AGREEMENT AND PLAN OF MERGER

Agreement and Plan of Merger

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612, Canadian Pacific Railway Company | SOO LINE HOLDING COMPANY | Soo Line Properties Company

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Title: AGREEMENT AND PLAN OF MERGER
Governing Law: New York Date: 9/7/2007
Industry: Misc. Fabricated Products Law Firm: Leonard Street;Sidley Austin;Shearman Sterling Sector: Basic Materials

EXHIBIT 10.25

AGREEMENT AND PLAN OF MERGER

dated as of September 4, 2007

among

SOO LINE HOLDING COMPANY,

SOO LINE PROPERTIES COMPANY,

CANADIAN PACIFIC RAILWAY COMPANY,
(solely for the purposes set forth herein)

and

DAKOTA, MINNESOTA & EASTERN RAILROAD CORPORATION

Table of Contents


		Page
ARTICLE I

DEFINITIONS

SECTION 1.01.	Certain Defined Terms		2
SECTION 1.02.	Other Defined Terms		12

ARTICLE II

CERTAIN PAYMENTS; THE MERGER

SECTION 2.01.	The Merger		14
SECTION 2.02.	Closing		14
SECTION 2.03.	Effect of the Merger		16
SECTION 2.04.	Certificate of Incorporation; By-Laws		16
SECTION 2.05.	Directors and Officers		16
SECTION 2.06.	Voting Trust		16

ARTICLE III

MERGER CONSIDERATION

SECTION 3.01.	Conversion of Securities		16
SECTION 3.02.	Share Units; Company Options; Warrants		17
SECTION 3.03.	Surrender of Shares; Stock Transfer Books		18
SECTION 3.04.	Working Capital Statement		20
SECTION 3.05.	Post-Closing Payments		21
SECTION 3.06.	Withholding Taxes		27
SECTION 3.07.	No Dissenter’s Rights		30

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

SECTION 4.01.	Authority of the Company		30
SECTION 4.02.	Incorporation and Qualification and the Company and the Subsidiaries		31
SECTION 4.03.	Capital Stock of the Company and the Subsidiaries		31
SECTION 4.04.	Subsidiaries		31
SECTION 4.05.	No Conflict		32
SECTION 4.06.	Consents, Approvals, Licenses, Etc		32
SECTION 4.07.	Financial Statements; Budgets		33
SECTION 4.08.	Absence of Certain Changes		33
SECTION 4.09.	Employee Benefit Plans; Labor Matters		35
SECTION 4.10.	Absence of Litigation		36

Table of Contents
(continued)


		Page
SECTION 4.11.	Compliance with Laws		36
SECTION 4.12.	Taxes		36
SECTION 4.13.	Material Contracts		38
SECTION 4.14.	Environmental Matters		40
SECTION 4.15.	Tangible Personal Property and Real Property		41
SECTION 4.16.	Intellectual Property		42
SECTION 4.17.	Brokers		42
SECTION 4.18.	Insurance		42

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF PURCHASER

SECTION 5.01.	Incorporation and Authority of Purchaser		43
SECTION 5.02.	No Conflict		43
SECTION 5.03.	Consents and Approvals		44
SECTION 5.04.	Absence of Litigation		44
SECTION 5.05.	Investment Purpose		44
SECTION 5.06.	Financing		44
SECTION 5.07.	Brokers		44

ARTICLE VI

ADDITIONAL AGREEMENTS

SECTION 6.01.	Conduct of Business Prior to the Closing		45
SECTION 6.02.	Access to Information		47
SECTION 6.03.	Confidentiality		48
SECTION 6.04.	Regulatory and Other Authorizations; Consents		48
SECTION 6.05.	Investigation		50
SECTION 6.06.	Further Action		51
SECTION 6.07.	Directors’ and Officers’ Indemnification		51
SECTION 6.08.	Stockholders’ Representative Appointment		52
SECTION 6.09.	Preserve Accuracy of Representations and Warranties; Notification of Certain Matters		54
SECTION 6.10.	Acquisition Proposals		54
SECTION 6.11.	Indemnity		54
SECTION 6.12.	Guaranty		56
SECTION 6.13.	Consents; Reports		56
SECTION 6.14.	Gross-Up Escrow Account		57

Table of Contents
(continued)


		Page
ARTICLE VII

CONDITIONS TO CLOSING

SECTION 7.01.	Conditions to Obligations of the Company		57
SECTION 7.02.	Conditions to Obligations of Parent and Purchaser		58

ARTICLE VIII

TERMINATION, AMENDMENT AND WAIVER

SECTION 8.01.	Termination		59
SECTION 8.02.	Effect of Termination		60
SECTION 8.03.	Waiver		60

ARTICLE IX

GENERAL PROVISIONS

SECTION 9.01.	Expenses		60
SECTION 9.02.	Notices		60
SECTION 9.03.	Survival		62
SECTION 9.04.	Public Announcements		62
SECTION 9.05.	Headings		62
SECTION 9.06.	Severability		62
SECTION 9.07.	Entire Agreement		62
SECTION 9.08.	Assignment		62
SECTION 9.09.	No Third-Party Beneficiaries		63
SECTION 9.10.	Waivers and Amendments		63
SECTION 9.11.	Specific Performance		63
SECTION 9.12.	Governing Law; Consent to Jurisdiction; Waiver of Jury Trial		63
SECTION 9.13.	Counterparts		64

iii

AGREEMENT AND PLAN OF MERGER, dated as of September 4, 2007, among Soo Line Holding Company, a Delaware corporation and an indirect wholly owned subsidiary of the Guarantor (“ Parent ”), Soo Line Properties Company, a Delaware corporation and a wholly owned subsidiary of Parent (“ Purchaser ”), Dakota, Minnesota & Eastern Railroad Corporation, a Delaware corporation (the “ Company ”), solely for the purposes of Article V and Sections 6.03 and 6.12, Canadian Pacific Railway Company, a company organized under the laws of Canada (the “ Guarantor ”), and, at such time as it is appointed pursuant to Section 6.08(a), the Stockholders’ Representative.

W I T N E S S E T H :

WHEREAS, the Boards of Directors of Guarantor, Parent, Purchaser and the Company have each determined that it is in the best interests of their respective stockholders for Parent to acquire the Company upon the terms and subject to the conditions set forth herein;

WHEREAS, the Boards of Directors of Guarantor, Parent, Purchaser and the Company have each approved this Agreement and declared its advisability and approved the merger (the “ Merger ”) of Purchaser with and into the Company in accordance with the terms of this Agreement and the applicable provisions of the General Corporation Law of the State of Delaware (the “ DGCL ”);

WHEREAS, concurrently with the execution and delivery of this Agreement by the parties hereto, the holders of a number of shares of the common stock, par value $0.01 per share, of the Company (the “ Shares ”) sufficient to adopt and approve this Agreement and approve the Merger (the “ Requisite Stockholder Approval ”) are executing and delivering written consents to deliver the Requisite Stockholder Approval;

WHEREAS, the Company has issued the Preferred Stock and the Warrants (each as hereinafter defined);

WHEREAS, the Company has elected to redeem the Preferred Stock in accordance with its terms at the Closing (as hereinafter defined), and Purchaser wishes to fund such redemption, upon the terms and subject to the conditions set forth herein;

WHEREAS, it is intended that the holders of all of the Warrants (as hereinafter defined) will sell such Warrants to the Company at the Effective Time upon the terms and subject to the conditions set forth in the Warrant Purchase Agreement and Purchaser wishes to fund the purchase of such Warrants, upon the terms and subject to the conditions set forth herein;

WHEREAS, in order to induce Guarantor, Parent and Purchaser to enter into this Agreement, it is intended that the holders of Shares and holders of certain of the Warrants will enter into the Termination Agreement (as hereinafter defined) and it is intended that holders of Preferred Stock, Share Units and Options (each as hereinafter defined) will enter into a Release Agreement (as hereinafter defined); and

WHEREAS, the Company is required to satisfy its payment obligations for the Company Options and the Share Units in accordance with the terms thereof at the Closing, and

Purchaser wishes to fund such payment, upon the terms and subject to the conditions set forth herein;

NOW, THEREFORE, in consideration of the premises and of the mutual agreements and covenants hereinafter set forth, Guarantor, Parent, Purchaser and the Company hereby agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01. Certain Defined Terms . As used in this Agreement, the following terms have the following meanings:

“ 1994 Bonus Share Plan ” means the Company Bonus Share Plan approved and instituted by the Board of Directors of the Company by unanimous resolution dated June 28, 1994.

“ 2004 Bonus Share Plan ” means the Company Bonus Share Plan approved and instituted by the Board of Directors by unanimous resolution dated December 9, 2004.

“ Action ” means any claim, action, suit, arbitration or proceeding by or before or brought or conducted by any third-party or Governmental Entity, or arbitrator, or any audit or investigation by any Governmental Entity.

