coal industry primer

Brandon Blossman

[email protected]

(713) 333-2994( )

George O’Leary

[email protected]

(713) 333-2973

Jessica Chipman

C l I d t P i

[email protected]

(713) 333-2992

Coal Industry PrimerAugust 18, 2010

**IMPORTANT DISCLOSURES BEGIN ON PAGE 83 OF THIS REPORT**

Coal Overview“Coal is a commodity utterly lacking in glamour.”

-Barbara Freese, from Coal, a Human History (2003)

This is a primer…it explains how the coal industry works. Our predictions/forecasts will be published separately i i i d i l d “C l P d S D i d S k V l i ” d in two pieces, an industry report entitled “Coal Producers: Sector Dynamics and Stock Valuation” and a company report that covers Arch Coal, Alpha Natural Resources, Peabody Energy, CONSOL Energy, and Massey Energy …our first wave of coal company coverage (more to come).

One could argue that recent metallurgical coal markets have given the coal sector some sparkle, but while coal has been getting a lot of attention recently, most of it hasn’t been very glamorous. Domestically, aggressive regulation is increasing costs and constraining production. On the demand side, after a dramatic 2009 drop, regulation is increasing costs and constraining production. On the demand side, after a dramatic 2009 drop, recovery YTD has been modest at best. Globally, the picture is much brighter. Global coal consumption isn’t just growing, it’s growing faster than any other commodity, and it’s growth that has been accelerating. This growth in global demand, coupled with a challenging supply response, will continue to support relatively strong pricing and more closely intertwine international markets. This will ensure coal’s status as a truly global commodity.

Coal now provides 30% of the world’s energy up from a 1999 low of 25% Absolute demand has accelerated Coal now provides 30% of the world’s energy, up from a 1999 low of 25%. Absolute demand has accelerated, growing at 5% annually since 2000 compared to 2%/year from 1981 – fueled by developing economies’ thirst for energy. Globally, 60% of coal is consumed for power generation and the rest by the industrial sector, primarily for use in steel production.

China is by far the largest consumer, using 42% of the world’s coal (up from 29% in 2000). The U.S. ranks a distant second at 17% (down from 24% in 2000). Global reserves reflect 120 years of supply at current demand ( ) y pp ylevels. The U.S. has the most coal reserves - 29% of the world’s total. Second is Russia (19%) and third, China (14%).

In the U.S., production and consumption are dominated by domestic electricity generation. Global macro drivers are becoming increasingly meaningful as developing countries like China and India import more coal, tightening coal markets across the world as countries increase exports to satisfy emerging market demand.

2

ConclusionsGlobal demand growth - Global growth in steel demand and the rapid growth in Chinese and Indian coal-fired generation will support global demand growth for both metallurgical and steam coal in the near to mid-term.

Gl b l l i d l f l b l l ll f b h Global supply constraints - Traditional sources of global supply will continue to face both resource and infrastructure issues. Increasing the production of higher quality coals (particularly metallurgical coal) will continue to be a challenge.

Tightening global market – We expect tight global demand/supply fundamentals to support continued strength in coal prices both globally and in the U S continued strength in coal prices, both globally and in the U.S.

In U.S., flattish demand growth – Near-term, we project domestic demand will be flat as new coal-fired generation retirements offset new plant additions and domestic steel production remains flat. Longer-term, the threat of aggressive environmental regulation (traditional pollutants and CO2) limits new-build coal-fired generation and will accelerate (traditional pollutants and CO2) limits new-build coal-fired generation and will accelerate the retirement of older coal-fired facilities.

US Production continues East to West move – In the Eastern U.S., the Central Appalachian basin is facing cost pressures with declining resource/productivity and more stringent regulation. As Eastern U.S. coal production declines, lower-cost Western U.S. coal regulation. As Eastern U.S. coal production declines, lower cost Western U.S. coal (particularly Powder River Basin) will pick up the slack. Long lead times and high capital costs for new mines create an upward bias to the coal price floor.

That ever-present caveat – The domestic wildcard is US natural gas price, which caps the price of eastern steam coal. Also, low gas prices accelerate the pace at which coal-fired

3

p g p pelectricity generators move to fuels which are lower cost than expensive Eastern steam coals.

Table of Contents

Topic PageNumber

I. What is Coal? Page 5II. Coal: Global Perspective Page 10III Coal: Domestic Perspective Page 24III. Coal: Domestic Perspective Page 24IV. Getting Coal out of the Ground 5V. Coal Transportation Page 48VI. Coal Pricing Page 57VII. What We’re Watching Page 67VIII. Appendix Page 74pp gIX. Definitions/Conversion Factors Page 82

4

What is Coal?

555

Types of Coal

Bituminous – Most widely used. High heat content, can be used both for electric generation (as steam coal) and in iron and steel production (as metallurgical or coking coal) 52% of global coal reserves 75% of global coal

Heat ContentL R k C l H d C l

rve

coal). 52% of global coal reserves. 75% of global coal production in 2007.

