THE STABILITY OF COAL. The William Poundstone Lecture Series West Virginia University. Richard M. Whiting Peabody Energy.

THE STABILITY OF COAL The William Poundstone Lecture Series West Virginia University Richard M. Whiting Peabody Energy November 14, 2002

THE STABILITY OF COAL The U.S. Energy Sector The Coal Industry & Peabody Personal Opportunities in Coal 2

THE U.S. ENERGY SECTOR Share of U.S. Energy Consumption for Electricity 45 40 Percent 35 30 25 1975 1980 1985 1990 1999 2000 3

THE U.S. ENERGY SECTOR Electricity and Capacity Enjoy a Century of Growth Installed Generating Capacity Kilowatts in Millions 800 700 600 500 400 300 200 100 4000 3500 3000 2500 2000 1500 1000 500 Kilowatt Hours in Billions Generation 0 1902 1907 1912 1917 1922 1927 1932 1937 1940 1945 1950 1955 1960 1964 1970 1974 1980 1984 1990 1995 1999 0 Installed Generating Capacity Generation 4 Source: 1940-1999 Energy Information Administration and Edison Electric Institute; 1902-1937 U.S. Census of Central Electric Light & Power stations.

THE U.S. ENERGY SECTOR Coal is America s Most Abundant Energy Source U.S. Fuel Resources Electricity Fuel Sources Gas 10% Oil 5% 55 50 45 40 51% Coal 85% 35 30 25 20 15 20% 17% 10 5 0 6% 6% Coal Nuclear Gas Hydro Other 5 Ultimately recoverable demonstrated reserves on Btu basis. Source: USGS, National Assessment of United States Oil and Gas Resources; Energy Information Administration Monthly Energy Review, March 2002 (2001 year), U.S. Coal Reserves.

THE U.S. ENERGY SECTOR Inexpensive Electricity: Essential to Our Prosperity The less dependent we are on foreign sources of crude oil, the more secure we are at home. An integral piece of homeland security is energy independence. President George W. Bush October 11, 2001 6

THE U.S. ENERGY SECTOR Energy Policies Affect Real People Consider These Key Statistics America s dependence on foreign oil is growing Imports represent 56% in 2001, up from 39% in 1988 Since the 1970s, U.S. energy use has increased at twice the rate (30%) as energy production (14%) To satisfy projected demand, we need to build one new electric plant per week for the next two decades In 2000, natural gas prices quadrupled Energy, in late 2000, soared from 4% to 14% of family budgets 200,000 manufacturing jobs lost from July to December 2000 80% of small/medium-sized manufacturers reported lower profits due to higher energy costs in 2000 7 Source: National Association of Manufacturers, EIA.

THE U.S. ENERGY SECTOR Coal-Based Electricity Fuels Sustained Prosperity While the Relative Importance of Oil and Gas Dwindles 225.0 Real GDP Index Referenced to 1974 200.0 175.0 150.0 125.0 100.0 Electricity Use Oil and Gas Use Coal Use 75.0 50.0 1974 1979 1984 1989 1994 1999 8 Source: Energy Information Administration Annual Energy Review 1999; U.S. Department of Commerce, Bureau of Economic Analysis.

THE U.S. ENERGY SECTOR Coal s Cost Advantage Continues $10 Natural Gas Higher Priced and More Volatile $9 $8 Delivered $ / MM Btu $7 $6 $5 $4 $3 Oil Natural Gas $2 Coal $1 $0 Dec 98 Mar 99 Jun 99 Sep 99 Dec 99 Mar 00 Jun 00 Sep 00 Dec 00 Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun 02 9 Delivered cost of fossil fuel at steam electric utility plants. Source: Energy Information Administration, Electric Power Monthly and August 2002 Short-Term Energy Outlook.

THE U.S. ENERGY SECTOR U.S. Low-Cost Electricity Comes from Coal 12 Average 2001 Retail Price ( /MM Btu) 11 10 9 8 7 6 5 4 RI VT CA ID OR ME CT WA NH NJ & NY LA MA FL MS TX IL SC NV AZ DE SD VA 0 10 20 30 40 50 60 70 80 90 100 MD AR PA MI NC GA MT AL KS OK MN WI TN NE Percent of Generation from Coal CO MO NM OH IA UT WY KY ND IN WV 10 Source: Energy Information Administration. <7.0 7.0-9.0 > 9.0 Hydro

THE U.S. ENERGY SECTOR Existing Coal Plants Drive Near-Term Growth U.S. Coal-Based Generating Plants % Capacity Utilization 100 80 60 40 20 59% 70% 85% Coal plants operated at 70% of capacity in 2000 Optimal utilization is 85% of capacity Growth potential: 200 million tons per year 0 1990 2000 Optimal 11 Source: 1990 and 2000, Resource Data International CoalDat 5.5 Optimum utilization: industry and Peabody estimates.

