8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): June 1, 2006 (June 5, 2006)

HALLADOR PETROLEUM COMPANY

(Exact Name of Registrant as specified in Charter)

0-14731

(Commission File Number)

Colorado	84-1014610
(State or Other Jurisdiction of Incorporation)	(IRS Employer Identification No.)

1660 Lincoln Street, Suite 2700, Denver, Colorado	80264-2701
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: 303-839-5504

________________

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

____________________________________________________________________________________________

Item 8.01 - Other Events

On June 1, 2006, we signed a Letter of Intent to purchase membership interests in Sunrise Coal, LLC, an Indiana limited liability company ("Sunrise").   Following the proposed acquisition, we would hold a majority of the voting membership interests in Sunrise and would appoint three members to a five member management committee. This letter of intent replaces the letter of intent we signed with Sunrise in January 5, 2006 which would have resulted in Sunrise becoming a wholly-owned subsidiary of Hallador. Sunrise is continuing the development of its Carlisle Mine, with production scheduled to begin in early 2007. Sunrise has advised us that it will discontinue mining operations at its Howesville Mine on June 10, 2006.

On June 1, 2006, we agreed to lend Sunrise up to $5,000,000 to allow Sunrise to continue development of the Carlisle Mine. The $5,000,000 will be converted into membership units in Sunrise upon the closing of our proposed acquisition of membership interests in Sunrise.

The Letter of Intent as executed by both parties  and the Promissory Note as executed are attached hereto as Exhibits.

Item 9.01 - Financial Statements and Exhibits

(a) Not applicable

(b) Not applicable

(c) Exhibits - The following exhibits are filed hereto.

99.1 -  Letter of Intent dated June 1, 2006 by and between Hallador Petroleum Company and Sunrise Coal, LLC

99.13 -Promissory Note dated June 1, 2006 by and between Sunrise Coal, LLC (Borrower) and Hallador Petroleum Company (Lender)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	HALLADOR PETROLEUM COMPANY
Date: June 5,  2006	By: /s/ Victor P. Stabio
	Victor P. Stabio
	Chief Executive Officer and President

EX-99

[HPCo Letterhead]

June 1, 2006

Brent Bilsland

Sunrise Coal, LLC

6641 State Road 46

Terre Haute, Indiana 47802

Re:Sunrise Coal, LLC

Gentlemen:

This letter, effective when executed by the parties hereto, will evidence the current mutual intent, as set forth in Article 1 below, of Hallador Petroleum Company, a Colorado corporation (“Hallador”), on the one hand, and Sunrise Coal, LLC an Indiana limited liability company (“Sunrise”), on the other hand, for Hallador to purchase preferred and common membership interests in Sunrise as further described herein, and entering into such documents, including an amended and restated operating agreement for Sunrise (the “Amended Operating Agreement”) and a Membership Interest Purchase Agreement, related thereto as the Parties deem necessary or appropriate (collectively, the “Transaction Documents”). Hallador and Sunrise are sometimes referred to individually as “Party” and collectively as the “Parties.” The proposed investment in Sunrise, the Amended Operating Agreement and the transactions related thereto, are collectively referred to herein as the “Transactions.”

This letter is intended to set forth certain basic terms of the understanding reached to date and to serve as a basis for further discussions and negotiations between the Parties with respect to the Transactions and the Transaction Documents. The matters set forth in Article 1 are not intended to and do not constitute a binding agreement of the Parties with respect to the Transactions or the Transaction Documents. Any such binding agreement will arise only upon the negotiation, execution and delivery of mutually satisfactory definitive agreements and the satisfaction of the conditions set forth therein, including obtaining satisfactory financing and the approval of such agreements by the respective governing authority of each Party.

The matters set forth in Article 2 of this letter do constitute binding agreements of the Parties.