Sub-bituminous – Second most widely used. Lower heat content than bituminous, but high enough for electric generation. 30% of global coal reserves. 10% of global coal production.

Low Rank Coal47%

Hard Coal53%

Lignite17%

Sub-Bituminous30%

Bituminous52%

Anthracite1%

Steam Coal Metallurgical Coal

% o

f G

loba

l Re

seBa

se (

2008

)

Lignite – Also referred to as “brown” coal. Lower heat content than bituminous or sub-bituminous coal, but relatively cheaper and so used for electric generation. Used heavily in Europe (~25% coal use). 17% of global coal reserves. 14% of global coal production.

Prim

ary

Use Electric

generationElectric

generationElectric

generationDomestic

fuelSteel

Production

Coal Production by Type (2007)Anthracite – Least used. High heat content, but rare and relative cost makes it too expensive for electric generation. Mostly used as domestic fuel (e.g. space heating). Only ~1% of global coal reserves and coal production.

Metallurgical/Coking coal is high Btu (13 000 14 000

Coal Production by Type (2007)

Bituminous (Met Coal)

Sub-Bituminous

10%

Anthracite1%

Metallurgical/Coking coal is high Btu (13,000-14,000 Btu/lb) bituminous coal used in the industrial sector to produce steel. Steel is an alloy based primarily on iron. Iron occurs only as iron oxides in the earth’s crust and the ores must be converted, or ‘reduced’, using met coal. Met quality coal is scare and often more difficult/costly to extract than steam coal

Bituminous (Thermal

Coal)

Lignite14%

(Met Coal)12%

6

difficult/costly to extract than steam coal.

Source: IISI, EIA/DOE, Tudor, Pickering, Holt & Co.

Coal)62%

Coal History Lesson – Early Use and the Industrial Revolution

Coal has been used for a long time –since 370 BC. At first, a domestic fuel, sometimes used for the creation of metals (used by blacksmiths). But primarily a secondary fuel source to wood.

1769

James Watt develops steam

engine

1882

First coal-fired electric

generating station

1905Coal produced:~900 mm tons

In the 18th century, the Industrial Revolution changed everything. Changes in technology (particularly the steam engine) and mass production required increasing amounts of higher

g g g

1700Coal produced:

< 1 mm tons q g gquality fuel - coal fit the bill and consumption exploded.

The late 19th century saw the birth of

1875

Coal coke replaces charcoal as primary fuel for iron blast

furnaces

to s

yelectricity – and coal became linked with electric generation.

7

Coal History Lesson – Modern EraIn the late 19th century, other forms of fuel began to take share from coal.

Mass production of automobiles began in the early 20th t i th d f il D i th 20th century, spurring the need for oil. During the 1950s, oil replaced coal as the most widely used energy source.

The first nuclear plant was commissioned in the 1950s. During the 70s and 80s, many more were added, from 1965-1990, consumption of nuclear

1950s

Oil surpasses coal as most widely used

energy source

1977

SMCRA, Clean Water Act, Mine Act and

Black Lung Actpassed

1990

Clean Air Act

2005

Energy Policy Act of 2005 , , p

energy grew at ~20%/year.

As countries built out better distribution systems and increased production, natural gas consumption grew as well…going from ~nil in 1900 to ~25% of global energy consumption in 2000.

2009Coal produced:~7,650 mm tons

1965Coal produced:~3,000 mm tons

As a percent of total world energy consumption, coal hit a low (at ~25%) in 1999.

Taking the reins from mature countries, developing nations began to drive growth in coal demand (in earnest since 2001).

1986

China becomes #1 consumer of coal, surpassing U.S. for

first time

,,

Today, coal is the fastest growing fuel source (at ~5%/year) and makes up ~30% of global energy consumption (oil is ~35% and nat gas ~25%). Coal provides fuel for ~40% of global electricity generation and ~70% of steel production.

8

Coal History Lesson – the U.S.

History of Energy Use in the U.S., by Fuel Type (1635-2008) To put coal’s history into perspective in the chart

35

40

45perspective, in the chart to the left we show the U.S.’s historical consumption of energy, by fuel type.

1890-1970s: Natural gas & nuclear take share from coal in power

sector, oil does in transportation

15

20

25

30

Qua

dril

lion

Btu

yp

Extrapolating this to developing nations, we would expect a rapid increase in coal demand

Cars, cars, cars –-oil surpasses coal as primary energy

source

1985+: Coal grows with GDP,

0

5

10

15

5 5 5 0 0 7 7 7 7 7 7

increase in coal demand in these countries near-term and slower, steady growth mirroring GDP growth long-term.

