COAL FACILITY LEASE AND OPERATING AGREEMENT

Exhibit 10.35

LOADOUT LLC

TO

ELK RIDGE, INC.

PREPARED: JULY 7, 2005

LESSOR: LOADOUT LLC

LESSEE: ELK RIDGE, INC.

DATE OF LEASE: JULY 7, 2005

TABLE OF CONTENTS TO COAL FACILITY LEASE AND OPERATING AGREEMENT

COAL FACILITY LEASE AND OPERATING AGREEMENT

THIS COAL FACILITY LEASE AND OPERATING AGREEMENT (this “Agreement”), is made and entered into this 7th day of July, 2005, by and between LOADOUT LLC, a Delaware limited liability company (“Lessor”), and ELK RIDGE, INC., a Kentucky corporation (“Lessee”) .

WITNESSETH:

WHEREAS, Lessor is the owner of a coal facility more particularly described on Exhibit A attached hereto, and roughly five miles of trackage, located on Caney Creek in Knott and Floyd Counties, Kentucky near the community of Wayland, Kentucky, all as more particularly identified on the map attached hereto as Exhibit B (the “Facility”); and

WHEREAS, Lessor intends to lease the Facility to Lessee pursuant to this Agreement;

WHEREAS, Lessor and CSX Transportation (“CSXT”) have entered into an agreement to authorize the rehabilitation of a rail siding connected to the CSXT railway to facilitate service to Lessee by providing rail service to the Facility, and Lessee shall enter into a Service Agreement (the “Service Agreement”) with CSXT regarding rail service to the Facility; and

WHEREAS, Lessee intends to utilize the Facility to load coal mined from the properties of Penn Virginia Operating Co., LLC, an affiliate of Lessor (“Affiliate Coal”), as well as coal mined from properties of others (“Adverse Coal”) into trains for transportation to market via the CSXT rail transportation system.

NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows;

ARTICLE I—TERM AND NATURE OF AGREEMENT

Section 1.1—Lease of Facility . That for and in consideration of the sum of [    *    ] cash in hand paid by Lessee unto Lessor, the receipt and sufficiency of which is hereby acknowledged, and in further consideration of the minimum rentals and shipment royalties to be paid by Lessee to Lessor as hereinafter stipulated, and of the covenants, provisions, stipulations and agreements hereinafter contained on part of Lessee to be kept, performed and observed, Lessor hereby exclusively leases to Lessee, and Lessee hereby leases from Lessor, the Facility for the purposes of handling, preparing, storing, blending, loading and/or shipping certain coal mined by Lessee or others and certain coal designated by Lessor, from time to time, subject to and upon the terms and conditions set forth in this Agreement.

Section 1.2—Ingress and Egress . Lessor hereby grants to Lessee the non-exclusive right of ingress and egress to and from the Facility over existing roadways, or extensions thereof, located on property owned or controlled by Lessor and/or its affiliates as shown on Exhibit B attached hereto. All of such roadways and extensions thereof shall for purposes of this Agreement be considered part of the “Facility” as defined above. Such rights of ingress and egress are granted only to the extent Lessor has the right to grant the same. Lessor and Lessee agree to cooperate with each other and any other persons with the right to use the roadways, or extensions thereof, to coordinate and plan the use of the roads so as to minimize the interference with each other’s operations. The cost of maintaining and repairing the roadways or extensions thereof used for ingress and egress to and from the Facility shall be shared on a pro-rated basis by Lessor, Lessee and any other persons with the right to use such roadways or extensions thereof.

Section 1.3—Term . This Agreement will take effect as of                      2005, and shall continue for an initial period of ten (10) years (“Initial Term”) . If Lessee is in compliance with all terms and conditions of this Agreement and Lessee, together with any of its owners or other affiliated entities, is in compliance with all terms and conditions of any additional lease or other agreement in effect with 3. Lessor at the time of the expiration of the Initial Term, then Lessee may renew this Agreement, subject to the same terms and conditions herein stated, for an additional five (5) year term by giving Lessor written notice of Lessee’s intention to renew this Agreement at least three (3) months prior to expiration of the Initial Term.