In consideration of the rights and obligations of the Parties hereunder, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Parties, the Parties hereby agree as follows:

May 25, 2006

Page 2

ARTICLE 1

TRANSACTIONS

1.1   The Transactions. Sunrise shall issue additional membership interests which shall be purchased by Hallador in exchange for a commitment to make a capital contribution of up to $20,500,000. Hallador shall become the owner of 60% of the Common Units of Sunrise and the existing Sunrise members (the “Sunrise Founders”) shall own 40% of the Common Units of Sunrise, plus each Party shall own Preferred Units according to the amounts contributed by each Party. The Parties shall agree to additional terms for the capital contribution commitment and operation of Sunrise according to the Amended Operating Agreement.

1.2   Transaction Documents. The Parties shall negotiate the terms and conditions of the Transaction Documents in good faith, including an Amended Operating Agreement in accordance with the terms set forth on Exhibit A attached hereto.

1.3   Loan to Sunrise. Upon approval and subject to a subordination agreement with Sunrise’s lenders, Hallador will agree to lend up to $5,000,000 (the “Loan”) to Sunrise prior to the completion of the Transactions and the execution of the Transaction Documents. Sunrise will execute a promissory note, in form and substance satisfactory to Hallador, in the amount of the Loan. Any and all amounts outstanding under the Loan at the time of execution of the Transaction Documents shall be converted into a capital contribution and equity in Sunrise.

ARTICLE 2

BINDING AGREEMENTS

2.1   Exclusivity. This letter shall remain in force and effect until the earlier of the date that the Parties enter into definitive Transaction Documents, or August 1, 2006 (the “Exclusivity Period”). During the Exclusivity Period, none of Sunrise or its members, managers, officers or directors will, directly or indirectly, discuss, solicit, pursue, negotiate for or commit to any arrangements relating to the sale or transfer of membership interests or other equity ownership interest in Sunrise or of any of Sunrise’s assets. If this letter is terminated by Hallador prior to entering into the Transaction Documents, the Exclusivity Period shall also terminate.

2.2   Confidentiality. The contents of this letter and negotiations hereunder are intended to be confidential and are not to be discussed with or disclosed to any third person, except (i) Hallador may publicly announce it is entering into negotiations with Sunrise with respect to the Transactions; (ii) with the express prior written consent of the other Party hereto; (iii) as may be required or appropriate in response to any summons, subpoena or discovery order or to comply with any applicable law, order, regulation, ruling, stock exchange or national market rule; provided that (a) the disclosing Party seeks, under applicable law, confidential treatment for such information by the governmental or regulatory authority or such other recipient, where appropriate, and (b) prior to such disclosure, the other Party is given prompt written notice of the disclosure requirement so that it may take whatever action it deems appropriate, including intervention in any proceeding and the seeking of an injunction to prohibit such disclosure; or (iv) to financial advisors, legal counsel and other consultants assisting such Party, or to third parties in order to obtain such consents or approvals from such third parties as may be necessary or desirable.

2.3   Expenses. Except as expressly set forth herein, each Party shall bear its own costs associated with negotiating and performing its obligations under this letter.

2.4   Approval. No Party shall be bound by any Transaction Document until (i) such Party’s governing body shall have approved the Transaction Documents, (ii) such Party shall have executed the Transaction Documents, and (iii) all conditions precedent to the effectiveness of the Transaction Documents shall have been satisfied, including the obtaining of any and all requisite federal and state regulatory orders or approvals in form and substance satisfactory to the Parties.

2.5   Entire Agreement. This letter constitutes the entire agreement of the Parties relating to the subject matter hereof and supersedes all prior discussions, agreements or understandings, whether oral or written, relating to such subject matter, including the letter of intent between the Parties executed on January 5, 2006. There are no other written or oral agreements or understandings between the Parties. Any amendment of this letter must be written and signed by both Parties.

2.6   Governing Law. THIS LETTER SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES.

May 25, 2006

Page 4

2.7   Non-Inclusive; Non-Binding. This letter does not contain all matters upon which agreement must be reached in order for the Parties to enter into the Transaction Documents and consummate the Transactions. This letter does not create and is not intended to create a binding and enforceable contract between the Parties with respect to the provision of Article 1 and the subject matter of any Transaction Document, and may not be relied upon by a Party as the basis for a contract by estoppel or otherwise. A binding commitment with respect to the Transactions and the Transaction Documents can only result from the execution and delivery of definitive Transaction Documents.