Wood is primary energy source

Industrial Revolution

maintaining its share of U.S. energy consumption at ~25%

1635

1735

1835

1890

1940

1957

1967

1977

1987

1997

2007

Coal Nat Gas Petroleum Nuclear Wood Hydro & Other

9

Coal: Global Perspective

101010

Global Energy Consumption - Regional

The top 5 energy consumers – the U.S., China, Russia, Japan and India – make up ~50% of total world energy consumption.US

20%South

Energy Consumption, by Region (2009)

gy p

Energy consumption growth is slowing down in more mature countries like the U.S. and Japan. The U.S.’s consumption of energy has grown at ~0.3%/year since 2001, compared with 1 4%/year since 1965 Japan’s

20%

Europe/Eurasia (x-

Russia)Russia6%

Middle East6%

America5% Other

16%

with 1.4%/year since 1965. Japan’s consumption has been roughly flat since 2001.

China and India are the world’s fastest growers, with growth accelerating in recent years. Since 2001, China’s consumption of

20%China19%Asia Pac (x-

China/India/Japan)

9%

6%

Consumption of Energy (1965-2009) y , penergy has grown at 10.4%/year and India’s at 5.6%/year.

1 000

1,500

2,000

2,500

oil

equi

vale

nt

0

500

1,000

mm

ton

nes

11Source: BP Statistical Energy Review 2010, Tudor, Pickering, Holt & Co.

US China Russia India Japan

Global Coal Consumption

Globally, coal is consumed primarily for two uses – electricity generation (the power sector

29%

30%

2 8003,2003,600

alen

t

Global Consumption of Coal (1981-2009)

uses electricity generation (the power sector consumes ~60% of coal) and steel-making (the industrial sector consumes ~35% of coal).

The world’s consumption of coal has grown at a rate of 2.1%/year since 1980. More recently

23%

24%

25%

26%

27%

28%

400800

1,2001,6002,0002,4002,800

m t

onne

s oi

l equ

iva

(2001-2008), this growth has accelerated, growing at ~5%/year. In 2009, consumption dropped off with the recession, down ~0.8% from 2008.

As a percent of total world energy

22%

23%

0400

mm

Coal Consumption % of Global Energy Consumption

As a percent of total world energy consumption, coal declined from ~40% of total in 1965 to ~25% in 1999 as natural gas and nuclear made headway in the electric power sector. From 2001-2008, coal consumption increased as a percent of world energy

Global Coal Consumption (2009)

Other4%

Global Coal Consumption (1995)

Other20% p gy

consumption. By 2009, it made up ~30% of the total.

Power Sector

62%

Industrial Sector

34%

Power Sector

60%

Industrial Sector

20%

12Source: BP Statistical Energy Review 2010, EIA/DOE, Tudor, Pickering, Holt & Co.

62%60%20%

#1 Use of Coal: Electric Generation

Coal delivered to electric power plants makes up ~60% of coal consumption.Coal as % of Total Coal Consumption

Top Countries with Coal as % Electric Generation

makes up 60% of coal consumption.

The countries that both consume the most coal and are the most coal-dependent for electric generation are the U S China and India Combined

Electric Generation Rank in WorldSouth Africa 94% 6

Poland 93% 9

China 81% 1the U.S., China, and India. Combined, they consume about two-thirds of total global coal production.

Australia 76% 10

Israel 71% na

Kazakhstan 70% 14

India 68% 3

C h R 62% 18Czech Rep 62% 18

Morocco 57% na

Greece 55% 26

USA 49% 2

Germany 49% 7Germany 49% 7

13Source: WCI, Tudor, Pickering, Holt & Co.

#2 Use of Coal: Steel and Iron Production

Coal delivered to the industrial sector makes up ~35% of coal consumption.120

140

s

Global Steel Production

Coking coal is an input in ~70% of steel production. When using coal, each ton of steel produced requires ~1,400 lbs of coking coal. Each ton of pig iron requires a ton of coking coal.20

40

60

80

100

mm

met

ric

tonn

es

Since 1995, global steel production was steadily rising (3.8%/year) until the market fallout of 2008, but production recovered quickly in 2009.

% Global Steel Production, by Region

0

20

China drives growth. The country has exploded as the largest steel-producing nation in the world over a span of ~10 years, growing at a rate of 13%/year. The U.S.’s steel production, 30%

40%

50%

60%China takes world market share, ramping up production even as

other countries cut back

meanwhile, has been on a steady decline, down 2%/year.

0%

10%

20%

14

China EU Japan U.S. India S. America

Source: IISI, Tudor, Pickering, Holt & Co.

Coal Consumption – By RegionThe top 5 coal consumers – China, the U.S., India, Japan and Russia – make up ~75% of total world coal consumption.

Th ld’ i f l i

India8%

Japan3%

Other8%

Coal Consumption, by Region (2009)

The world’s consumption of coal is accelerating as developing countries like China and India add more coal-fired generation and increase steel production. From 2001-2009, China coal consumption grew at a rate of 10 7%/ d I di t 6 8%/

China47%

US

Europe/Eurasia (x-

Asia Pac 8%*

10.7%/year and India at 6.8%/year.

Growth in consumption of coal has been slowing in recent years in maturing countries. From 2001-2008, the U.S.’s consumption growth was only 0.3%/year vs. +1.9%/year

US15%

Russia)14%

Top 5 Consumers of Coal (1981-2009)

* Asia Pac excludes China, India & Japan

g y y yfrom 1980-2000.