Section 1.4—Investigation of Facility . Lessee acknowledges that it has full and complete responsibility for making its own independent inspection, investigation and evaluation of the Facility (including, without limitation, roadways and extensions thereof) to determine existing conditions, limitations of the areas involved, equipment necessary to conduct and complete operations, and laws affecting performance hereunder. Lessor makes no implied or express warranty or representation whatsoever

concerning the Facility, and Lessee covenants and agrees that no representations or warranties whatsoever, express or implied have been made by or on behalf of Lessor or its employees, agents or representatives regarding the Facility (including, without limitation, roadways and extensions thereof), its condition, its fitness for a particular purpose, the use or operation that may be made thereof or the income that may be derived therefrom. Lessor shall in no event assume or be liable for any loss Lessee under this Agreement. Lessor does not assume responsibility or liability for the present or future condition of the Facility (including, without limitation, roadways and extensions thereof), and Lessor shall not be liable to Lessee for any damage to or destruction of the Facility (including, without limitation, roadways and extensions thereof) or Lessee’s property or the property of any other person which occurs within, on or at the Facility (including, without limitation, roadways and extensions thereof).

ARTICLE II—FACILITY OPERATIONS

Section 2.1—Maintenance . Except as expressly otherwise set forth below for those certain items set forth on Exhibit C attached hereto, Lessee shall, at all times during the term hereof, including, without limitation, any idle times or times when the Facility is not in active operation, and at its sole cost and expense, maintain and keep secure the Facility and the structures, fixtures and equipment situated thereon, and make all repairs thereto, interior and exterior, structural and non-structural, ordinary and extraordinary, foreseen and unforeseen, so as to keep the Facility and the structures, fixtures and equipment thereon in a general condition equal to or exceeding the condition existing at the date on which the Facility is fully operational, subject to normal wear and tear. All repairs, replacements and renewals shall be equal in quality and class to the original work. Lessor shall not be required to maintain, alter, repair, rebuild or replace the Facility or any of the structures, fixtures and equipment thereon, or any of the roadways or rail trackage in any way; provided, however, that Lessor does agree that for a one (1) year period beginning on the date the Facility is first available for operation, it will repair or replace those certain used major component parts listed on Exhibit C that it has provided for the Facility, unless the need for repair or replacement is due to Lessee’s negligence (such as failing to do routine maintenance, lubrication, etc.) . All repairs, replacements and renewals shall immediately become and shall remain the property of Lessor and shall be part of the Facility. Lessee shall obtain prior written approval of Lessor

before commencing any maintenance or replacement activities that are not in the ordinary course of business, or before constructing any additional structures, fixtures and equipment at the Facility. The Facility is and shall remain the property of Lessor.

Section 2.2—Expenses of Operations . Any and all costs, expenses and liabilities accruing or resulting from Lessee’s operations at the Facility, including, without limitation, security during non-operating hours, shall be borne solely by Lessee.

Section 2.3—Method of Operations . Lessee shall conduct its operations at the Facility in a careful, skillful and workmanlike manner in accordance with recognized modern methods and practices so as to secure the most efficient handling, blending and shipping of coal as possible, and in compliance with all applicable federal, state and local laws, regulations and ordinances, as well as the Service Agreement. Lessee shall be solely responsible for the scheduling of rail cars and other communication with CSXT for the providing of rail cars and railroad services to the Facility and shall be solely responsible for all charges related to such rail cars and services provided by CSXT or others.

Section 2.4—Handling and Shipping of Coal to Lessor . Subject to (i) the delivery of coal to the Facility, (ii) reasonable coordination of such coal with Lessee’s delivery and shipping schedules and (iii) events beyond the reasonable control of Lessee, Lessee shall prepare, handle and/or blend and/or load and ship coal designated by Lessor from time to time at the Facility. Lessee shall make the same payments under Article III of this Agreement to Lessor for such coal designated by Lessor from time to time and shipped from the Facility as it does for other coal shipped from the Facility. Lessee shall be entitled to charge a shipment fee that does not exceed its [    *    ] from the entity requesting shipment of the coal designated by Lessor. Lessee shall operate the Facility so as to give reasonable priority to all such coal designated by Lessor from time to time, and Lessee shall handle and/or blend and/or load and ship such coal designated by Lessor from time to time so as to achieve the required specifications and shipping schedules for such coal, provided that such requirement does not unreasonably interfere with Lessee’s operations.