2.8   Relationship of Parties. The Parties shall not be deemed in a relationship of partners or joint venturers by virtue of this letter, nor shall either Party be an agent, representative, trustee or fiduciary of the other. Neither Party shall have any authority to bind the other to any agreement.

2.9   Attorneys’ Fees. In the event it becomes necessary for either Party to file a suit to enforce the binding provisions of this letter, the substantially prevailing Party shall be entitled to recover, in addition to all other remedies or damages, reasonable attorneys’ fees and costs incurred.

[Signature page follows]

May 25, 2006

Page 4

If the provisions of Article 1 correctly set forth our current understanding and the provisions of Article 2 set forth our binding agreement, please execute both originals of this letter in the space provided below, retain one fully-executed original for your file, and return the other original to the undersigned. This letter may be executed in counterparts and by facsimile (followed by originals as set forth in the foregoing sentence), and all such counterparts together shall constitute but one agreement.

Very truly yours,

HALLADOR PETROLEUM COMPANY

By: /s/ VICTOR P. STABIO

Victor P. Stabio

President and Chief Executive Officer

Acknowledged, Agreed to and Accepted:

SUNRISE COAL, LLC

By:/S/ BRENT K. BILSLAND

Brent K. Bilsland

Managing Member and

Attorney-in-Fact

May 25, 2006

Page 5

EXHIBIT A

Terms of Amended Operating Agreement

Issuer:	Sunrise Coal, LLC, an Indiana limited liability company (“Sunrise”), located at 6641 State Road 46, Terre Haute, Indiana.
Capital Structure:	The current capital structure of Sunrise will be recapitalized such that all equity ownership in Sunrise will be represented by and divided into two classes of LLC Units on a going forward basis: Preferred Units and Common Units (the “Recapitalization”), such Units carrying the relative rights and obligations set forth below. As part of the Recapitalization, the Sunrise Founders will surrender all their existing membership interests in Sunrise in exchange for Preferred Units and Common Units.
Initial Hallador Capital Commitment / Initial Capital Contribution	$20,500,000, consisting of $20,000,000 cash and $500,000 of legal, accounting and other expenses incurred by Hallador.
Initial Sunrise Founder Capital Contribution	$2,800,000, including conversion of the principal amount of existing loans made by certain of the Sunrise Founders to Sunrise, plus an additional amount representing interest accrued on such loans to the date of conversion.
Additional Capital Commitments	Capital Calls for additional Capital Contributions shall be made as needed by Sunrise but only upon the approval of a Supermajority of the Board. All such Capital Calls shall be made on the basis of Participation Percentages of the Common Members. In the event any Common Member defaults on a Capital Commitment, the other Members shall be offered the right to fund such defaulted Capital Commitment. Any Member making such an additional Capital Contribution shall be issued an additional number of Common Units that result in an increase in such Member’s Participation Percentage to that percentage that equals the aggregate Capital Contributions by such Member divided by the aggregate Capital Contributions (including any additional Capital Contributions) made by all Members.
Common Unit Issuances	Subject to adjustment for future Capital Contributions made under “Additional Capital Commitments” above, initially Sunrise will be issued 40 Common Units and Hallador will be issued 60 Common Units. Accordingly the initial Participation Percentages of the Members will be as follows: Sunrise40.00% Hallador60.00% Total100.00%