Russia is one of the only countries where coal consumption has been on a long-term decline (down 3.5%/year from 1985-2009, though this decline has been slowing in recent years) This

1,200

1,600

2,000

il eq

uiva

lent

p ( )

decline has been slowing in recent years). This is primarily due to Russia’s increasing use of domestic natural gas for electricity generation.

Japan’s consumption is small, but important, as it is the largest importer of coal in the

0

400

800

mm

ton

nes

oi


g pworld (~25% of global net imports).

US China India Japan Russia

Coal Production Mirrors Consumption

Gl b l C l P d ti & C ti (1981 2010E)

The world’s production of coal has grown at a rate of 2.2%/year since 1981. More recently (2001-2009), this growth accelerated growing at

Historical Forecast

3,500

4,000

uiva

lent

Global Coal Production & Consumption (1981-2010E)

this growth accelerated, growing at 4.3%/year.

2,000

2,500

3,000

mm

ton

nes

oil e

qu

1,500

m

Coal Consumption Coal Productionp

16Source: BP Statistical Energy Review 2010, EIA/DOE, Tudor, Pickering, Holt & Co.

Growth Fueled by Power Generation Build-out

China has been developing it’s coal-fired power fleet at a rapid pace

1,200

1,400

China Coal Fired Power Generation Capacity (GW)

fired power fleet at a rapid pace. With 130 GWs coming online in the next 5 years, there will be 450-500 MM tons of annual incremental steam coal demand by 2015 (another 125 400

600

800

1,000

GW's

y (GWs expected online by 2020). This is an increase from current levels of ~20% and ~6%, respectively.

Smaller in scale but more dramatic India Coal Fired Power Generation Capacity (MW)

‐

200

2007 2015 2020 2025 2030 2035

Smaller in scale, but more dramatic in its growth trajectory, India is poised to nearly double its current coal generation fleet by 2017. The 75 GWs under construction today 100,000

120,000

140,000

160,000

180,000

aWat

ts

represents annual an incremental 250 MM tons of annual steam coal demand by 2017. This is an increase of ~40% from current levels.0

20,000

40,000

60,000

80,000

Meg

a

17Source: India Central Electric Authority, Tudor, Pickering, Holt & Co.

Coal Production – By Region

Coal Production - 2008 Total & Annual Growth Rates

'08 Production

Country (mm short tons) Since 1981 Since 2001

Annual Growth RateRussia

4%

Indonesia4%

South Africa4%

Other5%

Coal Production, by Region (2009)

China 2,782 5.8% 10.6%

U.S. 1,063 0.9% 0.2%

Australia 512 4.6% 2.9%

India 402 4.3% 5.5%

Russia 327 0.6% 3.2%

Indonesia 250 22 9% 14 0%

China46%

Europe/

Australia7%

India6%

4%

The top 5 coal producers – China, the U.S.,

Indonesia 250 22.9% 14.0%

South Africa 229 1.5% 1.6%

Total World 2.2% 5.1%US16%

Eurasia(x-Russia)

14%

Top 5 Producers of Coal (1981-2009)

Australia, India and Russia – make up ~80% of total world coal production.

China’s coal production growth has only slightly lagged its increase in consumption, growing at 10 6%/year (vs consumption +10 7%/year) 800

1,200

1,600

2,000

s oi

l equ

ival

ent

10.6%/year (vs. consumption +10.7%/year)… meaning China has, until recently, been able to internally meet almost all of its demand needs.

The U.S.’s coal production has been virtually flat, mirroring sluggish consumption growth in the

0

400

800

mm

ton

nes


country.US China Australia India Russia

Where Is the Coal?

Global coal reserves stand at roughly 910 billion short tons. Based on 2008 production of ~7.6 billion tons the world has ~120

Global Coal Reserves by Region: Short Tons and % of World Total (2009)

U.S.~260 BB tons

Russia~170 BB tons

(19%)

China~125 BB tons

Europe/Eurasia(x-Russia)

~130 BB tons(14%)

billion tons, the world has ~120 years worth of coal resource remaining.

The top 5 holders of reserves –the U.S., Russia, China, Australia and India account for ~80% of ~260 BB tons

(29%)125 BB tons

(14%)

South America

India~65 BB tons

(7%)

and India – account for ~80% of the world’s total coal reserves (4 of these countries are also ranked in the top 5 consumers).

Based on 2009 production, certain large coal producers have

South Africa~35 BB tons

(4%)

Australia~85 BB tons

(9%)

South America~16 BB tons

(2%)

large coal producers have significantly lower resource lives than others. China, for example (the #1 coal producer), has only ~40 years of coal resource remaining. Indonesia (#6 coal

TOTAL WORLD~910 BB tons

producer) has < 20 years left.

On the other side of the spectrum is the U.S. (#2 coal producer) with > 200 years of coal resource remaining and Russia (#5 coal

19

producer) with ~500 years left.