“ Affiliate ” means, when used with respect to a specified Person, another Person that, either directly or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

“ Aggregate Closing Consideration ” means $1,480,000,000.00.

“ Aggregate Strike Price Amount ” means the sum of the aggregate exercise price payable in respect of all Shares issuable upon the exercise of each vested and unvested Company Option and each Warrant and the aggregate Base Value of each Share Unit granted under the 2004 Bonus Share Plan.

“ Agreement ” means this Agreement and Plan of Merger, dated as of August [_], 2007, among Purchaser, Parent and the Company (together with attachments hereto) and all amendments hereto made in accordance with Section 9.10 .

“ Audited Financial Statements ” means the balance sheets, statements of income and statements of cash flows as of the last day of, and for each of, the three most recent calendar years immediately preceding the date hereof, together with the reports thereon by an independent auditor.

“ Base Value ” means with respect to a Share Unit granted under the 2004 Bonus Share Plan, the base value established for such unit in accordance with the 2004 Bonus Share Plan.

“ Bonus Share Plans ” means the 1994 Bonus Share Plan and the 2004 Bonus Share Plan.

“ Books and Records ” means all books of account and other financial records and corporate records pertaining to the Company and the Subsidiaries.

“ Business ” means the business of the Company and the Subsidiaries as conducted as of the date of this Agreement, including, but not limited to, the railroad business.

“ Business Day ” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in the City of New York.

“ Capital Expenditures Difference ” means the aggregate of the proposed Capital Expenditures, as set forth on Schedule 6.01(b)(vi) of the Disclosure Schedule, for the period beginning on July 1, 2007 through the last day of the calendar month immediately preceding the Closing Date, less the actual capital expenditures of the Company during such period (other than any amount for capital expenditures incurred in connection with the Flooding Repair Project).

“ Cash ” means the total amount of cash and cash equivalents and short-term investments, each of which shall be calculated in accordance with GAAP in a manner consistent with the calculation of the corresponding line items on the Company’s Audited Financial Statements for the year ended December 31, 2006, held by the Company and its Subsidiaries as of 12:01 a.m., Central time, on the Closing Date.

“ Closing Date ” means the date on which the Closing occurs.

“ Common Equity Consideration ” means the amount equal to (i) the Aggregate Closing Consideration, (ii)(a) if Target Working Capital less Estimated Working Capital is a positive number, then less such number or (b) if Target Working Capital less Estimated Working Capital is a negative number, then plus the absolute value of such number, less (iii) the Estimated Debt Amount, less (iv) the Preferred Redemption Amount, less (v) the Consulting Fees Payable, less (vi) the Escrow Amount, less (vii) the Gross-up Escrow Amount and plus (vii) the Aggregate Strike Price Amount and plus (ix) an amount equal to the actual capital expenditures of the Company incurred from August 20, 2007 through Closing solely in connection with upgrading the existing bridges and tracks at the Waseca Sub, the Marquette Sub and the Rapid City Sub from 286K standard to 315K standard as part of the Flooding Repair Project, in each case, without duplication.

“ Consultants ” means any and all consultants (including, without limitation, engineering consultants), financial advisors, accountants, investment bankers or attorneys of the Company and its Subsidiaries in connection with this Agreement and the transactions contemplated hereby or with respect to any transactions considered by the Company or the Subsidiaries as alternatives to the Merger and, solely with respect to the matters set forth in the

Gross-Up Agreement, Kevin Schieffer, and, solely with respect to the matters set forth in the Director Change in Control Agreements, the directors named therein.

“ Consulting Fees Payable ” means any and all Liabilities of the Company or any of its Subsidiaries to be paid at the Closing for any item set forth on Schedule 1.01(a)(i) and any (i) fees, costs, or expenses of, or amount owing to, any Consultant, or (ii) dataroom and due diligence costs or expenses, in each case incurred by the Company or the Subsidiaries in connection with this Agreement and the transactions contemplated hereby or with respect to any transactions considered by the Company or the Subsidiaries as alternatives to the Merger.

“ Control ” (including the terms “ Controlling ,” “ Controlled by ” and “ under common Control with ”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or otherwise.

“ Credit Risk Premium ” means any Credit Risk Premium (as defined in 49 United States Code 822(f)(3)) paid to the FRA in connection with the FRA Loan and accrued by the Company through the Closing Date.

“ Debt Amount ” means, as of 12:01 a.m., Central time, on the Closing Date, (i) the principal amount and accrued and unpaid interest outstanding under the FRA Loan, the Fishback Mortgage, the Illinois Rehabilitation Loan, the South Dakota Construction Loan and the Revolver and prepayment and termination costs related thereto, plus (ii) capital lease obligations of the Company and its Subsidiaries, calculated in accordance with GAAP in a manner consistent with the calculation of the corresponding line item on the Company’s Audited Financial Statements for the year ended December 31, 2006, plus (iii) any other Indebtedness not included in clauses (i) and (ii), minus (iv) Cash, and (v)(a) if the Capital Expenditures Difference is a positive number, then plus such amount or (b) if the Capital Expenditures Difference is a negative number, then minus the absolute value of such amount.

“ Definitive Agreements ” means this Agreement, the Escrow Agreement, the Gross-up Escrow Agreement, the Termination Agreement, the Warrant Purchase Agreement, the Release Agreements and any contracts or agreements executed pursuant or related hereto or thereto, including any documents or certificates delivered pursuant hereto or thereto or to carry out the transactions contemplated under any Definitive Agreement.

“ Development Property ” means any real property that is, as of the date hereof, in one or more phases of development, including pre-construction, provided that a real property shall cease to be a Development Property at the time such real property becomes a Stabilized Property.

“ Disclosure Schedule ” means the Disclosure Schedule delivered to Purchaser by the Company pursuant to this Agreement.

“ DM&E ” means the Dakota, Minnesota & Eastern Railroad Corporation, a Delaware corporation.

“ Encumbrance ” means any security interest, pledge, mortgage, lien (statutory or other), charge, adverse claim of ownership or use, easement, encroachment, defect in title or other encumbrance of any kind.

“ Environment ” means surface waters, ground waters, soil, subsurface strata and ambient air.

“ Environmental Claims ” means actions, suits, demands, claims, notices of noncompliance, proceedings, consent orders or consent agreements relating to Environmental Laws, Environmental Permits or Hazardous Materials.

“ Environmental Law ” means any applicable Law relating to protection of the environment.

“ Environmental Permit ” means any permit, approval, identification number, license or other authorization required under any applicable Environmental Law.

“ Equityholders ” means the holders of Shares, Share Units, Warrants and Company Options, in each case outstanding immediately prior to the Effective Time.

“ Equityholder’s Percentage ” means, except as set forth on Schedule 1.01(a)(iii) , as to any holder of Shares, Share Units, Company Options or Warrants, in each case outstanding immediately prior to the Effective Time, the percentage as determined in good faith by the Stockholders’ Representative in accordance with the way that a marginal dollar of Per Share Merger Consideration would be allocated to such holder under Section 3.01(a) , Section 3.02 and Section 3.05 ; provided that the aggregate Equityholder’s Percentage for all holders of Shares, Share Units, Company Options and Warrants shall total one hundred percent (100%), and provided further that such Equityholder’s Percentages may be adjusted from time to time upon certification by the Stockholders’ Representative that a transfer of the right, title and interest in an Equityholder’s Percentage has occurred in accordance with any plan approved by a majority of the Equityholders. The Equityholder’s Percentages for the Equityholders as of the date of this Agreement are set forth in Schedule 4.03 of the Disclosure Schedule.

“ Escrow Agreement ” means the Escrow Agreement, initially dated as of a date prior to the Closing Date, between the Company, Parent, Purchaser and a commercial bank or trust company having net capital of not less than $250 million, as escrow agent, to be mutually agreed upon by Parent and the Company.

“ Expected Withholding Tax ” means (i) any Tax that would not have been imposed but for the failure of the payee to provide a properly completed and executed IRS Form W-9, or otherwise to establish an exemption from U.S. backup withholding tax, or the failure of the payee to provide a properly completed and executed IRS Form W-8 BEN and (ii) any applicable withholding Tax on compensation for services rendered to the Company or its Subsidiaries by employees, independent contractors or consultants.

“ Financial Agreement ” means the Financial Agreement dated November 22, 1993 between the Company and the Chicago & North Western Transportation Company, predecessor in interest to Union Pacific Railroad Company.

“ FIRPTA Report ” means a report, prepared by FMV Opinions, Inc., providing an opinion of the fair market value of the real property and total assets of the Company as of December 31 ^st of years 2002-2006 and as of the Closing Date or as close thereto as practicable, in all cases determined in accordance with applicable regulations under Section 897 of the Internal Revenue Code.

“ Fishback Mortgage ” means the Mortgage Agreement, dated as of April 15, 2003, between the Company and Fishback Financial Corporation.