1-LA/886174.3

May 25, 2006

Page 6

Preferred Unit Issuances	Preferred Units will be issued to Hallador and the Sunrise Founders (as a group) and adjusted from time to time based upon the aggregate Capital Contributions made by each of Hallador and the Sunrise Founders (as a group) divided by the aggregate Capital Contribution made by Hallador and the Sunrise Founders.
Tax Distributions:	For any fiscal year of Sunrise, Available Cash Flow will be distributed to the Members in amounts deemed sufficient for each member to pay its federal, state, and local income tax liability attributable to its allocable share of the taxable income of the Sunrise (a “Tax Distribution”) for the prior fiscal year. For such purpose, the Parties will agree upon the effective income tax rate of each Member. Tax Distributions will be made within the first ninety (90) day period after such prior fiscal year but only to the extent necessary and available for distribution (taking into account all distributions made to the Members in the fiscal year to which a Tax Distribution applies). Any Tax Distribution will be deemed to be an advance distribution of amounts otherwise distributable to the Members under “Distributions” set forth below and will be reallocated among the Members in the amounts that would subsequently otherwise be distributable to the Members under such paragraph in the order they would otherwise have been distributable.
Distributions:	Each fiscal quarter of Sunrise (and after the payment of all Tax Distributions), Sunrise shall make distributions to the Members to the extent there is Available Cash Flow (i.e., cash flow received by Sunrise from its operations, reduced by payments to satisfy Sunrise’s expenses, liabilities (including the Credit Agreement) and reserve withholding needs) as follows: First, to the holders of Preferred Units (in such capacity, “Preferred Members”), a ten percent (10%) per annum rate of return on their respective average daily Unreturned Capital Balances (as defined below) for the fiscal quarter of the distribution (the “Preferred Returns” of such Members). Distributions of Preferred Returns shall be made to the Preferred Members in proportion to their respective accrued and unpaid Preferred Returns. Preferred Returns shall accrue and compound annually until paid in full. Second, to Preferred Members, in an amount equal to their respective Unreturned Capital Balances. As used in this Term Sheet, the term “Unreturned Capital Balance” of a Preferred Member will be the aggregate amount of Capital Contributions made by the Member with respect to the Preferred Units of the Member, reduced by all prior distributions made with respect to such Unreturned Capital Balance. Unreturned Capital Balance distributions shall be made to the Preferred Members in proportion to their respective Unreturned Capital Balances. Thereafter, to the holders of Common Units (in such capacity, “Common Members”) in proportion to their respective Participation Percentages. As used in this Term Sheet, the term “Participation Percentage” of a Common Member shall be a fraction (expressed as a percentage), the numerator of which is the number of Common Units of which the Member is the record owner and the denominator of which is the aggregate number of issued and outstanding Common Units.
Allocations:	Allocations of the Sunrise income and loss for “book for tax” or “capital accounting” purposes shall be made to the members each fiscal year in a manner sufficient for the “capital account” of each member to equal the amount of a distribution each member would receive if the Sunrise liquidated all its assets for their “book for tax” value, satisfied all its liabilities, and distributed the constructive proceeds under the order and priority outlined above under the heading “Distributions.” Allocations of the Sunrise taxable income and taxable loss shall be made in a manner consistent with their corresponding allocations of book income and loss, except to the extent a different allocation is required by the tax laws. Hallador and the Sunrise Founders shall negotiate reasonably and in good faith as to the values to be assigned to the specific asset classes of Sunrise for book for tax purposes and the specific application of Section 704(c) to any book tax disparity created by such valuations.
Voting Rights:	All voting rights and management will be vested exclusively in the Board, except where otherwise required by law. Only the Common Members will be entitled to vote on all matters presented to the Members for vote. Accordingly, voting of the Members will be made on the basis of Participating Percentages.
Management:	Except as described below, management of Sunrise shall be pursuant to the majority vote of a board of managers (the “Board”). The number of managers appointed to the Board shall be 5, with 3 managers to be appointed by Hallador and 2 managers to be appointed by the Sunrise Founders. The affirmative vote of at least 4 managers (the “Supermajority”) shall be required to approve the following actions by Sunrise: issuances of additional equity, additional capital contributions, a merger of Sunrise or a sale of all or substantially all of the assets of Sunrise.
Transfers:	Transfers to an affiliate of a member, a family member of a member or to a trust controlled by a member shall be permitted transfers. All other transfers shall be subject to a right of first refusal by Sunrise and the other Sunrise members. The Sunrise Founders shall have the right to tag along with any sale of Hallador’s membership interest in Sunrise equal to 50% or more of the outstanding membership interests in Sunrise.
Non-compete:	Each Sunrise member will agree not to compete against Sunrise’s business while an employee of Sunrise and will agree not to engage in any new coal mining ventures within an area of five miles around each Sunrise project if a member terminates his or her employment with Sunrise.
Audits and Financial Information:	Sunrise will provide year-end audits and quarterly audit reviews conducted by an accounting firm of Hallador’s choice.