Source: BP Statistical Energy Review 2010, Tudor, Pickering, Holt & Co.

Coal Quality MattersSome of the largest producers of coal – like China (#1 largest coal producer), India (#3) and Russia

Coal Net Calorific Values & Production Rank (#5) - produce coal that is, on average, of lower quality.

Lower quality coal can be used economically for electricity

Average ProductionCountry btu/lb* Rank in WorldColombia 11,700 10

USA 11,430 2

Coal Net Calorific Values & Production Rank

y ygeneration, but for coal to be acceptable for coking (and thus steelmaking), it must meet certain quality specifications ( i t t t t t f h

USA 11,430 2

Indonesia 11,088 6

Australia 11,052 4

S. Africa 10,152 7

Poland 9,864 9(moisture content, content of ash and other impurities, plasticity).

Roughly half of coal consumed in China is consumed by the

,

Russia 9,810 5

China 9,558 1

Kazakhstan 7,992 8

India 7,938 3industrial sector, so China must supplement local coal with met-quality coal from Australia and Indonesia to meet demand.

*Note this is the average of production…range is wide.

20Source: IISI, Tudor, Pickering, Holt & Co.

Trade Flows – Net Importers/Exporters

Coal exports (~920 mm tons in 2008) only make up ~12% of global coal production. Most coal is consumed locally.Net Exporters of Coal (2008)Net Importers of Coal (2008) y

Steam coal makes up the majority of the coal trade, at ~70% of total coal exports.

The international market is split into two regions – Atlantic and Pacific.

Net Imports % World Net Exports % WorldMMTons Total MMTons Total

Japan 186 24% Australia 252 32%

Korea 100 13% Indonesia 203 26%

Chinese Taipei 66 8% Russia 76 10% g

In the Atlantic market, the European Union (primarily the UK, Germany and Spain) drives demand, while supply is provided by Russia, Columbia, South Africa

d th U S

India 58 7% Columbia 74 9%

Germany 46 6% South Africa 60 8%

UK 43 6% U.S. 43 5%

Italy 25 3% Kazakhstan 27 3%

France 21 3% Canada 20 3%

T k 19 2% Vi t 20 3% and the U.S.

Demand in the Pacific market is driven by Japan, Korea, Chinese Taipei and India. The main suppliers are Australia, Indonesia and Russia.

Turkey 19 2% Vietnam 20 3%

Spain 19 2% Venezuela 6 1%

Others 195 25% Others 12 2%

Total 778 100% Total 793 100%

In 2009, China switched from being a net exporter to a net importer of coal, with net imports of ~105 mm tons of coal in ’09 vs. net exports of ~5mm tons in ’08.

21Source: WCI, Tudor, Pickering, Holt & Co.

Trade Flows – Steam Coal Exports (2008)*

Eurasia

U.S.~40 mm tons

(6%)

Eurasia~75 mm tons

(11%)

China~45 mm tons

(7%)( )

(7%)

South America Indonesia

South Africa~70 mm tons Australia

~140 mm tons

~80 mm tons(12%)

~200 mm tons(30%)

TOTAL WORLD~670 mm tons (10%) 140 mm tons

(20%)~670 mm tons

<5 mm tons5-25 mm tons25-50 mm tons50-100 mm tons

22Source: EIA/DOE, Tudor, Pickering, Holt & Co.

>100 mm tons

* Percent denotes region’s percent of world total steam coal exports.

Trade Flows – Coking Coal Exports (2008)*

EurasiaCanada

U.S.~40 mm tons

(17%)

Eurasia~7 mm tons

(3%)

China~4 mm tons

(1%)

Canada~30 mm tons

(12%)

( )(1%)

Indonesia

Australia~150 mm tons

~25 mm tons(9%)

TOTAL WORLD~250 mm tons 150 mm tons

(58%)~250 mm tons

<5 mm tons5-25 mm tons25-50 mm tons25-100 mm tons


>100 mm tons

* Percent denotes region’s percent of world total steam coal exports.

Coal: Domestic Perspective

242424

U.S. Coal Supply

44% 44% 26%

The Powder River, Central Appalachian and Illinois basins make up over 70% of total reserves and production in the U.S.

Powder River Basin (PRB)

Bi h k f (44% l

Major U.S. Coal Basins - % Total U.S. Coal Mines, Production and Reserves

Northern Appalachia1%5% 5%

5%9%

19%12%

6%

Biggest chunk of reserves (44% total U.S.) and production (44%).

Relatively inexpensive extraction with reserves near surface and easy topography.

Low heat content and location

58%

Powder River Basin

Uinta Region

Illinois Basin

1%

1%

5% 5%further away from markets means transportation relatively more expensive.

Central Appalachian (CAPP)

Declining resource, thinning coal seams

20%

8%

Gulf Coast Lignite

1%

4% 4%

% f U S T t l

seams.

Increasingly difficult/expensive extraction, further encumbered by government regulation.

High heat content. Source of most of U.S. met coal production.

