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Cure for Gas Pain: Existing and New Coal Generation February 2, 2005

Cure for Gas Pain: Existing and New Coal Generation February 2, 2005. Strategy One: Manage Safe, Low-Cost Operations. Southern Powder River Basin Position #1 Sales Volume 115.8 Reserves 3,110. Colorado Position #1 Sales Volume 7.6 Reserves 270. St. Louis.

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Cure for Gas Pain: Existing and New Coal Generation February 2, 2005

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  1. Cure for Gas Pain: Existing and New Coal Generation February 2, 2005

  2. Strategy One: Manage Safe, Low-Cost Operations Southern Powder River Basin Position #1 Sales Volume 115.8 Reserves 3,110 Colorado Position #1 Sales Volume 7.6 Reserves 270 St. Louis DTA Terminal Southwest Position #1 Sales Volume 18.7 Reserves 1,107 Midwest Position #1 Sales Volume 32.5 Reserves 4,319 Queensland Sales Volume 6.1 Reserves 226 Appalachia Position #6 Sales Volume 15.9 Reserves 621 Port of Santa Cruz Dalrymple Bay Terminal Venezuela (25.5% interest) Sales Volume 6.5 Reserves 175 Venezuela Port of Brisbane Queensland Port of Newcastle Market positions are as of December 31, 2003. 2003 reserves & 2004 sales volume in millions of short tons. Venezuela sales volume and reserves for Paso Diablo Mine, of which Peabody owns a 25.5% interest. Source: Peabody analysis & industry reports.

  3. Low-Cost Electricity From CoalOver 50% of the Electricity is from Coal Cost Per kWh & Percent of Coal Generation 9.6¢ 3% 5.6¢ 10% 5.8¢ 94% 6.1¢ 64% 12.0¢ 17% 6.3¢ 65% 6.1¢ 9% 6.9¢ 70% 5.0¢ 1% 6.6¢ 44% 7.1¢ 61% 4.9¢ 96% 8.1¢ 55% 6.5¢ 85% 5.7¢ 69% 6.8¢ 92% 8.6¢ 51% 5.6¢ 94% 7.0¢ 47% 5.1¢ 98% 5.8¢ 94% 6.5¢ 50% 7.0¢ 78% 11.3¢ 1% 6.5¢ 75% 6.2¢ 85% 7.0¢ 58% 4.6¢ 92% 6.1¢ 60% 6.6¢ 61% 6.2¢ 40% 5.8¢ 50% NH 11.4¢ 22% VT 11.1¢ 0% MA 10.8¢ 23% RI 10.8¢ 0% CT 10.5¢ 13% NJ 10.3¢ 16% DE 7.3¢ 54% MD 7.2¢ 56% 7.6¢ 42% 7.3¢ 88% 6.7¢ 63% 6.2¢ 56% 7.0¢ 44% ¢ = average price per kilowatt hour YTD 10/04 % = percent of total generation from coal for 2003 7.8¢ 39% 7.2¢ 26% 8.1¢ 31% 10.8¢ 8% < 6.0¢ 6.0¢ - 7.0¢ < 7.0¢ - 8.5¢ >8.5¢ Hydro 15.5¢ 15% Source: Energy Information Administration, January 2004.

  4. Basic Electricity and Energy Infrastructure Needed • Load growth of more than 60% in last 20 years • Little new baseload resources added • Little new transmission added • Real electricity prices starting to rise • Nuclear generation capacity reaching output limit • 1990 66% capacity factor • 2004 91% capacity factor • Coal generation capacity becoming fully utilized • 1990 59% capacity factor • 2004 74% capacity factor • Load expected to grow another 20% over next 10 years • Clear Skies-like rules proposed by the EPA in December likely to close 5 - 10% of existing coal capacity – small, older, higher cost plants starting in 2010 • Existing coal fleet has an average age of 35 years • 6 - 8 year lead time for new coal generation

  5. Coal Use Grows While Emissions Decline Coal used for electricity has tripled since 1970 while emissions have been significantly improved +177% Electricity from Coal NOx 0% SO2 -35% PM10 -87% Source: EPA National Air Pollutant Emission Trends, EIA Annual Energy Review 2002 (October 2003).