“ Flooding Repair Project ” means the construction and other work necessary to repair flooding damage to the Waseca Sub, the Marquette Sub and the Rapid City Sub as described on Schedule 4.08(a)(viii) and such other construction and other work as may be determined by the Company to be necessary to repair such flooding damage, including to make upgrades as necessary to achieve 315K standards.

“ FRA Loan ” means the Financing Agreement, dated as of December 16, 2003, among the Company, Iowa, Chicago & Eastern Railroad Corporation and the United States of America, represented by the Secretary of Transportation acting through the Administrator of the Federal Railroad Administration, as amended by Amendment No. 1 thereto, dated July 20, 2004 and as further amended by Amendment No. 2 thereto, dated as of February 21, 2007.

“ Future Consulting Fees ” means any and all Liabilities of the Company or any of its Subsidiaries (or the Surviving Corporation on behalf of the Company) not paid at the Closing or arising after the Closing for (i) any item set forth on Schedule 1.01(a)(ii) , (ii) fees, costs, or expenses of, or amount owing to, any Consultant, or (iii) dataroom and due diligence costs or expenses, in each case incurred by the Company in connection with this Agreement and the Merger and the transactions contemplated hereby or with respect to any transactions considered by the Company or the Subsidiaries as alternatives to the Merger except (x) amounts payable in connection with the Construction Milestone Payment, the Coal Milestone Payment, the Final Adjustment Amount and the Transfer described in Section 2.02(e), and (y) amounts payable to the Consultants to the extent such amounts, fees, costs or expenses are incurred as a result of any engagement initiated by or on behalf of, or instructions from or for the benefit of, the Company or the Surviving Corporation following the Closing.

“ GAAP ” means United States generally accepted accounting principles in effect from time to time applied consistently throughout the period involved.

“ Governmental Entity ” means any United States or foreign federal, national, supra-national, state, provincial, or local government, governmental, regulatory, self-regulatory or administrative authority, agency or commission or any court, tribunal or judicial or arbitral body or political or other subdivision, department or branch of any of the foregoing.

“ Governmental Order ” means any order, judgment, injunction, decree, stipulation, determination or award entered, issued or made by or with any Governmental Entity.

“ Gross-up Agreement ” means the Withholding Tax Gross-up Agreement, dated as of the date of this Agreement, between Kevin Schieffer and the Company, which agreement shall

be amended and modified by the parties thereto after the date hereof to the extent reasonably necessary to reflect the principles set forth on Schedule 6.14 of the Disclosure Schedule.

“ Hazardous Materials ” means (a) those substances regulated under the United States Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act and the Clean Air Act; (b) petroleum and petroleum products, radioactive materials and polychlorinated biphenyls; and (c) chemicals or substances regulated as toxic or hazardous under any applicable Environmental Law.

“ HSR Act ” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.

“ ICCTA ” means the ICC Termination Act of 1995.

“ IC&E ” means the Iowa, Chicago & Eastern Railroad Corporation, a Delaware corporation.

“ Illinois Rehabilitation Loan ” means the Track Rehabilitation Loan Agreement, dated as of June 26, 1992, between the Company, as the successor to the Soo Line Railroad Company, and the State of Illinois, acting by and through its Department of Transportation.

“ Indebtedness ” means, with respect to any Person, (a) all indebtedness of such Person, whether or not contingent, for borrowed money and prepayment and termination costs related thereto, (b) all obligations of such Person for the deferred purchase price of property or services (including the aggregate principal amount thereof and the aggregate amount of any accrued but unpaid interest thereon), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments and prepayment and termination costs related thereto, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (f) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit (other than the Letter of Credit) or similar facilities or in respect of interest rate and currency obligation swaps, hedges or similar arrangements and prepayment and termination costs related thereto, (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of such Person or any warrants, rights or options to acquire such capital stock, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, other than the Preferred Stock, the Company Options and the Warrants, (h) all Indebtedness of others referred to in clauses (a) through (g) above guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through any agreement and (i) all Indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness.

“ Intellectual Property ” means all patents, copyrights, software, service marks. domain names, trade dress and trade secrets.

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

“ IRS ” means the United States Internal Revenue Service.

“ knowledge of the Company ” means the actual knowledge, after due inquiry, of Kevin V. Schieffer, Kurt V. Feaster, Lynn A. Anderson, J. Ed Terbell, Mike Ball, John Brooks, Randy H. Henke, Daniel L. Goodwin, Steve O. Scharnweber, Clyde F. Mittleider and Ray Gigear.

“ Land Holdings ” means any real property that is unimproved and not a Development Property.

“ Law ” means any United States or foreign federal, national, supra-national, state, provincial, local, municipal or similar constitution, statute, law, ordinance, regulation, rule, code, order, requirement or rule of law (including any rules of any self-regulatory organization, securities exchange or clearinghouse or common law).

“ Letter of Credit ” means the Irrevocable Standby Letter of Credit Number SCL SCL011670 issued by National City Bank, as amended through July 21, 2006, in favor of KM Strategic Investments, LLC, in the amount of $10,000,000 as of the date of this Agreement.

“ Liabilities ” means any and all debts, liabilities and obligations, whether accrued or fixed, absolute, matured or determined.

“ Licenses ” means all of the licenses, permits, franchises and other governmental authorizations required under any Law for the operation of the Business.

“ Material Adverse Effect ” means any condition, change, circumstance, or effect (or any development that would result in any condition, change, effect or circumstance) that, individually or in the aggregate with all other changes, circumstances, or effects, is, or would reasonably be expected to be, materially adverse to the financial condition or results of operations of the Company and the Subsidiaries, taken as a whole, except for any such changes or effects resulting from (i) changes or effects affecting the securities markets generally or changes in general economic, regulatory or political conditions or other changes that affect the railroad or coal industries in general, (ii) any action taken pursuant to or in accordance with this Agreement, (iii) changes caused by acts of terrorism or war (whether or not declared) occurring after the date of this Agreement, (iv) the consummation of this Agreement or the transactions contemplated hereby or the announcement of the execution thereof and (v) any uninsured damage resulting from the flood conditions affecting the Waseca Sub, the Marquette Sub and the Rapid City Sub since August 2007 and so long as such uninsured damage does not exceed $10,000,000, except , with respect to the foregoing clauses (i) through (iii), to the extent that such changes, effects, or actions have a disproportionate effect on the Company and the Subsidiaries, taken as a whole, relative to other participants in the industries in which the Company and the Subsidiaries operate.

“ New Construction ” means the construction and operation of a new line of railroad that extends between the existing lines of the DM&E and coal mines in the Powder River Basin area of Wyoming, as defined in STB Finance Docket No. 33407, or as my be modified by Parent or its Affiliates (or its or their transferees, successors and assigns) from time to time.

“ Off-the-Shelf Software ” means any and all Company Software that is commercially available off-the-shelf Software and (i) is not material to the Company or any Company Subsidiary, (ii) has not been modified or customized for the Company or any Company Subsidiary, and (iii) is licensed to the Company or any Company Subsidiary for a one-time or annual fee of $10,000 or less.

“ Permitted Encumbrances ” means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (a) liens for Taxes not yet due and payable or the validity of which is being contested in good faith; (b) Encumbrances imposed by law, such as materialmen’s, mechanics’, workmen’s, repairmen’s, warehousemen’s and carrier’s liens and other similar liens arising in the ordinary course of business for sums not due and payable; (c) pledges or deposits to secure obligations under workers’ compensation Laws or similar legislation or to secure public or statutory obligations under applicable Law; and (d) survey exceptions, reciprocal easement agreements and other customary encumbrances on title to real property that (i) were not incurred in connection with any Indebtedness and (ii) do not, individually or in the aggregate, materially adversely affect the use of such property.

“ Person ” means any individual, partnership, firm, corporation, association, trust, limited liability company, unincorporated organization, a Governmental Entity or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.

“ PRB Expansion ” means the New Construction and the improvements or rehabilitation to the rail lines of the Company and its Subsidiaries reasonably relating thereto and the entering into of mine access agreements as referenced in Section 3.05(b)(i) of the Disclosure Schedule.

“ Preferred Redemption Amount ” means the amount, including accrued and unpaid dividends (whether or not declared) or similar amounts, required to be paid to the holders of the Preferred Stock to redeem the Preferred Stock pursuant to the terms of the Preferred Stock at the Effective Time.

“ Preferred Stock ” means, collectively, the Company’s (i) Series A preferred stock, par value $1.00 per share, (ii) Series B preferred stock, par value $1.00 per share, (iii) Series C preferred stock, par value $1.00 per share, (iv) the Series C-1 preferred stock, par value $1.00 per share, and (v) the Series D preferred stock, par value $1.00 per share.

“ Purchaser Disclosure Schedule ” means the Disclosure Schedule delivered to the Company by the Purchaser pursuant to this Agreement.