EX-99.13 OTH CONTRCT

This instrument and the rights and obligations evidenced hereby are subordinate in the manner and to the extent set forth in that certain Debt Subordination Agreement (the “Subordination Agreement”) dated as of June 1, 2006, between Sunrise Coal, LLC and Old National Bank to the Senior Debt (as defined therein), as the same may be amended from time to time, as more particularly described in the Subordination Agreement, and each holder of this instrument, by its acceptance hereof, shall be bound by the provisions of the Subordination Agreement.

PROMISSORY NOTE

$5,000,000.00             &# 160;           Denver, Colorado

            June 1, 2006

FOR VALUE RECEIVED, SUNRISE COAL, LLC, an Indiana limited liability company (the “Borrower”), hereby unconditionally promises to pay ON DEMAND to the order of HALLADOR PETROLEUM COMPANY, a Colorado corporation (“Lender”), at 1660 Lincoln Street, Suite 2700, Denver, Colorado 80264, or at such other address as the holder of this Promissory Note (this “Note”) may specify in writing, in lawful money of the United States of America and in immediately available funds, the principal amount of up to FIVE MILLION DOLLARS AND NO/00 ($5,000,000.00) (the “Maximum Principal Amount”), or, if less, the then outstanding aggregate principal amount of all advances as set forth on Schedule A attached hereto and updated from time to time by Borrower and Lender, and to pay interest on the unpaid principal amount hereof from time to time at a rate of eight percent (8%) per annum (the “Base Rate”), no later than five days after the date on which Lender demands payment of this Note, or the date which is five years after the date of this Note (as first set forth above) if no such demand is made before such date (the “Maturity Date”) if not sooner paid.

WHEREAS, Borrower must have funds immediately available in order to continue its development of the Carlisle coal mine (collectively, the “Project”) located near Terre Haute, Indiana.

WHEREAS, Borrower and Lender have entered into a letter of intent with respect to a proposed investment by Lender in Borrower (the “Letter of Intent”) and Lender therefore desires that Borrower continue the development of the Project.

Section 1. Advances. Borrower may request advances under this Note from time to time, in form and substance acceptable to Lender in Lender’s sole and absolute discretion; provided, however, the total principal amount outstanding at any time under this Note shall not exceed the Maximum Principal Amount. Notwithstanding any provision to the contrary herein, each advance requested by Borrower under this Note may be approved or rejected by Lender in Lender’s sole and absolute discretion. If at any time the aggregate principal amount outstanding under this Note exceeds the Maximum Principal Amount, Borrower agrees to immediately repay to Lender such excess amount, plus all accrued but unpaid interest thereon. Borrower may request advances under this Note no more often than twice each calendar month. Lender shall fund each approved advance under this Note within five Business Days following receipt of such request and all supporting instruments and documents which Lender may require. Subject to the terms and conditions in this Note, Borrower may borrow and repay, but not reborrow under this Note.

Section 2. Payment of Principal and Interest. Interest shall accrue at the Base Rate on the outstanding principal balance of this Note from the date such principal amount is disbursed to Borrower until the outstanding principal balance of this Note is paid in full. Borrower shall pay such interest and the unpaid principal balance of this Note on the Maturity Date. Notwithstanding anything to the contrary herein, Lender shall not demand payment of this Note any earlier than the date that is at least twelve months after the date hereof; provided that notwithstanding the foregoing Lender may accelerate this Note at any time in accordance with the provisions of Section 10 hereof.

(a)Payment on Next Succeeding Business Day. If the payment date falls on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest. For purposes of this Note, “Business Day” means a day of the year on which banks are not required or authorized to close in Denver, Colorado or New York, New York.