  6. LOWEST COST BASELOAD OPTIONNew Mine Mouth Coal New Gas $56.69 Midwest Footprint Options $49.45 Mine Mouth $45.89 $42.52 $39.36 Required 2009 Price ($ / MWh, including return) $26.37 2009 Delivered Fuel Prices Cost of Capital Var. O&M Fixed O&M Coal Gas Source: Energy Information Administration Annual Energy Outlook 2003 & Peabody analysis; assumes 90% capacity factor, 10.8% weighted cost of capital, 30-year investment life, delivered fuel cost as shown above, latest environmental technologies & EIA’s estimates of capital and non-fuel costs

  7. Prairie State:Cleanest Plant in Illinois Source : EPA's - eGRID and Prairie State's draft air permit.

  8. Prairie State Uses the Latest Technologies Will Remove 98% H2SO4, 80% Hg & 99.9% Particulate Dry Electrostatic Precipitators (ESP) Selective Catalytic Reduction (SCR) Pulverized Coal Boiler Wet Electrostatic Precipitators (ESP) SO2 Scrubbers Stack Steam Generator 779 MW Net Units Turbine Low-NOx Burners Cooling Tower

  9. FLAG - Visibility Guidelines: Barrier to New, Clean Coal

  10. The Path to Zero Emissions from Coal-Fueled Generating Plants The Current & Next Generation… of Generation RETROFITEXISTING PLANTS BUILD “ADVANCED PC” PLANTS DEVELOP COALGASIFICATION PURSUE HYDROGEN& SEQUESTRATION Peabody’s PlannedPrairie State Energy Campus The Power SystemsDevelopment Facility The Proposed FutureGen Project TVA’s Paradise Plant

  11. The Path to Zero Emissions from Coal-Fueled Generating Plants Emissions from Coal-Fueled Generating Plants 4.37 Clear Skies/CAIR needed to provide predictable improvements in emissions and affordable electricity 1.08 0.97 0.37 0.39 0.26 0.16 0.182 0.17 0.12 0.07 0.08 0.06 0.03 Near-Zero U.S. Average 1970 U.S. Average 2003 Clean Air Interstate Rule 2010 Clean Air Interstate Rule 2015 Existing IGCC (Permit Level) Prairie State (Permit Level) IGCC Projection FutureGen Goals Source: EPA’s Clean Air Markets database; Energy Information Administration 2004 Annual Energy Outlook; GE Energy; SFA Pacific.

  12. IGCC: Promising Technology Requires Time for Commercialization • Peabody supports development of IGCC with hope the technology reaches commercialization stage • Southern Gasifier • FutureGen • Promising, but still needs time to “ripen on the vine” • Public utility commissions in Wisconsin, elsewhere, choosing Advanced PC over IGCC currently • S&P: IGCC technology likely not financeable • Next generation of IGCC needs support • DOE & State Funding • Ratepayer Support

  13. Need for New Baseload GenerationNatural Gas Frequently Sets Regional Price Percent of time gas and oil on the margin projected in 2004 Source: Cambridge Energy Research Associates, April 7, 2004.

  14. Transmission Would Help Move Coal-Fueled Electricity to Areas Dependent on Gas CERA Interconnect Study (2004) • “The cost of transmission congestion…is mainly caused by the relative prices of coal and natural gas. Transmission constraints limit the amount of the relatively low-marginal-cost coal-fired generation in the Midwest from reaching load centers… where more expensive oil- and gas- fired generation sets the price of power.” • Assumed $4.20/mmbtu gas prices in 2010 • Identified roughly $2.2 billion of investment - roughly equal to total US transmission spending annually

  15. Only 10 High Voltage Paths out of Coal Rich Middle US 10 9 8 7 6 5 2 3 1 4 Legend: Coal Nuclear Transmission Lines: 345 kV 500 kV 765 kV Transmission Tie

  16. Coal Critical For Curing U.S.Natural Gas Pain • The greatest planned increase of natural gas is for electricity generation • Allows increased coal use at existing plants in off-peak • Displacing gas generation in the off-peak with coal • Midwest to East/Northeast and South • Added coal generation could reduce natural gas demand by 0.5 – 1.5 TCF per year over the next 5 years • Reduced gas demand for generation could improve gas costs to US consumers by $10 - $20 billion annually, assuming $0.50 - $1.00/mmbtu price reduction

  17. Cure for Gas Pain: Existing and New Coal Generation February 2, 2005

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