“ Real Property ” means any material real property owned or leased by the Company and the Subsidiaries.

“ Release ” means disposing, discharging, injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing and the like into or upon any land or water or air or otherwise entering into the Environment.

“ Release Agreement ” means the agreement in form of Exhibit A to be executed by holders of Preferred Stock and holders of Share Units and Options.

“ Remedial Action ” means all action to (a) clean up, remove, treat or handle in any other way Hazardous Materials in the Environment; (b) prevent the Release of Hazardous Materials so that they do not migrate, endanger or threaten to endanger public health or the Environment; or (c) perform remedial investigations, feasibility studies, corrective actions, closures and post-remedial or post-closure studies, investigations, operations, maintenance and monitoring.

“ Revolver ” means the Loan Agreement, dated as of December 16, 2003, by and among the Company, IC&E and National City Bank.

“ Share Unit ” means a credit to the plan account of a participant in the applicable Bonus Share Plan entitling such participant to receive (i) a payment based on the fair market value of one Share upon settlement, in the case of the 1994 Bonus Share Plan or (ii) a payment based on the difference between the fair market value of one Share and such Share Unit’s Base Value upon settlement, in the case of the 2004 Bonus Share Plan.

“ South Dakota Construction Loan ” means the Loan Agreement, dated as of August 12, 2005, between the Company and Brookings County Railroad Authority and the State of South Dakota.

“ Stabilized Property ” means any real property that is improved and (i) is 90% leased or (ii) one year has elapsed since a certificate of occupancy has been issued with respect to such real property.

“ STB ” means the Surface Transportation Board or any successor agency.

“ Stockholders’ Agreement ” means the Stockholders’ Agreement, dated September 3, 1986, as amended.

“ Subsidiaries ” means Cedar American Rail Holdings, Inc., a Delaware corporation, the IC&E, and Wyoming Dakota Railroad Properties, Inc., a Delaware corporation.

“ Tangible Personal Property ” means all machinery, equipment, tools, supplies, furniture, fixtures, personalty, vehicles, rolling stock and other tangible personal property used in the Business.

“ Target Working Capital ” means -$40,010,843 (deficit of $40,010,843).

“ Tax ” or “ Taxes ” means (i) any and all income, gross receipts, sales, use, employment, franchise, profits, property or other taxes, duties, assessments or other governmental charges in the nature of a tax (whether payable directly or by withholding), together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority with respect thereto and (ii) any liability of the Company or any of its Subsidiaries for the payment of amounts determined by reference to amounts described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation of the Company or any of its Subsidiaries under any Tax sharing agreement or arrangement.

“ Tax Return ” means any report, return, declaration or other filing required to be supplied to any taxing authority with respect to Taxes including any amendments thereto.

“ Termination Agreement ” means the agreement entered into in connection with this Agreement in the form of Exhibit B hereto among holders of Shares, certain holders of Warrants and the Company.

“ Unaudited Financial Statements ” means the unaudited balance sheet, statement of income and statement of cash flow of the Company as of July 31, 2007.

“ Warrants ” means, collectively, the outstanding and unexpired warrants to purchase Shares issued by the Company set forth on Schedule 4.03 of the Disclosure Schedule.

“ Warrant Purchase Agreement ” means the Warrant Purchase Agreement, dated as of the date hereof, among the Company and each of the Sellers (as defined therein) in the form of Exhibit C hereto pursuant to which each of the Sellers has agreed to surrender to the Company at the Effective Time the Warrants held by such Seller in exchange for the applicable amount of the Option/Warrant Merger Consideration.

“ Working Capital ” means, as of a particular time, (a) (i) current assets (other than Cash, income taxes receivable and any deferred income taxes receivable) less (ii) Future Consulting Fees, to the extent not already reflected in current liabilities, less (iii) current liabilities other than deferred income Taxes payable, including, to the extent they have not been paid by the Company or arrangements have not been made for payment at the Closing by the Paying Agent on behalf of the Company, payroll, excise and similar Taxes arising as a result of the transactions contemplated by this Agreement and all change in control payments or deal/transaction bonuses paid or payable in connection with the transactions contemplated herein (other than current maturities of long-term debt, interest payable, Consulting Fees Payable and Future Consulting Fees) of the Company and its consolidated Subsidiaries, as of such time, in each case calculated in accordance with GAAP in a manner consistent with the calculation of the corresponding line items on the Company’s Audited Financial Statements for the year ended December 31, 2006, less (iv) all costs and expenses to be incurred after the Closing for any work related to the Flooding Repair Project (other than the costs and expenses of upgrading the existing bridges and tracks at the Waseca Sub, the Marquette Sub and the Rapid City Sub from 286K standard to 315K standard as part of the Flooding Repair Project), and plus (v) all payments or other reimbursements to the Company from insurance carriers with respect to the Flooding Repair Project received, or reasonably expected to be received, after the Closing. For

purposes of determining Working Capital, (i) inventory shall not include any item in existence on December 31, 2006 but excluded from inventory in the December 31, 2006 Audited Financial Statements, (ii) prepaid expenses shall not include any expense category not set forth in the December 31, 2006 Audited Financial Statements, (iii) any cash payment or Liability (whether accrued, absolute, contingent or otherwise) arising specifically from the Company’s termination of any capital lease at the request of Parent or Purchaser pursuant to Section 6.13(a) shall be excluded from Working Capital and (iv) any amounts paid or payable pursuant to the Gross-Up Agreement shall not be included in such determination.

(b) Unless otherwise specified herein, all references to “dollars” or “$” shall be deemed to be references to United States Dollars.

SECTION 1.02. Other Defined Terms . The following terms have the meanings defined for such terms in the Sections set forth below:


Term	Section
280G Amounts		3.06	(e)
280G Report		3.06	(e)
409A Amounts		3.06	(f)
Adjustment		3.01	(d)
Applicable Contracts		6.13	(b)
Benefit Plans		4.09	(a)
Budgets		4.07	(c)
Certificate of Merger		2.02	(a)
Certificates		3.03	(b)
Claim		6.11	(b)
Closing		2.02	(a)
Closing Date Payment Schedule		2.02	(b)
Coal Milestone Payments	3.05		(b)(ii)
Company	Recital
Company Intellectual Property		4.16
Company Licenses		4.06	(a)
Company Option		3.02	(b)
Construction Conditions		3.05	(b)(i)
Construction Milestone Payment		3.05	(b)(i)
Debt Payment Amount		2.02	(a)
Determination Date		3.05	(a)
DGCL	Recital
Disputed Pre-Closing Working Capital Amount		3.04	(a)
DM&E		1.01
Effective Time		2.02	(a)
Emergency Tonnage	3.03		(b)(iii)
ERISA		4.09	(a)
Escrow Account		2.02	(b)
Escrow Amount		2.02	(b)
Estimated Debt Amount		3.04	(a)
Estimated Working Capital		3.04	(a)


Term	Section
Estimated Working Capital Statement		3.04	(a)
Fifth Milestone Payment		3.05	(b)(ii)
Final Adjustment Amount		3.05	(a)
Final Debt Amount		3.04	(c)
Final Working Capital		3.04	(c)
First Milestone Payment		3.05	(b)(ii)
FIRPTA Amount		3.06	(d)
Fourth Milestone Payment		3.05	(b)(ii)
Gross-up Escrow Account		2.02	(b)
Gross-up Escrow Agreement		2.02	(b)
Gross-up Escrow Amount		2.02	(b)
Guarantor		Recital
Guaranteed Obligations		6.12
Holders		3.03	(a)
Incumbent Carrier		3.05	(b)(ii)
Indemnified Parties		6.07	(b)
Independent Accounting Firm		3.04	(d)
IRS Notice		3.06
Koch Transaction		6.11	(c)
LC Amount		6.11	(c)
Letter		3.03	(b)
Loss		6.11	(b)
Material Contracts		4.13	(a)
Merger		Recital
Milestone Statement		3.05	(b)(iii)
Non-Releasing Equityholder		6.11	(a)
Non-Releasing Equityholder Indemnity Amount		6.11	(a)
Notice of Disagreement		3.05	(b)(iii)
Option/Warrant Merger Consideration		3.02	(b)
Parent		Recital
Paying Agent		3.03	(a)
Paying Equityholder		6.08	(b)
Per Share Merger Consideration		3.01	(a)
Purchaser		Recital
Required Equityholders		6.08	(c)
Requisite Stockholder Approval		Recital
Restricted Equityholder		3.05	(b)(iii)
Second Milestone Payment		3.05	(b)(ii)
Shares		Recital
Sixth Milestone Payment		3.05	(b)(ii)
Stockholders’ Representative		6.08	(a)
Stockholders’ Representative’s Losses		6.08	(b)
Surviving Corporation		2.03
Termination Date		8.01	(a)
Third Milestone Payment		3.05	(b)(ii)


Term	Section
Tonnage Condition	3.05(b)(ii)
Track Maintenance Agreement		6.11	(c)
Transfer		2.02	(f)
Voting Trust		2.06
Voting Trust Agreement		2.06
WARN Act		4.09	(f)
Working Capital Statement		3.04	(b)

ARTICLE II

CERTAIN PAYMENTS; THE MERGER

SECTION 2.01. The Merger . Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, at the Effective Time Purchaser shall be merged with and into the Company.