THE U.S. ENERGY SECTOR New Coal Plants Provide Long-Term Growth 100+ coal-fueled plants announced Planned units span 35 states While many plants will not be built, total represents 60,000+ MW Generation Capacity (MW) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Planned Coal-Fueled Plants 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 Annual Tons Required (in thousands) 02 03 04 05 06 07 08 09 10 12 Source: Energy Argus, FT Energy, Platt's, U.S. Coal Review.

THE U.S. ENERGY SECTOR Coal for New Generation Comes From All Regions 13

THE U.S. ENERGY SECTOR New Plants Represent Clean, Low-Cost Generation 2000 SERC Dispatch Costs $/MWh $80 $70 $60 $50 $40 $30 $20 $10 Minimum Load 57,000 MW $13.63 Summer Peak 156,088 MW Winter Peak 139,146 MW 2000 SERC Supply, Demand and Dispatch Analysis THOROUGHBRED Projection Average Load 97,400 MW $40.29 140 120 100 80 60 40 20 Cumulative Capacity in MWs (000s) 14 $0 HYDRO NUCLEAR COAL GAS OIL FUEL FOR GENERATION Source: Peabody analysis of RDI modeled plant data. 0

THE U.S. ENERGY SECTOR Gas Industry Struggles to Maintain Supplies Meeting Gas Targets Related to Generation Will Require $1.5 TRILLION in private sector financing More than 255,000 miles of distribution pipelines (27% more than exist today) More than 38,000 miles of new transmission lines (14% increase) Double the number of wells drilled each year 60% greater number of drill rigs 400,000+ new workers will be needed 15 Source: The Honorable T. J. Glouthiere, Deputy Secretary, Department of Energy, July 2000.

1,400 1,200 Rig Count 16 THE U.S. ENERGY SECTOR Natural Gas Industry Struggles to Meet Demand 1,700 1,600 1,500 1,400 1,000 1,300 800 Bcf 1,200 1,100 Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 1,000 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Monthly Gas Production Gas Rig Count 600 400 200 -

THE U.S. ENERGY SECTOR How Do We Fuel Tomorrow s Electricity Generation? Status of Oil in America U.S. has just 21 billion barrels of proven reserves down 44% since 1970 Older fields producing less Domestic oil production at its lowest level since 1954 Oil inventories lower now than they were in 1976 when daily consumption was 30% less U.S. oil consumption at its highest level in history Imports of foreign oil at highest level ever OPEC controls more than 60% of world s oil 17 Source: Marshall Miller & Associates, 2001.

THE U.S. ENERGY SECTOR How Do We Fuel Tomorrow s Electricity Generation? Nuclear? Hydro? Renewables? Nuclear a sizeable source of baseload generation Upfront are the concerns of making plants safe from terrorist attacks. More difficult is the challenges of finding an acceptable way to store spent fuel and radioactive waste. Alan Greenspan, November 2001 Hydro: Reliability lacking and no new dams 18 Renewables: Commercial viability remains outside of mainstream

THE U.S. ENERGY SECTOR Changes in Coal-Fueled Electricity and Emissions 250% Percent Change Since 1970 200% 150% 100% 50% 0% -50% Coal Use Electricity from Coal Particulates (PM10) NOx SO 2-100% 1970 1975 1980 1985 1990 1995 2000 +201% +176% +18% -27% -84% 19 Sources: EPA National Air Pollutant Emission Trends 1990-1998, EIA Annual Energy Review 1999, and EIA Annual Energy Outlook 2001.

THE U.S. ENERGY SECTOR Improving Emissions from Coal-Fueled Plants 4.5 4.37 4 Pounds Per Million Btu 3.5 3 2.5 2 1.5 1 1.08 1.04 SO2 NOx 0.5 0 U.S. Average 1970 U.S. Average 2000 0.44 0.40 Clear Skies Proposal 2010 2008 0.19 0.25 0.14 0.167 0.08 Clear Skies Proposal 2018 Thoroughbred Projection 20 Source: EPA s Environmental Scorecard 2000; February 2002 Clear Skies proposal; and U.S. Department of Energy 2002 Annual Energy Outlook.