Central Appalachia

Mines

Production

Reserves Other (Not Pictured)

8% 8%15%% of U.S. Total

Illinois Basin (ILB)

Large resource, only likely growth area in the Eastern U.S.

Extraction less challenging than CAPP.


Mixed quality, may have high chlorine content.

Major U.S. Coal Basins - Attributes

Number of Reserves* '08 Production Heat Content SO2 Content 2008 Costs ($/ton)

Basin Mines (BB tons) (mm tons) (btu/lb) (lb/mmbtu) Transport Mining**( ) ( ) ( ) ( ) p g

Powder River Basin 17 115 510 8,800 0.8 $25 $8-$12

Central Appalachia 841 20 235 12,500 1.2 $15 $45-$65

Northern Appalachia 378 15 135 13,000 <3.0 $15 $35-$50

Illinois Basin 72 51 100 11,800 5.0 $15 $30-$40,

Uinta Basin 17 12 55 11,700 0.8 $20 $20-$30

*EIA-estimated recoverable reserves. For PRB, using WY and MT reserves as proxy.**Based on company filings and TPH estimates.

Of the five basins above, Powder River Basin (PRB) coal production is growing the most (+3.9%/year since 2000) while other basins, like Central Appalachia (CAPP), have been declining (-1.2%/year since 2000).

On a mmbtu basis, on average, PRB coal is by far the cheapest to mine…however, it is located furthest from market, and so most utilities must pay hefty fees to transport PRB coal to their plants.

PRB (sub-bituminous), Gulf Coast lignite, Uinta Basin (bituminous) and Illinois Basin (bituminous) coals are used exclusively for electric generation.

Metallurgical coal is found in the CAPP and NAPP basins. It is estimated that ~90% of domestic met coal consumed and ~70% of exported met coal came from the CAPP basin in 2008.


Going forward, we expect PRB coal production to increase over time, while CAPP coal continues to decline.

Top Holders of U.S. Coal Reserves

Holders of coal reserves in the U S Estimated Reserves Percent Holders of coal reserves in the U.S. are fragmented. Excluding the U.S. government, the top 10 holders only account for ~20% of reserves.

The federal government leases its

st ated ese ves e ce tRank Company (million short tons) Total U.S.

1 U.S. Government 88,000 33%

2 Great Northern Properties LP (private) 20,000 8%

3 Peabody Energy Corporation (BTU) 9,000 3%

4 CONSOL Energy Inc. (CNX) 4,500 2%

5 Arch Coal Inc (ACI) 3 900 1%lands. Applications for lease are submitted to the Bureau of Land Management (BLM), which approves or rejects the lease after evaluating environmental and social impacts

5 Arch Coal, Inc. (ACI) 3,900 1%

7 Massey Energy Company (MEE) 2,400 1%

8 Alpha Natural Resources (ANR) 2,300 1%

6 The North American Coal Corp. (NC) 2,200 1%

9 Natural Resource Partners LP (NRP) 2,100 1%

10 Patriot Coal Corp. (PCX) 1,800 1%

11 Pocahontas Land Corporation (NSC) 1 700 1% and determining market value. Leases are won via a sealed bidding process. Lease terms are for 20 years, but can be terminated after 10 years if not duly developed.

11 Pocahontas Land Corporation (NSC) 1,700 1%

12 Murray Energy Corporation (private) 1,700 1%

14 Luminant Mining (private) 1,300 0%

13 Rio Tinto Energy America (RIO-GB) 1,100 0%

15 International Coal Group (ICO) 1,080 0%

17 Penn Virginia Resource Partners, LP (PVR) 829 0%

18 Alliance Resource Partners (ARLP) 647 0% Royalty rates are 12% of gross coal produced for surface mines and 8% for underground mines.

18 Alliance Resource Partners (ARLP) 647 0%

16 Westmoreland Coal Company (WLB) 425 0%

Total (Top 16 Reserve Holders) 144,981 55%Total US 260,000 100%

27Source: National Mining Association, Tudor, Pickering, Holt & Co.

Major U.S. Coal Basins – Key Players

Basin Key Players

Powder River Basin ACI ANR BKH BTU NRP (landholder) WLB Rio Tinto Great Northern Prop LP (landholder) Kiewit (private)Powder River Basin ACI, ANR, BKH, BTU, NRP (landholder), WLB, Rio Tinto, Great Northern Prop LP (landholder), Kiewit (private)

Central Appalachia ACI, ANR, ARLP, CNX, ICO, JRCC, MEE, NRP (landholder), PCX, PVR (landholder)

Northern Appalachia ANR, ARLP, CNX, ICO, NRP (landholder), PCX, PVR (landholder), Murray (private)

Illinois Basin ARLP, BTU, ICO, JRCC, NRP (landholder), PCX, PVR (landholder), Murray (private)

Uinta Basin ACI CNX Rio Tinto Murray (private) Oxbow (private) Energy West (private) Blue Mountain (private)

Public coal producers with other business lines – ANR (small gas E&P), BKH (primarily utility,

Uinta Basin ACI, CNX, Rio Tinto, Murray (private), Oxbow (private), Energy West (private), Blue Mountain (private)

Gulf Coast Lignite WLB, Kiewit (private), Luminant Mining (private), North American Coal Corp. (subsidiary of NC)

also have oil & gas E&P), CNX (big gas E&P), WLB (small IPP) and WLT (coke, gas E&P).