SECTION 2.02. Closing . (a) Subject to Section 6.13 , as promptly as practicable after all of the conditions set forth in Article VII have been satisfied or, if permissible, waived, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger (the “ Certificate of Merger ”) with the Secretary of State of the State of Delaware, in such form as is required by, and executed in accordance with, the relevant provisions of the DGCL (the date and time of such filing of the Certificate of Merger (or such later time as may be agreed by each of the parties hereto and specified in the Certificate of Merger) being the “ Effective Time ”). Immediately prior to such filing of the Certificate of Merger a closing (the “ Closing ”) shall be held at the offices of Shearman & Sterling LLP, 599 Lexington Avenue, New York, New York or such other office as the Company and Purchaser may mutually agree upon in writing.

(b) At the Closing, and immediately prior to the Effective Time, Parent or Purchaser shall (i) deliver to the Company (A) the Preferred Redemption Amount and (B) an amount equal to any outstanding Indebtedness of the Company and its consolidated Subsidiaries which will be, or may become, payable as a result of the consummation of the transactions contemplated by this Agreement (the “ Debt Payment Amount ”), (ii) deliver to the Paying Agent, (A) an amount equal to the consideration to which the holders of Shares become entitled pursuant to Section 3.01(a) hereof less such holders’ proportional share of the aggregate Equityholder’s Percentage of the Escrow Amount, (B) an amount equal to the Consulting Fees Payable, and (C) an amount equal to the consideration to which the holders of Share Units, Company Options and Warrants become entitled pursuant to Section 3.02 hereof less such holders’ such holders’ proportional share of the aggregate Equityholder’s Percentage of the Escrow Amount and (iii) deposit or cause to be deposited (by wire transfer of immediately available funds) cash in the amount of (A) $10,000,000, as such amount may be adjusted in accordance with Section 3.04(a) (the “ Escrow Amount ”), in an account (the “ Escrow Account ”) maintained pursuant to the Escrow Agreement to be entered into prior to Closing by Parent, Purchaser, the Company and the Stockholders’ Representative which Escrow Agreement shall provide that any interest and other income resulting from the investment of the Escrow Amount

by the escrow agent shall be held in the Escrow Account and shall be disbursed from the Escrow Account in accordance with this Agreement and (B) $7,500,000 (the “ Gross-up Escrow Amount ”), in an account (the “ Gross-up Escrow Account ”) designated by Purchaser and maintained pursuant to the Gross-up Escrow Agreement (the “ Gross-up Escrow Agreement “) to be entered prior to the Closing by the Company, Kevin Schieffer, the Stockholders’ Representative and Purchaser, which Gross-up Escrow Agreement shall provide that any interest and other income resulting from the investment of the Gross-up Escrow Amount by the escrow agent designated by Parent shall be held in the Gross-up Escrow Account and shall be disbursed from the Gross-up Escrow Account in accordance with the Gross-up Agreement. The amounts described in clauses (i) and (ii) of this Section 2.02(b) , and the calculations thereof, shall be specified in a certificate of an officer of the Company delivered to Purchaser seven Business Days prior to the Closing (the “ Closing Date Payment Schedule ”). The Closing Date Payment Schedule shall be prepared in good faith and shall include reasonable documentation supporting the amounts set forth thereon. If Purchaser notifies the Company at least five Business Days prior to the Closing that it disagrees with the Closing Date Payment Schedule, the parties hereto shall use commercially reasonable best efforts to reach an agreement on such disputed items and amend the Closing Date Payment Schedule to reflect such agreement. The amounts reflected on the Closing Date Payment Schedule, as amended (if applicable), shall be paid as described above by wire transfer in immediately available funds to the accounts designated at least two Business Days prior to the Closing by the Company in a written notice to Purchaser.

(c) At the Closing, and immediately prior to the Effective Time, the Company shall redeem all of the Preferred Stock in accordance with the terms of the Preferred Stock, and the Company shall withhold and retain for further payment to the applicable Governmental Authority any applicable withholding Taxes in accordance with Section 3.06.

(d) At the Closing, and immediately prior to the Effective Time, the Company shall pay the Debt Payment Amount to the applicable creditors in the amounts set forth in the Closing Date Payment Schedule.

(e) No less than five Business Days prior to the Closing, the Company shall deliver to Purchaser an updated version of Schedule 4.03, which shall be true and correct as of the Closing Date. The Company shall reasonably consider any changes thereto requested by Parent prior to Closing.

(f) At the Closing, the Company shall sell, transfer and assign (“ Transfer ”) all of its right, title and interest in and to the Credit Risk Premium to an entity to be designated by the Stockholders’ Representative. Following the Closing, Parent shall, and shall cause the Surviving Corporation, Parent and its Affiliates, to cooperate with the Stockholders’ Representative and the entity to which the Credit Risk Premium is intended to be sold, transferred and assigned pursuant to the foregoing sentence to give effect to such sale, transfer and assignment and, if the Company is unable to Transfer the Credit Risk Premium to such entity at the Closing, then the Surviving Corporation shall use its commercially reasonable best efforts, at no cost or expense to the Surviving Corporation or any of its Affiliates and as the Stockholders’ Representative may reasonably request, to take such actions as are necessary to provide such entity with the economic benefits of the ownership of the Credit Risk Premium. The Stockholders’ Representative shall reimburse Parent and its Affiliates for all costs and

expenses incurred in connection therewith and the Stockholders’ Representative shall indemnify and hold Parent and its Affiliates harmless from and against all Losses related thereto.

SECTION 2.03. Effect of the Merger . As a result of the Merger, the separate corporate existence of Purchaser shall cease and the Company shall continue as the surviving corporation of the Merger (the “ Surviving Corporation ”). At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of the Company and Purchaser shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation.

SECTION 2.04. Certificate of Incorporation; By-Laws.

(a) At the Effective Time, the Certificate of Incorporation of the Surviving Corporation shall be amended in its entirety to read as the certificate of incorporation of Purchaser in effect immediately prior to the Effective Time, until thereafter changed or amended as provided therein or by applicable law.

(b) Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time, the By-laws of the Surviving Corporation shall be amended and restated in their entirety to read as the bylaws of Purchaser as in effect immediately prior to the Effective Time, until thereafter changed or amended as provided therein or by applicable law.

SECTION 2.05. Directors and Officers . The director or directors identified to the Company by Parent at least three (3) Business Days prior to the Closing Date shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-laws of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified or until the earlier of their death, resignation or removal.

SECTION 2.06. Voting Trust . Immediately following the Effective Time, the shares of the common stock, par value $.01 per share, of the Surviving Corporation shall be deposited into a voting trust (the “ Voting Trust ”) in accordance with the terms and conditions of a voting trust agreement (the “ Voting Trust Agreement ”), which agreement shall be in form and substance reasonably acceptable to Purchaser and to the STB.

ARTICLE III

MERGER CONSIDERATION

SECTION 3.01. Conversion of Securities . At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, the Company or the holders of any of the following securities:

(a) Each issued and outstanding Share immediately prior to the Effective Time (other than any Shares to be canceled pursuant to Section 3.01(b) ) shall cease to be outstanding and be canceled and shall be converted automatically into the right to receive such holders’ proportional share of the aggregate Equityholder’s Percentage of the Escrow Account, as set forth in Section 3.04 , and the Gross-up Escrow Account, as set forth in Section 3.06(g), and any Construction Milestone Payment and any Coal Milestone Payments as set forth in Section 3.05 , plus an amount in cash, equal to the quotient obtained dividing (i) the Common Equity Consideration by (ii) the sum of (A) the number of Shares outstanding immediately prior to the Effective Time (but after giving effect to Section 3.01(b) ), (B) the number of Share Units outstanding immediately prior to the Effective Time, (C) the number of Shares represented by the Company Options and (D) the number of Shares issuable in respect of the Warrants, without interest (the “ Per Share Merger Consideration ”), to the holder of such Shares, upon surrender, in the manner provided in Section 3.03 , of the certificate that formerly evidenced such Share, in all cases less any applicable withholding Taxes in accordance with Section 3.06 ;

(b) Each Share held in the treasury of the Company and each Share owned by Purchaser, Parent, Guarantor or any direct or indirect wholly owned subsidiary of Guarantor or of the Company immediately prior to the Effective Time shall be canceled without any conversion thereof and no payment or distribution shall be made with respect thereto;

(c) Each share of common stock, par value $.01 per share, of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation; and

(d) If, between the date of this Agreement and the Effective Time, there is a recapitalization, reclassification, stock split, stock dividend, subdivision, combination or exchange of shares with respect to, or rights issued in respect of, the Shares (each, an “ Adjustment ”), the Per Share Merger Consideration shall be adjusted accordingly, without duplication, to provide the holders of Shares with the same economic effect as contemplated by this Agreement prior to such Adjustment.