(b)Maturity Date. On the Maturity Date, Borrower shall pay and perform in full all Obligations then outstanding. Borrower shall make payment under this Note not later than 11:00 A.M. (New York City time) on the Maturity Date in U.S. dollars to Lender by wire transfer of same day funds to an account specified by Lender. All sums paid by Borrower in connection with this Note shall be applied first to accrued but unpaid interest, and next to principal remaining to be paid under this Note, and then to any other Obligations of Borrower hereunder; provided, however, that Lender may at its option refuse to accept any prepayment not otherwise permitted under this Note.

(c)Obligations. For purposes of this Note, the “Obligations” are Borrower’s obligation to pay principal, interest, charges, guarantees, indemnities and other amounts payable under this Note, and in the event of any proceeding for the collection or enforcement of the Obligations, after an Event of Default shall have occurred and be continuing, the expenses of any exercise by Lender of its rights under this Note, together with attorney’s fees and court costs.

Section 3. Prepayment.

(a)Optional Prepayments. Borrower may, upon at least three days’ notice to Lender, stating the proposed date and aggregate principal amount of the prepayment, prepay the outstanding principal amount of this Note in whole or in part, together with accrued interest to the date of such prepayment on the principal amount so prepaid; provided, however, that each partial prepayment shall be in an outstanding principal amount not less than $100,000 or an integral multiple of $50,000 in excess thereof (or, if the outstanding principal amount of this Note is less, such outstanding principal amount).

(b)Mandatory Prepayments. Prepayments of this Note shall be mandatory immediately upon any sale or other disposition of all or substantially all of the direct or indirect assets of Borrower in one or a series of transactions, whether by sale, lease, transfer, loss, damage, destruction, condemnation or otherwise, Borrower shall prepay the Obligations under this Note in an amount equal to such proceeds, together with all accrued and unpaid interest on the principal amount being prepaid through the date of prepayment.

Section 4. Failure to Comply. If Borrower fails to comply with any of its obligations set forth in Article 2 of the Letter of Intent, which Letter of Intent Borrower acknowledges is a material consideration for Lender’s participation in this Note, or any documents or agreements entered into in connection therewith, Borrower shall immediately prepay all of the principal amount then outstanding under this Note, together with all accrued and unpaid interest on such principal amount and any other Obligations of Borrower due under this Note.

Section 5. Default Interest. If all or any portion of the principal amount of this Note or any interest thereon is not paid on or prior to the date such amounts are due, such overdue amounts shall thereafter bear interest at the Base Rate plus five percent (5%) per annum. If this Note is not paid when due, Borrower further promises to pay all costs of collection, foreclosure fees, and reasonable attorneys' fees incurred by the holder, whether or not suit is filed hereon, together with the fees, costs and expenses as provided in this Note.

Section 6. Limitation of Interest Rate. The interest rate on this Note is expressly limited so that in no contingency whatsoever, whether by reason of acceleration of the maturity of this Note or otherwise, shall the interest contracted for or charged or received by any Lender exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under applicable law, and the amount of interest for any subsequent period, to the extent less than that permitted by applicable law, shall to that extent be increased by the amount of such reduction.

Section 7. Taxes. Any and all payments by Borrower under this Note shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all interest, penalties and other liabilities with respect thereto, excluding, in the case of Lender, taxes imposed on its net income, and franchise taxes imposed on it, by the United States (other than United States withholding taxes) or the jurisdiction under the laws of which Lender is organized or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges, and withholdings and interest, penalties and other liabilities being hereinafter referred to as “Taxes”). If Borrower shall be required by law to deduct or withhold any Taxes from or in respect of any sum payable under this Note, then (i) the sum payable shall be increased as may be necessary so that after making all required deductions and withholdings of Taxes (including deductions and withholdings of Taxes applicable to additional sums payable under this Section 6), Lender receives an amount equal to the sum it would have received had no such deductions or withholdings of Taxes been made, (ii) Borrower shall make such deductions and withholdings, and (iii) Borrower shall pay the full amount deducted or withheld to the relevant taxation authority or other authority in accordance with applicable law. Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 6 shall survive the payment in full of any and all amounts due under this Note.

