OPERATING AGREEMENT

                           PORCUPINE PRODUCTION, LLC



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

of the 16th day of February, 2000 by PEABODY NATURAL GAS, LLC, a Delaware

limited liability company with its principal offices at 701 Market Street, Suite

700, St. Louis, Missouri 63101 ("PNG"). PNG is hereinafter referred as the

"Member" and any subsequently admitted members shall hereinafter collectively be

referred to with PNG as the "Members". 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. PNG desires to form a limited liability company under the Delaware

Limited Liability Company Act ("Act") to be known as "Porcupine Production, LLC"

(the "Company") for the purposes set out in this Agreement.



         B. PNG shall be the Sole Member and Managing Member of the Company.



         C. PNG desires to set out in this Agreement its 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, PNG agrees as follows:



                                    ARTICLE 1

                                    FORMATION



         1.1      Formation. The Member does 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 Member has executed

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

Exhibit 1.1 (the "Articles"). PNG shall be the Sole Member and Managing Member

of the Company.



         1.2      Name.



                  The Company will do business under the name "Porcupine

Production, LLC". The Sole Member and Managing Member 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







         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 Sole Member and Managing Member,

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

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 Sole Member and 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)

for the exploration and development of natural gas reserves in the United States

which the natural gas 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 natural gas

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 natural gas-related purposes:



                  (a) The acquisition of natural gas reserves in the Project

Area;



                  (b) The development and conduct of natural gas exploration,

processing and shipping operations relative to the acquired natural gas

reserves, either directly with employees of the Company or through contractors;



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

of its Members) of all natural gas exploration, processing and shipping

operations on or relating to the acquired natural gas reserves and the

completion of reclamation obligations relative to the natural gas exploration,

processing or shipping operations conducted on or relating to the acquired

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