SECTION 3.02. Share Units; Company Options; Warrants .

(a) Except as set forth in Schedule 3.02(a), each holder of a Share Unit that is outstanding as of the Effective Time shall be entitled to receive such holders’ proportional share of the aggregate Equityholder’s Percentage of the Escrow Account, as set forth in Section 3.04 , and the Gross-up Escrow Account, as set forth in Section 3.06(g), and any Construction Milestone Payment and any Coal Milestone Payments as set forth in Section 3.05 , if any, and shall be paid by the Paying Agent, on behalf of the Surviving Corporation, in exchange for the cancellation of such Share Unit, an amount in cash, without interest, in each case less any applicable withholding Taxes in accordance with Section 3.06, which applicable withholding Taxes shall be paid to the Surviving Corporation immediately after being so withheld for further payment to the applicable Governmental Entity, equal to, as applicable, (i) with respect to Share Units granted under the 1994 Bonus Share Plan, the product of (a) the Per Share Merger Consideration and (b) the aggregate number of such holder’s Share Units or (ii) with respect to Share Units granted under the 2004 Bonus Share Plan, (A) the product of (1) the Per Share

Merger Consideration and (2) the aggregate number of such holder’s Share Units less (B) the aggregate Base Value for such holder’s Share Units.

(b) Each holder of (i) a vested or unvested option to purchase Shares (a “ Company Option ”) or (ii) a Warrant, in each case outstanding at the Effective Time, shall be entitled to receive such holders’ proportional share of the aggregate Equityholder’s Percentage of the Escrow Account, as set forth in Section 3.04 , and the Gross-up Escrow Account, as set forth in Section 3.06(g), and any Construction Milestone Payment and any Coal Milestone Payments as set forth in Section 3.05 , if any, and shall be paid by the Paying Agent, on behalf of the Surviving Corporation, in exchange for the cancellation of such Company Option or Warrant, an amount in cash, without interest, in each case less any applicable withholding Taxes in accordance with Section 3.06 , which applicable withholding Taxes shall be paid to the Surviving Corporation immediately after being so withheld for further payment to the applicable Governmental Entity, equal to the product of (x) the number of Shares subject to such Company Option or Warrant, as applicable, and (y) the excess of (1) the Per Share Merger Consideration over (2) the exercise price per Share issuable upon the exercise of such Company Option or Warrant, as applicable (the aggregate amount of which is the “ Option/Warrant Merger Consideration ”).

SECTION 3.03. Surrender of Shares; Stock Transfer Books .

(a) At least fifteen Business Days prior to the Effective Time, the Company shall designate a bank or trust company reasonably acceptable to Purchaser to act as agent (the “ Paying Agent ”) for (i) the holders of Shares, Share Units, Company Options and Warrants (the “ Holders ”) to receive the funds to which such Holders shall become entitled pursuant to Section 3.01 (a) and Section 3.02 and (ii) the Consulting Fees Payable to which any Consultants shall become entitled upon consummation of the Merger. Except as provided in Section 3.03(b) below, such funds shall be invested by the Paying Agent as directed by Parent; provided, that such investments shall be in obligations of or guaranteed by the United States of America or of any agency thereof and backed by the full faith and credit of the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively, or in deposit accounts, certificates of deposit or banker’s acceptances of, repurchase or reverse repurchase agreements with, or Eurodollar time deposits purchased from, commercial banks with capital, surplus and undivided profits aggregating in excess of $1 billion (based on the most recent financial statements of such bank which are then publicly available at the SEC or otherwise).

(b) At least ten Business Days prior to the Effective Time, the Company shall cause the Paying Agent to deliver to each person who is, as of such date, (i) a Holder entitled to receive the Per Share Merger Consideration pursuant to Section 3.01(a) or Section 3.02 a form of letter of transmittal reasonably acceptable to Purchaser (which shall specify, in the case of a Holder of Shares, that delivery shall be effected, and risk of loss and title to the certificates evidencing such Shares (the “ Certificates ”) shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the Certificates and, if applicable, evidencing ownership of Share Units, Company Options and Company Warrants pursuant to such letter of transmittal and (ii) a Consultant entitled to receive any Consulting Fees Payable a letter of instruction (together with the letter of transmittal, a

“ Letter ”) for payment of the applicable Consulting Fee Payable to the Consultant. Upon delivery to the Paying Agent of a Letter duly completed and validly executed in accordance with the instructions thereto, together with (A) as applicable, Certificates or evidence of ownership of Share Units, Company Options and Company Warrants, (B) with respect to each Equityholder, each Release and/or Termination Agreement to which such Equityholder is to be a party, and (C) such other documents as may be required pursuant to such instructions, (1) the Holder shall be entitled to receive in exchange for its Certificates, Share Units, Company Options or Company Warrants (or appropriate evidence of the ownership thereof) the Per Share Merger Consideration for each Share formerly evidenced by such Certificate, Share Units, Company Options or Warrants (in each case after giving effect to any required withholding Tax in accordance with Section 3.06 , which applicable withholding Taxes shall be paid to the Surviving Corporation immediately after being so withheld for further payment to the applicable Governmental Entity) and such Certificates, Share Units, Company Options or Company Warrants shall then be canceled and (2) a Consultant shall be entitled to receive its applicable Consulting Fee Payable. Notwithstanding the foregoing, the aggregate Per Share Merger Consideration to which Globe Investments, Martin Curie Capital Return Trust PLC (F&C Asset Management PLC), Electra Investment Trust PLC, Hoare Govett Nominees Limited, Candover Investments PLC and Sun Alliance Trust Co. LTD become entitled to receive at the Closing under this Agreement shall be reduced by the amount of any payment with respect to the FIRPTA Report, estimated to be $555,000.00. No interest shall accrue or be paid on the Per Share Merger Consideration or Consulting Fees Payable. The Company shall cause the Paying Agent to pay by wire transfer on the Closing Date the amount that a Holder is entitled to receive pursuant to Section 3.01(a) or Section 3.02 or that a Consultant is entitled to receive to any such Holder or Consultant who delivers to the Paying Agent, at least two Business Days prior to the Effective Time, the documentation required by the first two sentences of this Section 3.03(b) , together with wire instructions for such holder’s account. If the payment equal to the Per Share Merger Consideration is to be made to a person other than the person in whose name the surrendered certificate formerly evidencing Shares is registered on the stock transfer books of the Company, it shall be a condition of payment that the Certificate or evidence of ownership of Share Units, Company Options or Warrants so surrendered shall be endorsed properly or otherwise be in proper form for transfer and that the person requesting such payment shall have paid all transfer and other Taxes required by reason of the payment of the Per Share Merger Consideration to a person other than the registered holder of the certificate surrendered, or shall have established to the satisfaction of the Surviving Corporation that such Taxes either have been paid or are not applicable. If any Holder is unable to surrender such holder’s Certificates, Share Units, Company Options or Company Warrants because such Certificates, Share Units, Company Options or Company Warrants have been lost, mutilated or destroyed, such holder may deliver in lieu thereof an affidavit and indemnity bond in form and substance and with surety reasonably satisfactory to the Surviving Corporation.

(c) At any time following the sixth month after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds which had been made available to the Paying Agent and not disbursed to Holders or Consultants (including, without limitation, all interest and other income received by the Paying Agent in respect of all funds made available to it) together with any applicable withholding Taxes withheld and not yet paid to the Surviving Corporation, and, thereafter, such Holders and Consultants shall be entitled to look to the Surviving Corporation (subject to abandoned

property, escheat and other similar laws) only as general creditors thereof with respect to any Per Share Merger Consideration or Consulting Fees Payable that may be payable under this Section 3.03 . Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any Holder for any Per Share Merger Consideration or to any Consultant for any Consulting Fees Payable delivered in respect thereof to a public official pursuant to any abandoned property, escheat or other similar law.

(d) At the close of business on the day of the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of Shares on the records of the Company. From and after the Effective Time, the holders of Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided herein or by applicable law.

SECTION 3.04. Working Capital Statement .

