OPERATING AGREEMENT

                     PEABODY DEVELOPMENT LAND HOLDINGS, LLC



         THIS OPERATING AGREEMENT (this "Agreement") is made and entered into as

of the 16th day of February, 2000 by and between (i) PEABODY DEVELOPMENT

COMPANY, a Delaware corporation with its principal offices at 301 N. Memorial

Dr., St. Louis, MO 63102 ("PDC") and (ii) PEABODY HOLDING COMPANY, INC., a New

York corporation, with its principal offices at 701 Market Street, Suite 700,

St. Louis, MO 63101 ("PHCI"). PDC and PHCI are hereinafter collectively referred

to with PHCI as the "Members" and each individually as a "Member". For purposes

of this Agreement, the term "Member" shall include any party then acting in such

capacity in accordance with the terms of this Agreement.



                                    RECITALS



         A. PDC and PHCI desire to form a limited liability company under the

Delaware Limited Liability Company Act ("Act") to be known as "Peabody

Development Land Holdings, L.L.C." (the "Company") for the purposes set out in

this Agreement.



         B. PDC and PHCI desire to set out in this Agreement their respective

rights, duties and liabilities with respect to such limited liability company.



         NOW, THEREFORE, in consideration of the Recitals and the mutual

covenants and undertakings set forth herein, PDC and PHCI agree as follows:



                                    ARTICLE 1



                                    FORMATION



         1.1      Formation. The Members do hereby form the Company as a limited

liability company under the Act for the purposes and term set out in this

Agreement. To effect the formation of the Company, the Members have executed and

duly recorded certificate of formation in the form attached hereto as Exhibit

1.1 (the "Articles").



         1.2      Name.



                  The Company will do business under the name "Peabody

Development Land Holdings, LLC". The Members shall execute and file the Articles

and such other certificates as shall be required under the Act and under the

laws of each state in which the Company is required or desires to be qualified

to do business.



         1.3      Principal Office. The principal office of the Company shall

initially be at 301 N. Memorial Dr., St. Louis, Missouri. The principal office

may hereafter from time to time be moved to such other place in the United

States of America as may be designated by the "Managing Member", as hereinafter

defined, with written notice to all Members. The books and



                                       1







records of the Company shall be maintained at the Company's principal place of

business, or such other location in the United States of America as determined

by the Managing Member with written notice to all Members.



         1.4      Term. The duration of the Company is perpetual, or until

liquidation in accordance with the terms of this Agreement for the Company or as

required by the Act.



         1.5      Property Ownership. All assets and property owned by the

Company, whether real or personal, tangible or intangible, shall be held in the

name of the Company.



                                    ARTICLE 2

                          PURPOSES AND NON-COMPETITION



         2.1      Purposes. The Company is formed to conduct reserve holdings

and all other physical operations (other than office operations) solely to (i)

in the State of Illinois in which the coal reserves contributed by the Members

are located and logical extensions of those reserves as the members unanimously

agree and (ii) any other areas in which the Members unanimously agree to hold

coal reserves (the areas referred to in (i) and (ii) above are hereinafter

referred to as the "Project Area"). The purposes of the Company are limited to

the following coal-related purposes:



                  (a) The acquisition of coal reserves in the Project Area;



                  (b) The development and conduct of underground mining,

processing and shipping operations relative to the acquired coal reserves,

either directly with employees of the Company or through contract miners;



                  (c) The permitting and bonding (either directly or through one

of its Members) of all coal mining, processing and shipping operations on or

relating to the acquired coal reserves and the completion of reclamation

obligations relative to the coal mining, processing or shipping operations

conducted on or relating to the acquired coal reserves;



                  (d) The purchasing, selling, brokering, processing and/or

shipping of coal from whatever source in the Project Area;

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