Section 2.5—Refuse Disposal . Lessee shall dispose of all refuse produced or generated at the Facility promptly in

accordance with all federal, state and local laws, regulations and ordinances, including, without limitation, all associated reclamation responsibilities in the permitted disposal areas. Lessor shall have no obligations or responsibilities to provide any land or property for a refuse disposal site and all such disposal obligations and responsibilities shall be fulfilled by Lessee at its sole cost and expense.

Section 2.6—Electric Power, Telephone Service and Utilities . Lessee shall, at its sole cost and expense, be responsible for all electricity used at the Facility and for all charges for telephone service and other utilities and shall maintain electric power, telephone service and such other utilities thereto. Upon Lessor’s request, at the expiration or termination of this Agreement, Lessee shall promptly assign to Lessor such of Lessee’s rights under any agreements that exist between Lessee and the power company or any other utility providing service to the Facility.

Section 2.7—Inspection . Lessor shall have the right to inspect the Facility and the work performed thereon by Lessee at any and all reasonable times.

Section 2.8—Permits and Bonds . Lessee shall diligently work to obtain the transfer of all of the permits shown on Exhibit D (collectively, the “Permits”) into Lessee’s name as soon as can practicably be done after notice from Lessor, at Lessee’s expense. Lessee agrees to substitute its bonds for the Permits. Lessee shall be responsible for obtaining all other permits, bonds, licenses and other agreements required for it to operate the Facility.

In the event that Lessee does not (i) transfer of all of the Permits into its name and acquire bonds for the Permits within ninety (90) after notice from Lessor or (ii) obtain all other permits, bonds, licenses and agreements required to operate the Facility as soon as practicable, but in no event later than one hundred eighty (180) days from the date of the execution of this Agreement, then Lessor may, at its option, terminate this Agreement by serving written notice thereof to Lessee. If, however, Lessee has been diligent in its efforts to have the Permits transferred and the transfer of the Permits is being held up through no fault of Lessees, then Lessor will give this due consideration. During the period when Lessee is operating the Facility prior to the transfer of the Permits, Lessee shall be bound by all terms and conditions of the Permits and their bonds, maintain responsibility and liability therefore, perform all work

in accordance therewith and pay all fines, fees and assessments issued with regard to the Permits. Lessee shall also file all reports and notices necessary to maintain the Permits, properly establish and serve notice of its exclusive responsibility for the Facility’s operation and properly establish its exclusive responsibility for the health and safety of Lessee’s employees.

Upon the expiration, termination or cancellation of this Agreement, Lessor may elect to (i) require Lessee to transfer to Lessor or Lessor’s designee any and all permits and licenses, including the Permits and the Service Agreement, that Lessee holds for the Facility, without payment therefore, such transfers to be made at the expense of Lessor, (ii) require Lessee to complete its reclamations obligations under the Permits after Lessor has had 180 days to remove such of the Facility as it may elect to recover, or (iii) require Lessee to immediately commence reclamation activities, including the removal of the Facility as required to be removed under the Permits, with salvage proceeds of the Facility going to Lessee to offset any costs associated therewith. Upon election (i) above, Lessee shall promptly take all actions and execute all agreements and instruments necessary to transfer the Permits. The above notwithstanding, Lessor acknowledges that if this Agreement terminates or expires and Lessor either operates the Facility itself, or leases or contracts the Facility to a third party, then Lessee would not be expected to retain the Facility permits in its name. Upon the transfer of such permits and licenses to Lessor or its designee, any bonds of Lessee shall be replaced.