Section 8. Representations, Warranties and Covenants of Borrower. Borrower represents and warrants that the following statements are true, correct and complete:

(a)Borrower (i) is a limited liability company duly organized and validly existing under the laws of the State of Indiana, (ii) is duly qualified and in good standing in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed, and (iii) has all requisite power and authority to own or lease and operate its properties and to conduct its business as presently conducted and to execute and deliver, and to perform its obligations under, this Note.

(b)This Note has been duly executed and delivered by Borrower and is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms.

Section 9. Covenants. So long as any Obligations under this Note shall remain outstanding, Borrower shall:

(a)use the proceeds of this Note solely for working capital and for third-party costs and expenses related to the development and construction of the Project, including the purchase of materials, equipment and services physically incorporated into the Project, and for costs and expenses related to the closing of the Howesville coal mine as approved in advance by Lender in its sole and absolute discretion;

(b)comply with all applicable laws, rules, regulations and orders, including all applicable laws regarding the protection and safety of the environment and Borrower’s employees, applicable to Borrower’s operations and properties noncompliance with which could have a material adverse effect on Borrower, its financial condition or its operations; and shall obtain and do all things necessary to renew, extend and continue in effect all permits, licenses and approvals necessary to operate its business in compliance with all applicable laws;

(c)at any reasonable time and from time to time, upon reasonable prior notice, permit Lender or any agents or representatives thereof to examine its records and books, and visit its properties, including, but not limited to, the Project sites, and to discuss its affairs, finances and accounts with any of Lender’s managers, officers or directors and with its independent certified public accountants;

(d)keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and businesses of Borrower in accordance with generally accepted accounting principles;

(e)pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or property as well as all other material liabilities, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside;

(f)give Lender immediate notice of the receipt by Borrower of any notice of default under any document, instrument or agreement evidencing Borrower’s indebtedness for borrowed money to which Borrower is a party or by which it or its properties are bound or affected, including, without limitation, the Credit Agreement dated as of April 19, 2006 by and between Borrower and Old National Bank (together with all documents and instruments executed in connection therewith, the “Senior Credit Documents”), together with a copy of such notice;

(g)not engage in any business other than the ownership and operation of coal reserves and coal mines and related businesses;

(h)not, except as contemplated under the Letter of Intent, merge into or consolidate with any other entity, acquire any other entity, allow any other entity to merge into it, materially change its form of organization or its business, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or sell, transfer, assign, discount, lease or otherwise dispose of any of its business assets except for in the ordinary course of business;

(i)not, except as contemplated in the Senior Credit Documents, create, incur, assume or suffer to exist any indebtedness, nor create or suffer to exist any liens, charges or other encumbrances of any kind on its assets; and

(j)not modify, amend, supplement, terminate, replace or waive any rights under any material agreement relating to the Project without Lender’s prior written consent, which consent shall not be unreasonably withheld.

Section 10. Events of Default. Upon the occurrence and continuance of any one or more of the following (each an “Event of Default”), all amounts then remaining unpaid on this Note may become, or may be declared to be, immediately due and payable as provided herein:

(a)Borrower fails to pay when due any principal, interest or other Obligations when the same becomes due and payable hereunder, and such failure continues for a period of three (3) days following the date upon which any such payment was due.

(b)Borrower breaches any covenant or any other term or condition of this Note in any material respect and, in each such case, such breach, if subject to cure, continues for a period of five (5) days after the occurrence thereof.

(c)Any representation or warranty made by Borrower herein shall be false or misleading in any material respect on the date that such representation or warranty was made or deemed made.

(d)Borrower shall generally not pay its debts as such debt becomes due, or shall admit in writing its inability to pay debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against Borrower seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, Borrower) shall occur, or the action to authorize any of the actions set forth above in this Section 9 (d).

(e)Any money judgment, writ or similar final process shall be entered or filed against Borrower or any of its real or personal property or other assets for more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of thirty (30) days.

(f)Borrower’s failure to perform or comply in all material respects with its obligations under Article 2 of the Letter of Intent or any related agreement with Lender.

(g)The occurrence of a change in the controlling ownership of Borrower.