(a) No later than five (5) Business Days before the Closing Date, the Company shall deliver to Purchaser a statement containing good faith estimates of Working Capital (the “ Estimated Working Capital ”) and of the Debt Amount (the “ Estimated Debt Amount ” and such statement, the “ Estimated Working Capital Statement ”), in each case as of 12:01 a.m., Central time, on the Closing Date. The Estimated Working Capital Statement will be prepared on a basis consistent with and using the same methods used in preparing the Audited Financial Statements as of December 31, 2006 and shall include reasonable documentation supporting the amounts set forth thereon. If Purchaser notifies the Company at least three (3) Business Days prior to the Closing that it disagrees with the Estimated Working Capital Statement or the Estimated Debt Amount, the parties hereto shall use commercially reasonable best efforts to reach agreement on such disputed items and amend the Estimated Working Capital Statement to reflect such agreement. If the parties are not able to resolve such dispute prior to the Closing, such amount in dispute up to $10,000,000, shall be deposited into the Escrow Account at the Closing (the “ Disputed Pre-Closing Working Capital Amount ”) and shall be subject to the dispute resolution mechanism set forth in Section 3.04(d) .

(b) No later than 90 days following the Closing Date, Parent shall cause to be prepared and delivered to the Stockholders’ Representative a statement of Working Capital and the Debt Amount, in each case as of 12:01 a.m., Central time, on the Closing Date (the “ Working Capital Statement ”). The Working Capital Statement will be prepared on basis consistent with and using the same methods used in preparing the Audited Financial Statements as of December 31, 2006 and shall include reasonable documentation supporting the amounts set forth thereon and shall state whether Parent continues to dispute the Disputed Pre-Closing Working Capital Amount.

(c) Subject to Section 3.04(d) , the Working Capital Statement, and the Working Capital and the Debt Amount set forth therein, shall be final, binding and conclusive on the parties hereto (the “ Final Working Capital ” and the “ Final Debt Amount ”).

(d) The Stockholders’ Representative may dispute any amounts reflected on the Working Capital Statement and, to the extent still in dispute, any Disputed Pre-Closing Working Capital Amounts, solely on the basis that the amounts reflected on the Working Capital

Statement and, to the extent still in dispute, any Disputed Pre-Closing Working Capital Amounts were not arrived at in a manner consistent with and using the same methods used in preparing the Audited Financial Statements as of December 31, 2006 or were arrived at based on mathematical or clerical error; provided , however , that the Stockholders’ Representative shall have notified Parent in writing of each disputed item, specifying the estimated amount thereof in dispute and setting forth, in reasonable detail, the basis for such dispute, within 30 Business Days of Parent’s delivery of the Working Capital Statement to the Stockholders’ Representative. In the event of such a dispute, the Stockholders’ Representative and Parent shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto. Any item or amount to which no dispute is raised in a timely delivered notice will be final, conclusive and binding on the parties as of the end of such 30 ^th Business Day. If the Stockholders’ Representative and Parent are unable to reach a resolution with such effect within 30 Business Days after the receipt by Parent of the Stockholders’ Representative’s written notice of dispute, Parent shall submit the items remaining in dispute for resolution to KPMG, LLP (or, if such firm shall decline or is unable to act or is not, at the time of such submission, independent of the Company and Parent, to another independent accounting firm of international reputation mutually acceptable to the Stockholders’ Representative and Parent) (either KPMG, LLP or such other accounting firm being referred to herein as the “ Independent Accounting Firm ”), which shall, within 30 Business Days after such submission, determine and report to the Stockholders’ Representative and Parent upon such remaining disputed items, and such report shall be final, binding and conclusive on the Stockholders’ Representative and Parent and the Working Capital and the Debt Amount as adjusted pursuant to such report shall be, respectively, the “ Final Working Capital ” and the “ Final Debt Amount ”. Notwithstanding anything to the contrary contained above, the Independent Accounting Firm is solely authorized and permitted to determine whether the Parent’s calculations were prepared in a manner consistent with and using the same methods used in preparing the Audited Financial Statements as of December 31, 2006 or were arrived at based on mathematical or clerical error. The fees and disbursements of the Independent Accounting Firm shall be allocated between the Stockholders’ Representative and Parent in the same proportion that the aggregate amount of such remaining disputed items so submitted to the Independent Accounting Firm that is unsuccessfully disputed by each such party (as finally determined by the Independent Accounting Firm) bears to the total amount of such remaining disputed items so submitted.

(e) In acting under this Section 3.04 , the Stockholders’ Representative, Parent and the Independent Accounting Firm shall be entitled to the privileges and immunities of arbitrators.

SECTION 3.05. Post-Closing Payments . (a) The date on which both of the Final Working Capital and the Final Debt Amount have been finally determined in accordance with Section 3.04 is hereinafter referred to as the “ Determination Date ”, and the amount of such Final Working Capital and the Final Debt Amount shall be used to adjust the Common Equity Consideration (the amount of such adjustment as determined pursuant to the following two sentences, “ Final Adjustment Amount ”). In the event that the sum of (i) the Final Working Capital less the Estimated Working Capital and (ii) the Estimated Debt Amount less the Final Debt Amount is a positive number, then Parent shall pay to the Paying Agent, for prompt payment to the Equityholders, in proportion to their respective aggregate Equityholder’s Percentage in the Escrow Account, an amount equal to such positive number (less any applicable

withholding Taxes in accordance with Section 3.06 , which applicable withholding Taxes shall be paid to the Surviving Corporation immediately after being so withheld for further payment to the applicable Governmental Entity), together with interest thereon at a rate equal to the average LIBOR for the period beginning on the Closing Date and ending on the date of payment. In the event that the sum of (x) the Final Working Capital less the Estimated Working Capital and (y) the Estimated Debt Amount less the Final Debt Amount is a negative number, then the Stockholders’ Representative and Parent shall direct the escrow agent maintaining the Escrow Account to pay Parent an amount equal to the absolute value of such negative number, together with interest earned thereon. Any required payment shall be made by Parent or the escrow agent (at the direction of the Stockholders’ Representative), as the case may be, on the third Business Day following the Determination Date, in immediately available funds by wire transfer to, in the case of the Equityholders, the Paying Agent and, in the case of Parent, such bank account or accounts as Parent may specify. At the time of the payment of the Final Adjustment Amount pursuant to this Section 3.05 , the balance of the Escrow Account shall be paid to the Paying Agent for distribution by the Paying Agent to the Equityholders in accordance with their respective Equityholder’s Percentages. If the funds held pursuant to the Escrow Agreement are not sufficient to pay the Final Adjustment Amount, then Parent shall have the right to setoff and apply the Construction Milestone Payment or a Coal Milestone Payment against any such shortfall (plus interest accruing on such amount from the Closing Date to the payment date at an annual rate of 5%); provided that no party shall have any other right of setoff for any reason whatsoever against the Construction Milestone Payment or any Coal Milestone Payment or any interest accrued thereon except with respect to Parent’s rights of setoff with respect to to: (1) the Final Adjustment Amount as set forth in Section 3.05(a) , (2) the FIRPTA Amount, the 280G Amounts and the 409A Amounts as set forth in Section 3.06 , and (3) the LC Amount and the Non-Releasing Equityholder Indemnity Amount as set forth in Section 6.11 .

(b) Milestone Payments.

(i) Parent (or its transferees, successors or assigns) shall cause the Surviving Corporation (or its transferees, successors or assigns) to pay to the Equityholders an aggregate of $350,000,000, less any amount deposited into escrow pursuant to Section 6.11 (plus interest on such amount from the Closing Date to the earlier of the payment date and December 31, 2012, at a rate of 5% compounded annually and less any applicable withholding Taxes in accordance with Section 3.06 ) (the “ Construction Milestone Payment ”), and subject to Parent’s right to setoff against the Construction Milestone Payment with respect to: (1) the Final Adjustment Amount as set forth in Section 3.05(a) , (2) the FIRPTA Amount, the 280G Amounts and the 409A Amounts as set forth in Section 3.06 , and (3) the LC Amount and the Non-Releasing Equityholder Indemnity Amount as set forth in Section 6.11 , upon the earlier to occur of either: (A) the issuance of a “notice(s) to proceed”, duly authorized, directly or indirectly, by the board of directors of Parent (or its transferees, successors or assigns) in its sole discretion, under contracts for construction of any portion of the New Construction line for which the maximum aggregate amount committed to be paid exceeds $500 million, or (B) Parent (or its transferees, successors or assigns) or one or more of its Affiliates (or their transferees, successors or assigns), to the extent such Affiliate or Affiliates are authorized to do so by the board of directors of Parent (or its transferees, successors or assigns) in its sole discretion, causing the movement of more

than 10,000 cubic yards of earth in connection with the New Construction line (collectively, the “ Construction Conditions ”). Parent agrees that, for either the issuance of the “notice(s) to proceed” or the movement of more than 10,000 cubic yards of earth in connection with the New Construction to take place, its board of directors must (or the board of directors of its transferees, successors or assigns shall be required to) take formal action authorizing such activity. Notwithstanding the foregoing, if neither of the Construction Conditions has been satisfied prior to December 31, 2025, no Construction Milestone Payment shall be payable.