Companies with most geographic diversity – ACI, ANR, BTU.

Geographically concentrated coal production – MEE (CAPP), BKH (PRB), WLT (Alabama).

Largest metallurgical coal producers – ANR, MEE, WLT.

Getting gassier via E&P – CNX.

Small cap – BKH, NRP, WLB, ARLP, ICO, JRCC, PCX, PVR.


p , , , , , , ,

U.S. Coal Production

Since 1949, the U.S. has grown coal production at a rate of

1,200

Annual U.S. Coal Production (1949-2009)

Recession years: ’75, ’83, ’93, ’02, ‘09 p1.4%/year. Growth has been slower in recent years (2001-2008 grew at rate of 0.5%/year) and ’09 saw a big drop in production (-7.8% vs ’08)

400

600

800

1,000

mm

sho

rt t

ons

vs. 08).

What the U.S. hasn’t consumed locally, it has exported. Net exports are small in the scheme of things, accounting for only 5% of

0

200

Monthly U S Coal Production (Jan 06 to Mar 10) things, accounting for only 5% of U.S. coal production in 2009 (at 59 mm tons…40% steam, 60% met).

In 2009, U.S. coal exports went primarily to Europe (~50% of total 80

100

120

ns

Monthly U.S. Coal Production (Jan-06 to Mar-10)

2009 down 8% y/y

p y p (exports), Canada (~20%), South America (~15%, mainly Brazil) and Asia (~10%, mainly India, South Korea and China).

0

20

40

60

mm

sho

rt t

on

29Source: IISI, EIA/DOE, Tudor, Pickering, Holt & Co.

Top U.S. Coal Producers'08 Production Percent

Rank Company (mm short tons) Total U.S.1 Peabody Energy Corporation (BTU) 201 17%

2 Rio Tinto Energy America (RIO-GB) 141 12%

3 Arch Coal, Inc. (ACI) 134 11%

Unlike coal reserve holders, coal producers in the U.S. are much more consolidated. The top 10 coal producers account , ( )

4 Alpha Natural Resources, LLC (ANR) 90 8%

5 CONSOL Energy Inc. (CNX) 64 5%

6 Massey Energy Company (MEE) 40 3%

7 Patriot Coal Corp. (PCX) 33 3%

8 North American Coal Corp. (subsid of NC) 30 3%

9 Westmoreland Coal Company (WLB) 29 3%

top 10 coal producers account for ~70% of total U.S. coal production.

10 Kiewit Mining Group, Inc. (private) 28 2%

11 Alliance Resource Partners (ARLP) 26 2%

12 Murray Energy Corporation (private) 26 2%

13 Luminant Mining (private) 23 2%

14 International Coal Group (ICG) 18 2%

15 BHP Billiton 16 1%

16 Chevron Mining Inc. (CVX) 11 1%

17 PacifiCorp (private) 11 1%

18 James River Coal Company (JRCC) 11 1%

Total 933 79%

30Source: National Mining Association, Tudor, Pickering, Holt & Co.

Where Are Markets for Coal in the U.S.?

High transportation costs drive regional coal consumption

U.S. Regional Annual Coal Consumption, Million Tons and % of U.S. Total*

consumption.

Historically, Appalachia was the dominant source of domestic production.

consequently demand NortheastMidwest …consequently, demand (coal-fired generation and steel mills) developed in adjacent regions –East/Midwest.

84 mm tons8%

Midwest424 mm tons

38%West

133 mm tons12%

The recent rise of Western production is not geographically matched to the Eastern US-focused demand base.

Southwest155 mm tons

14%

Southeast317 mm tons

28%

*R i f ll Mid t IL IN IA KS MI MN MO NE ND OH SD WI S th t AL DE FL GA KY MD MS NC SC TN


*Regions as follows: Midwest: IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI. Southeast: AL, DE, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV. Southwest: AR, LA, OK, TX. West: AZ, CA, CO, ID, MT, NV, NM, OR, UT, WA, WY. Northeast: CT, MA, NH, NJ, NY, PA.

U.S. Coal Consumption – Almost All for Electricity

Since 1949, U.S. consumption of coal has grown at a rate of 1 2%/year Consumption growth

100%1,200

U.S. Coal Consumption & Electric Generation as % Total (1973-2009)

1.2%/year. Consumption growth has been slower in recent years-2001-2008 averaged +0.8%/year and ’09 was down 10.8% vs. ’08.

Total coal demand has increased

80%

90%

400

600

800

1,000

mm

sho

rt t

ons

~2x’s over the last 35 years, closely tracking the 2.2x’sincrease in power generation over the same time period.

