OPERATING AGREEMENT

                            PEABODY NATURAL GAS, LLC



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

of the 16th day of February, 2000 by PEABODY HOLDING COMPANY, INC., a New York

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

Louis, Missouri 63101 ("PHCI"). PHCI is hereinafter referred to as the "Member"

and any subsequently admitted members shall hereinafter collectively be referred

to with PHCI 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. PHCI desires to form a limited liability company under the Delaware

Limited Liability Company Act ("Act") to be known as "Peabody Natural Gas, LLC"

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



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



         C. PHCI 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, PHCI 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"). PHCI shall be the Managing Member of the Company.



         1.2      Name.



                  The Company will do business under the name "Peabody Natural

Gas LLC". The 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 701 Market Street, Suite 700, St. Louis, Missouri 63101. 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 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)

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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