(h)The occurrence of a default or event of default (which has not been cured during any applicable cure or grace period) under any document, instrument or agreement evidencing Borrower’s indebtedness for borrowed money, including, without limitation, the Senior Credit Documents.

Section 11. Remedies. At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Note and under applicable law, all of which rights and remedies may be exercised without notice to or consent by Borrower, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder or under applicable law are cumulative, not exclusive and enforceable, in Lender’s discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by Borrower of this Note. To the maximum extent permitted by law, Lender may, at any time or times, proceed directly against Borrower to collect the Obligations owing by Borrower to Lender.

Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, accelerate the payment of all Obligations owing by Borrower to Lender and demand immediate payment thereof to Lender (provided, that, upon the occurrence of any Event of Default described in Section 9 (d), all Obligations owing by Borrower to Lender shall automatically become immediately due and payable).

Section 12. Miscellaneous.

(a)Lender is hereby authorized to record the date and amount of each payment or prepayment of the principal amount of this Note or any interest thereon on the schedules annexed hereto and constituting a part hereof, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded, provided that the failure to make any such recordation (or any error therein) shall not limit or otherwise affect the obligations of Borrower under this Note.

(b)Nothing in this Note shall be construed to compel or require Borrower or Lender to reach a binding agreement on the transactions contemplated by the Letter of Intent or in any other respect. This Note does not create and is not intended to create a binding and enforceable agreement between Borrower and Lender with respect to such transactions or any potential business consolidation or other transaction, and may not be relied upon by Borrower or Lender as the basis for a contract by estoppel or otherwise. A binding commitment with respect to the transactions contemplated by the Letter of Intent or any other transactions contemplated between Borrower and Lender can only result from the execution and delivery of definitive documents related to such transactions.

(c)All notices and other communications required or permitted to be given or made under this Note shall be in writing and shall be given or made by mail (certified or registered, return receipt requested), by overnight courier, via facsimile or by personal delivery at the address specified below or at such other address as shall be designated in a notice in writing:

If to Lender:

Hallador Petroleum Company

                                1660 Lincoln Street, Suite 2700

                                Denver, CO 80264

                                Attention: Victor Stabio

Facsimile: 303.832.3013

If to Borrower:

Sunrise Coal, LLC

6641 South Road 46

                               Terre Haute, Indiana 47802

                                Attention:Brent Bilsland

                                Facsimile:812.894.3665

(d)Any waiver of any rights under this Note is neither valid nor effective unless made in writing and signed by the holder of this Note. No delay or omission on the part of the holder of this Note in exercising any right shall operate as a waiver thereof or of any other right. A waiver by the holder of this Note upon any one occasion shall not be construed as a bar or waiver of any right or remedy on any future occasion. Should any one or more of the provisions of this Note be determined illegal or unenforceable, all other provisions shall nevertheless remain effective. This Note cannot be changed, modified, amended, or terminated except in writing and signed by Lender and Borrower.

(e)This Note is made for the benefit of, and shall be enforceable by, Lender and its successors and assigns.

(f)All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind.

(g)This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Colorado, without reference to the principles of conflicts of laws thereof.

(h)THE UNDERSIGNED HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY COLORADO STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN DENVER, COLORADO, AND ANY APPELLATE COURT THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COLORADO STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. THE UNDERSIGNED HEREBY AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. THE UNDERSIGNED, TO THE EXTENT IT MAY LEGALLY DO SO, HEREBY AGREES THAT ANY SUCH CLAIM, DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL WITHOUT A JURY AND THAT THE HOLDER OF THIS NOTE MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 11 (h) WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE UNDERSIGNED TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.

{Signature appears on following page}

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first above written.

BORROWER:

SUNRISE COAL, LLC

an Indiana limited liability company

By:/S/BRENT K. BILSLAND

Brent K. Bilsland

Managing Member and

Attorney-in-Fact

SCHEDULE A

ADVANCES AND REPAYMENTS OF AMOUNTS OUTSTANDING UNDER THE NOTE

Date of Advance   Amount of Advance   Date of Repayment   Amount of Repayment   Remaining Balance of Under Line of Credit   Notation Made By