(ii) Parent (or its transferees, successors or assigns) shall cause the Surviving Corporation (or its transferees, successors or assigns) to pay to the Equityholders certain payments (the “ Coal Milestone Payments ”) not to exceed $707,000,000 in the aggregate (plus an inflation adjustment accruing on each such amount from the Closing Date to the payment date at a rate of 2% compounded annually and less any applicable withholding Taxes in accordance with Section 3.06 ), and subject to Parent’s right to setoff against the Coal Milestone Payments with respect to: (1) the Final Adjustment Amount as set forth in Section 3.05(a) , (2) the FIRPTA Amount, the 280G Amounts and the 409A Amounts as set forth in Section 3.06 , and (3) the LC Amount and the Non-Releasing Equityholder Indemnity Amount as set forth in Section 6.11 , if prior to December 31, 2025, shipments of Powder River Basin coal over any portion of the New Construction line exceed certain tonnage targets (without rounding) for any calendar year as set forth in this clause (ii) below (the “ Tonnage Condition ”):


Tonnage Condition		Coal Milestone Payment
At least 40 million tons in any calendar year		$58,000,000 plus an inflation adjustment from the Closing Date at a rate of 2%, compounded annually (the “ First Milestone Payment ”)

At least 50 million tons in any calendar year		$60,000,000 plus an inflation adjustment from the Closing Date at a rate of 2%, compounded annually (the “ Second Milestone Payment ”)

At least 60 million tons in any calendar year		$100,000,000 plus an inflation adjustment from the Closing Date at a rate of 2%, compounded annually (the “ Third Milestone Payment ”)

At least 75 million tons in any calendar year		$164,000,000 plus an inflation adjustment from the Closing Date at a rate of 2%, compounded annually (the “ Fourth Milestone Payment ”)

At least 100 million tons in any calendar year		$175,000,000 plus an inflation adjustment from the Closing Date at a rate of 2%, compounded annually (the “ Fifth Milestone Payment ”)

At least 125 million tons in any calendar year		$150,000,000 plus an inflation adjustment from the Closing Date at a rate of 2%, compounded annually (the “ Sixth Milestone Payment ”)

Upon satisfaction of any Tonnage Condition (and payment of the corresponding Coal Milestone Payment), the Equityholders will no longer be eligible to receive the Coal Milestone Payment corresponding to said Tonnage Condition. For purposes of illustration, in no event will Parent be obligated to pay more than one of each of the First Milestone Payment, Second Milestone Payment, Third Milestone Payment, Fourth Milestone Payment, Fifth Milestone Payment and the Sixth Milestone Payment upon satisfaction of any Tonnage Condition. If during any calendar year the Company satisfies more than one Tonnage Condition that has not previously been satisfied, then Parent shall make the corresponding Coal Milestone Payments for each such Tonnage Condition which has been satisfied through such time. For purposes of illustration, Section 3.05(b) of the Disclosure Schedule sets forth an example of the satisfaction of multiple Tonnage Conditions during a particular calendar year. Any tonnage that is under contract with either railroad ( i.e. , BNSF or Union Pacific Railroad, or their successors) serving the PRB (the “ Incumbent Carriers ”) and moves on an emergency basis via any portion of the lines that may be constructed or improved pursuant to the PRB Expansion (“ Emergency Tonnage ”) shall not be included in measuring whether a Tonnage Condition has been met. Any tonnage under contract with Incumbent Carrier(s) that is moved over any portion of the PRB Expansion for less than six months shall be assumed to be Emergency Tonnage, unless there is a preponderance of the evidence to the contrary. Any tonnage under contract with Incumbent Carrier(s) that is diverted for more than six months shall be assumed to be other than Emergency Tonnage and shall be included in measuring whether a Tonnage Condition has been met, unless there is a preponderance of the evidence to the contrary. The parties understand and agree that the terms and conditions of any contract and agreement entered into after the Closing Date and related to the shipment of coal shall be determined by Parent in its sole discretion.

(iii) Timing of Payments . Within thirty (30) days following the satisfaction of the Construction Conditions or a Tonnage Condition, and, in any event, within forty-five (45) days following each calendar year prior to the earlier of December 31, 2025 and the payment of the Sixth Milestone Payment, Parent shall prepare and deliver to the Stockholders’ Representative a statement certified by Parent’s Chief Financial Officer or Chief Executive Officer setting forth (A) the status of the Construction Condition and the Tonnage Conditions, including a description of the status, in reasonable detail, of the PRB Expansion and (B) whether facts or circumstances have arisen to Parent’s knowledge that are likely to give rise to a deduction from the Construction Milestone Payment or any Coal Milestone Payment in respect of a FIRPTA Amount, 280G Amount, 409A Amount or an LC Amount (the “ Milestone Statement ”). Notwithstanding the foregoing and solely with respect to any of the above-described amounts payable after the fifth (5 ^th ) anniversary of the Effective Time in respect of any

portion of the Equityholder’s Percentages which are attributable to interests under the Bonus Share Plans or the Warrant Agreement dated November 4, 2005, between the Company and Kevin V. Schieffer (the holders of such Equityholder’s Percentages, the “ Restricted Equityholders ”), which Equityholders and their applicable Equityholder’s Percentages shall be identified in a writing delivered by the Stockholders’ Representative to Parent at least thirty (30) days prior to the fifth (5 ^th ) anniversary of the Effective Time, such payments shall not be paid to the Stockholders’ Representative or any Restricted Equityholder prior to January 1 of the calendar year next following the calendar year in which a Construction Condition or Tonnage Condition, as the case may be, occurs and shall be paid in such next following year on the later of the first Business Day of such year or the date the amount would otherwise be paid to the Stockholders’ Representative (and promptly paid to the Restricted Equityholders by the Stockholders’ Representative on receipt) as provided herein. The preceding sentence shall not, however, be interpreted as interfering with or as a waiver of Parent’s right to enforce its legal rights as provided above, provided that the parties hereto agree that if there is a dispute or payment thereafter as a result of a dispute it shall be paid in a manner that satisfies the requirements of Treasury regulation section 1.409A-3(g). The Milestone Statement shall become final and binding upon the parties on the sixtieth (60th) day following receipt thereof by the Stockholders’ Representative unless the Stockholders’ Representative gives written notice of its disagreement with the Milestone Statement (“ Notice of Disagreement ”) to Parent before such date. Any Notice of Disagreement must set forth in reasonable detail the nature of any disagreement. During the 30-day period following the delivery of a Notice of Disagreement, the Stockholders’ Representative and Parent shall seek in good faith to resolve in writing any differences that they may have with respect to any matter specified in the Notice of Disagreement. If, at the end of such 30-day period, the Stockholders’ Representative and Parent have not reached agreement on all such matters, then the Stockholders’ Representative and Parent shall be entitled to seek such other remedies as may be available at Law. Not later than the tenth (10th) day following the date the Milestone Statement becomes final, whether automatically because the Stockholders’ Representative does not provide a Notice of Disagreement, by agreement of Parent and the Stockholders’ Representative or otherwise, if the final Milestone Statement sets forth the satisfaction of the Construction Conditions or one or more Tonnage Conditions, as applicable, Parent shall cause the Surviving Corporation to deposit by wire transfer of immediately available funds to (i) a single bank account specified by the Stockholders’ Representative, the Construction Milestone Payment or the applicable Coal Milestone Payment(s), less, as applicable, any FIRPTA Amount, LC Amount, 409A Amount and 280G Amount and (ii) to the Escrow Account the Non-Releasing Equityholder Amount, if any. After deducting from any such Construction Milestone Payment or the applicable Coal Milestone Payment(s), as adjusted pursuant to the foregoing sentence, any amounts any Consultants are entitled to receive, which amounts Parent and the Stockholders’ Representative shall use commercially reasonable best efforts to agree upon within ten days of the Milestone Statement becoming final, and distributing such amounts to the Consultants as required, the Stockholders’ Representative shall distribute the remainder of such Construction Milestone Payment or Coal Milestone Payment(s), as applicable, among the Equityholders in proportion to their respective Equityholders’ Percentage or as otherwise agreed among the Equityholders

and the Stockholders’ Representative. Each party shall pay its own fees and expenses incurred during the 30-day review period with respect to the resolution of a Notice of Disagreement.

(iv) During the period of any dispute provided for in Section 3.05(b)(iii) , and otherwise not more frequently than once per year until December 31, 2025, at the request of the Stockholders’ Representative, Parent shall provide the Stockholders’ Representative and its representatives (including legal and financial advisors), reasonable access to the books, records, facilities and employees of the Surviving Corporation and, to the extent applicable, Parent and its Affiliates and any other person operating the PRB Expansion and its Affiliates, and Parent shall cooperate, and cause its Affiliates, the Surviving Corporation and any other person operating the PRB Expansion and its Affiliates to cooperate, with the Stockholders’ Representative and its representatives (including legal and financial advisors), to the extent reasonably required by the Stockholders’ Represen

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