Section 2.9—Compliance With Laws; Environmental Obligations . Lessee covenants and agrees that in connection with its operations and related activities at the Facility under this Agreement it will comply with any and all federal, state and local laws now enacted or which may be hereinafter enacted and any and all rules, regulations and orders promulgated thereunder governing Lessee’s operations on or with respect to the Facility. In addition to all other obligations of Lessee set forth elsewhere in this Agreement, Lessee hereby agrees to indemnify, defend and hold Lessor and other assigns of Lessor harmless from and against all liability in any way arising out of, connected with or related to the non-compliance by Lessee with any law, rules, regulation or order governing Lessee’s operations on or with respect to the Facility,, Copies of all permits, inspection reports, notices to comply, compliance, non-compliance or other orders issued by any governmental authority shall, upon request, be made available by Lessee to Lessor for inspection and copying. It is expressly understood and agreed that the covenants,

obligations and agreements of Lessee as provided in this Section 2.9 shall survive the cancellation, forfeiture, expiration or termination of this Agreement.

Without limitation of the foregoing, Lessee recognizes the importance of environmental protection and the necessity for proper ecological balance and, to further these objectives, Lessee agrees to conduct with utmost caution all of its operations under this Agreement, for the purpose of, as nearly as possible, preserving or improving conditions as they previously existed by minimizing any adverse alteration of the topography and interfering with, polluting, or impeding water courses as little as possible. Lessee further agrees, in order to promote these objectives, that at the expiration or termination of this Agreement, and in addition to all other terms and conditions thereof, it will leave the Facility in a clean and sanitary condition, free of debris, and shall be responsible for compliance with all environmental laws and regulations now in effect or hereafter enacted affecting the Facility (including retroactive regulations) or any activity carried on by Lessee thereon, regardless of whether any such laws or regulations impose liability of such condition or activity on Lessor as owner of the Facility.

ARTICLE III—PAYMENTS

Section 3.1—Minimum Rental and Shipment Royalty .

a. During the term of this Agreement, on or before the 25th day of each month, on account of the previous month, Lessee shall pay to Lessor by wire transfer of immediately available federal funds to such account as Lessor may designate, or to such other account or by other method as Lessor may from time to time designate, the greater of (i) a shipment royalty (a “Shipment Royalty”) equal to (x) [    *    ] per ton on each and every ton of Affiliate Coal and Adverse Coal shipped through the Facility during such previous month plus (y) [    *    ] per ton on each and every ton of coal owned by [            *            ] shipped through the Facility in accordance with the Throughput Agreement dated as of the date hereof between [            *            ] and Lessee during such previous month or (ii) a monthly minimum rental equal to [    *    ] (the “Monthly Minimum Rental”). The Monthly Minimum Rental shall be first due and payable on the 25 ^th day of the fourth month following the operational date of the Facility.

b. Each month’s Shipment Royalty shall be credited against the Monthly Minimum Rental so that no minimum Monthly Minimum Rental shall be due for any month where the Shipment Royalty equals or exceeds the Monthly Minimum Rental. In any month where the Shipment Royalty falls short of the Monthly Minimum Rental, the difference between the Monthly Minimum Rental paid and the Shipment Royalty due for that month shall be credited to Lessee’s account for subsequent months. Lessee shall then have the right to ship, without paying any Shipment Royalty, such quantities of coal as would produce, at the royalty rates prevailing at that time, a Shipment Royalty equal to that credit. In no event will Lessee pay less during any month than the Monthly Minimum Rental. The right of recoupment may be exercised at any time during the period which includes the calendar year during which the payment is made plus the following calendar year. However, the right of recoupment shall expire upon the expiration or termination of this Agreement.

Section 3.2—Records Relating to Payments; Reports; Audits . Lessee shall send appropriate documentation and records with each payment to Lessor showing shipping records, weights, customers, calculation methods utilized and any other information requested by Lessor. Lessee shall keep accurate and correct books of accounting and records showing, without limitation: (a) all Affiliate Coal and Adverse Coal shipped from the Facility; and (b) all coal designated from time to time by Lessor shipped from the Facility. Such books and records shall be available for inspection by Lessor and its representatives at the offices of Lessee at all times during regular business hours for the purpose of auditing and verifying the information sent along with payments from Lessee to Lessor.

