

      (d) technical services, including engineering, safety, environmental and
      real estate services

      (e) professional services, including legal accounting, insurance, tax,
      credit, finance, government affairs, and regulatory affairs.

                                       15

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