THE COAL INDUSTRY Peabody s Customer Base Export Export Electric Generating Plants Served Industrial Plants Served Peabody Headquarters 21

THE COAL INDUSTRY It All Starts at the Coal Mine Keys to Successful Mining are Basic Execution is Difficult Operate safely Identify and acquire the right reserves Recruit and retain quality employees Practice communications and training Invest in efficient technologies and equipment Share and implement best practices and processes Intensely manage costs 22 Leave the land in as good or better condition than prior to mining

THE COAL INDUSTRY Peabody s Record of Safety and Productivity 120 18 PRODUCTIVITY Tons per Miner Shift 100 80 60 40 20 16 14 12 10 8 6 4 2 SAFETY Accident Rate 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 0 Productivity Accident Rate 23

THE COAL INDUSTRY Peabody New Mining Projects Start Date New Operation Million Tons 1998 Francisco (IN) Farmersburg (IN) 3 4 225 Peabody Sales Volume 1999 2000 Riola (IL) Somerville (IN) Cottage Grove (IL) 1 3 2 200 175 150 125 176 167 194 200 179 180 2001 Vermilion Grove (IL) Colony Bay (WV) 2 1 100 75 2002 Rawhide (WY) Highland No. 9 (KY) Highland No. 11 (KY) Willow Lake (IL) River s Edge (WV) Big Run (KY) 3 4 1 4 1 1 50 25 0 CY 2000 CY 2001 CY 2002 Produced Traded 24 Source: Peabody data.

THE COAL INDUSTRY Peabody Manages Costs Through Best Practices 95-yard draglines for Somerville, Farmersburg and North Antelope/ Rochelle save $0.15 per yard Achieve cast blast efficiency of 30% Utilize dozer assist and highwall miners in Western mines Transfer TRACKERS quality monitoring system to Eastern mines Achieve world-class productivity in underground super-section units Utilize state-of-the-art preparation, transportation and blending systems in Appalachia Combine purchases of affiliates where leverage can be improved Pre-Bench Cast Overburden Coal Dozer Dragline Cast Dozer Dragline Spoil Cast Profile 25

THE COAL INDUSTRY Technology Continues to Improve 400 ton 340 ton 360 ton Maximum Capacity (tons) 240 ton 260 ton 170 ton 190 ton 1985 1990 1995 2000 26

THE COAL INDUSTRY Technology Initiatives Digital drives on shovels and draglines Larger trucks Global positioning systems High voltage equipment New generation flexible conveyors Mobile roof supports Computerized control and monitoring systems 27

THE COAL INDUSTRY People Make the Difference Safety priority Team-based approach Open, honest, direct communication Prudent compensation Training and best practices 28

THE COAL INDUSTRY Widely Recognized for Environmental Initiatives 29 Returning the land to as good or better condition than before mining

THE COAL INDUSTRY Companies Must Constantly Reshape Themselves Peabody s Track Record 1990 2001 Improvement Tons Sold (millions) 93.0 194.4 109% U.S. Market Share (%) 9.1 17.3 90% Low Sulfur Sales (millions) 52.7 155.3 195% Safety Accident Rate 16.1 3.6 78% Employee Count 10,200 6,500 36% Productivity (tons per shift) 33.5 94.3 181% Avg. Operating Cost Per Ton $19.25 $11.42 41% 30

THE COAL INDUSTRY It All Starts at the Coal Mine Keys to Successful Mining are Basic Execution is Difficult Operate safely Identify and acquire the right reserves Recruit and retain quality employees Practice communications and training Invest in efficient technologies and equipment Share and implement best practices and processes Intensely manage costs 1 Leave the land in as good or better condition than prior to mining

THE COAL INDUSTRY Technology Continues to Improve 400 ton 340 ton 360 ton Maximum Capacity (tons) 240 ton 260 ton 170 ton 190 ton 1985 1990 1995 2000 5

THE COAL INDUSTRY People Make the Difference Safety priority Team-based approach Open, honest, direct communication Prudent compensation Training and best practices 7

THE COAL INDUSTRY Widely Recognized for Environmental Initiatives 8 Returning the land to as good or better condition than before mining

Personal Opportunities in Coal

PERSONAL OPPORTUNITIES IN COAL Career Opportunities are Unlimited Engineering Environmental Operations Commercial Management Specialists 11

PERSONAL OPPORTUNITIES IN COAL Recipe for Opportunity and Success Basics Focus Flexibility Balance 12

PERSONAL OPPORTUNITIES IN COAL Defining and Driving Success Good Communications Solution Orientation Constant Learning 13

THE STABILITY OF COAL The William Poundstone Lecture Series West Virginia University Richard M. Whiting Peabody Energy November 14, 2002