Section 3.3—Determination of Weights . The weights of coal prepared, handled, blended, loaded and/or shipped from the Facility hereunder shall be determined by printouts of weights generated automatically at the Facility as part of the Facility’s certified batch load capabilities or certified truck scales in the case where coal is trucked out of the Facility. Lessee agrees to transmit to Lessor this information within three business days after the end of each calendar month. Lessee shall be responsible for maintaining copies of all such records of weights and keeping the batch load out calibrated and maintained at all times in proper operating order. Lessor reserves the right at all normal business times to observe the weighing of coal at the Facility and the development of printouts of such weights. Lessor shall have the right to request calibration of such weighing system from time to time during the term of this

Agreement, and Lessee shall maintain the weighing system in accordance with ASTM standards and all other standards for measurement set out by the railroad companies for intestate commerce.

ARTICLE IV—RELATIONSHIP OF PARTIES

Section 4.1—Independent Contractor . It is expressly agreed and understood that Lessee shall perform all work arising from or relating to this Agreement as an independent contractor. Lessee shall exercise exclusive direction and control over its work force and labor relations policies and direct the manner, method and mode of performance in all other aspects of all work arising from or relating to this Agreement by Lessee. Lessee shall not represent or hold itself out as an affiliate, subsidiary, partner, joint venturer, representative or agent of Lessor.

Section 4.2—Labor Relations . Lessee shall exercise complete and exclusive control over and responsibility for all aspects of hiring, employment, supervision, direction, hours, working conditions, compensation, discipline and discharge for all individuals engaged to carry on work arising from or relating to operations to be performed under this Agreement. Lessee shall comply with all present and future federal, state and local ordinances, rules and regulations pertaining to the duties and obligations arising out of the employer/employee relationship, including, but not limited to, unemployment compensation, social security, withholding taxes, state workers’ compensation, wage and hours laws, wage payment and collection laws, federal and state safety laws, occupational disease compensation and all other applicable rules and regulations promulgated under such laws. Lessee shall maintain supporting records showing evidence of its compliance with the requirements set out in this Section 4.2, make records available to Lessor for inspection upon request, and certify to Lessor on a quarterly basis in writing that it has complied with this Section 4.2.

ARTICLE V—INDEMNIFICATION AND INSURANCE

Section 5.1—Indemnification .

(a)  Lessee shall indemnify, defend and hold harmless Lessor, its affiliated companies and assigns and lessees, as well as their officers, directors, employees and agents, from and against, any and all claims, demands, suits, proceedings, judgments, losses, liabilities, damages, obligations, civil penalties, costs and expenses of every kind (including, without

limitation, reasonable attorney’s fees) (“Damages”), regardless of when made, arising from or growing out of or in connection with any of the following (i) any operations, work or other act done by Lessee in, on or about the Facility or any part thereof or upon the adjacent properties; (ii) any use, non-use, possession, occupation, condition, operation, maintenance or management by Lessee of the Facility or any part thereof or upon the adjacent properties; (iii) any negligence on the part of Lessee or any of its agents, contractors, servants, employees or invitees (other than Lessor or any of its officers, directors or agents); (iv) any accident, injury (including death) or damage to any person or property (including loss of use) occurring in, on or about the Facility or any part thereof during the term of this Agreement; or (v) any breach of or default in the performance by Lessee of any covenant, agreement or obligation to be performed or complied with by Lessee under this Agreement, including, without limitation, Lessee’s obligations to comply with and perform under any agreement(s) for rail trackage entered into between Lessor and CSXT or any other entity.

(b)  Lessee’s indemnity obligations under this Agreement shall survive the cancellation, termination or expiration of this Agreement.

Section 5.2—Insurance . Lessee shall maintain at its sole cost and expense, and shall require any subcontractors it may engage to perform any work at the Facility to maintain, at all times during the term of this Agreement, the insurance coverages set forth below with full policy limits applying, but not less than as stated:

(a)  Comprehensive general public liability, pollution coverage and property damage insurance with each underlying limit being not less than One Million Dollars ($1,000,000.00) in respect of bodily injury to or death of one person, Two Million Dollars ($2,000,000.00) in respect of bodily injury to or death of more than one person in any one occurrence, and in an amount of not less than Two Million Dollars ($2,000,000.00) in respect of damage to, pollution or destruction of property.

(b)  Employer’ s liability insurance protecting against employee claims for bodily injury, actions outside the scope of the Workers’ Compensation immunity and all other employee claims against employers with each underlying limit being not less than One Million Dollars ($1,000,000.00) per person and Two Million Dollars ($2,000,000.00) for each occurrence.

(c)  Fire, property damage, extended and all risks coverage for all buildings and structures comprising the Facility for the replacement value of such buildings and structures, as well as for all coal located at or adjacent to the Facility in an amount not less than Five Million Dollars ($5,000,000.00).

(d)  Automobile bodily injury liability insurance in the same bodily injury liability limits as set forth in (a) above, and automobile property damage liability insurance in an amount of not less than One Million Dollars ($1,000,000.00).

(e)  Lessee shall obtain excess/umbrella insurance in the amount of Five Million Dollars ($5,000,000), if requested by Lessor.

(f)  Workers’ Compensation insurance, occupational diseases insurance, including federal and state Black Lung coverage, unemployment compensation and all other insurance coverage for occupational injury, disease or hazards as required by the laws and regulations applicable to and covering employees of Lessee engaged in the performance of work under this Agreement.

Lessee’s obligations to obtain and maintain the insurance coverage stated in this Section 5.2 shall not be construed in any way to limit Lessee’s obligations under this Agreement, including Lessee’s obligation to indemnify Lessor as provided elsewhere under this Agreement, but shall serve as additional security therefor. In the event the Facility is damaged by fire, unless Lessor agrees to accept the full insurance proceeds in lieu of rebuilding, Lessee shall use all such insurance proceeds to rebuild the Facility as promptly as possible in accordance with the original design criteria as modified by the actual construction of the Facility, and Lessee shall submit to Lessor for approval the plans for such reconstruction, including the name of the proposed contractor who shall complete such reconstruction. If the Facility cannot be reconstructed in six (6) months following the damage, then, without limiting Lessor’s rights as set forth above concerning its acceptance of insurance proceeds in lieu of rebuilding, Lessor may accept the full insurance proceeds and terminate this Agreement.

Section 5.3—Form of Insurance . All of the insurance coverages required under Section 5.2 above shall be obtained from a reputable insurer who is licensed to do business in the Commonwealth of Kentucky. All policies or certificates of insurance obtained by Lessee under this Agreement (other than the policies required by Section 5.2 (f)) shall name Lessor as an additional insured, shall contain a provision for notice to

Lessor of any overdue or unpaid insurance premium, shall include an assumption of contractual obligations clause specifically referencing this Agreement and shall provide for thirty (30) day advance written notice to Lessor of any proposed cancellation or substantial change in coverage. In addition, every insurance policy required under Section 5.2 (other than pursuant to clause (f) thereof) above shall contain a waiver of subrogation by the insurer against Lessor, its owners, affiliates and subsidiaries. Each policy of insurance required hereunder shall be written as an “occurrence” contract unless the policy is available only on a “claims made” basis, in which case Lessee shall continue such insurance policy after termination of this Agreement for a period of three (3) years.

Section 5.4—Proof of Insurance Coverage . Lessee shall furnish to Lessor copies of all certificates evidencing the insurance coverages required by Section 5.2 above, including, but not limited to, copies of any bonds which may be required for such coverage, prior to commencing any operations at the Facility under this Agreement, and thereafter upon request by Lessor.

Section 5.5—Payment of Premiums . Lessor has the right (but not the obligation), in its sole discretion, to pay any overdue premium for the insurance coverages required to be obtained by Lessee under Section 5.2 above, or to take out and maintain such insurance coverages and collect the cost of any such coverage from Lessee by sending Lessee an invoice therefor. Lessee specifically agrees and acknowledges that its inability, failure, neglect or refusal to carry, maintain and keep current at all times during the term of this Agreement any insurance coverage required in Section 5.2 above, or its inability, failure, neglect or refusal to be and remain at all times during the term of this Agreement a subscriber of self-insurer in good standing with Kentucky’s Workers’ Compensation Fund, federal and state Black Lung funds or any other occupational disease and disability insurance fund, shall constitute a material breach of this Agreement which gives Lessor the right, in its discretion, to terminate this Agreement pursuant to Section 7.1 below.

ARTICLE VI—REPRESENTATIONS AND WARRANTIES

By Lessee:

Section 6.1—Financial Condition of Lessee . Lessee represents and warrants to Lessor tha