60%

70%

0

200Coal Consumption Electric Power Sector as % Total

Power production accounted for 94% of total U.S. coal demand in 2009.

As a result, key drivers of U.S. l d d GDP th

100

120

Monthly U.S. Coal Consumption (Jan-06 to Jan-10)’09 down 11% y/y

coal demand are GDP, weather, the U.S. generating fleet’s composition and coal/gas switching.

20

40

60

80

mm

sho

rt t

ons


0

U.S. Electricity Sector

After renewables, hydroelectric and nuclear, coal is the

Capacity by Fuel Type (2008)

Hydro-electric

Renewables4%

cheapest electric generation fuel source.

Consequently, the utilization of coal-fired generation is higher

Coal31%

Petroleum6%

Nuclear10%

9%

g gthan for natural gas or petroleum.

As a result, while coal plants make up roughly a third of

Natural Gas39%

Generation by Fuel Type (2009) make up roughly a third of electric generating capacity in the U.S., they provide nearly half of the electricity generated each year.

Generation by Fuel Type (2009)

C lNuclear

Hydro-electric

6%

Renewables4%

Coal45%

20%

Natural Gas

Petroleum1%


Natural Gas23%

U.S. Coal-Fired Power Generation Capacity – Little Growth

Coal-fired generating capacity hasn’t grown much over the previous 10 years, as plant retirements have kept pace with

Coal Generation Capacity 1995 2020 retirements have kept pace with

additions.

From 2009 – 2012, we expect 15 GW of new capacity (already under construction).310

320

330

nd G

Ws

1995-2020

Historical TPH Forecast

under construction).

We are not expecting new projects to be initiated until the CO2 regulation outcome is clear(er)…so little incremental 270

280

290

300

310

Thou

san

( )capacity will be added after current under-construction projects are completed.

Post-2009, we assume that ~1

250

260

270

GW/year of coal generation is retired each year. The equivalent of ~2% of the 55 GW of existing capacity of smaller plants less than 250 MWs and more than 45+

Additions Existing less Retirements

34

years old.

Source: Bloomberg, Tudor, Pickering, Holt & Co.

Coal-Fired Generation Took a Beating in ’09

From 2008 to 2009 electricity demand fell 4%.

Monthly Coal Consumed for Electric Generation

3,200

3,400

5-Yr Average

5-Yr High

However, hydroelectric and renewables generation were up 8%.

And..natural gas-fired generation was +4% as low gas prices allowed gas-fired 2,400

2,600

2,800

3,000

000

tons

per

day

2010

5-Yr Low

+4% as low gas prices allowed gas fired generation to capture incremental market share.

Coal-fired generation absorbed all of the 2009 reduction in electricity M thl N t l G C d f El t i G ti

2,000

2,200

Jan

Feb

Mar Apr

May Jun Jul

Aug Sep

Oct Nov Dec

2009

2009 reduction in electricity demand…and then some.

Coal-fired generation was off by 11%.

Monthly Natural Gas Consumed for Electric Generation

25

30

35

2010

5-Yr High

10

15

20

Bcf

per

day 2010

5-Yr Average

5-Yr Low

2009

35Source: Bloomberg, EIA/DOE, Tudor, Pickering, Holt

5

Jan

Feb

Mar Apr

May Jun Jul

Aug Sep

Oct Nov Dec

U.S. Industrial Coal Consumption

Industrial demand accounted for 6% of total U.S. coal demand in

U.S. Coal Consumption for Industry & Industry as % Total (1973-2009)

150

180

30%

35%

2009.

Coal consumption by the industrial sector has been on a fairly steady decline since the 60

90

120

mm

sho

rt t

ons

10%

15%

20%

25%

y y1970s, falling at a rate of 2.7%/year.

Steelmaking is the primary use for coal consumed in the

0

30

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

0%

5%

10%

Coal Consumption Industrial Sector as % Total

for coal consumed in the industrial sector. Metallurgical coal (coal used to fuel blast furnaces to make steel) is the type of coal consumed by this

60%

80%

100%

Weekly U.S. Steel Plant Utilization (1980-Present)

sector.

0%

20%

40%


The Rise of Powder River Basin Coal…

Powder River Basin (PRB) coal is the most-used coal in the U.S.,

Annual Coal Production by Producing Region, 1983-2008

500

600

comprising ~45% of total consumption in 2008. That’s up from ~15% in 1983.

The last 25 years have seen a dramatic shift from the use of

300

400

500

mm

ton

s

dramatic shift from the use of Eastern coal (Northern and Central Appalachia coal and Illinois Basin coal) to PRB coal driven by emissions regulations.

0

100

200

3 5 7 9 1 3 5 7 9 1 3 5 7

Production Growth Rates Per YearRegion Since 1983 Since 1990 Since 2000

Since 2000, PRB coal has grown at a rate of ~4%/year.

During that same period, production of Central Appalachian (CAPP) Northern Appalachian

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

PRB CAPP NAPP ILB Uinta GC Lignite

Region Since 1983 Since 1990 Since 2000Northern Appalachia -0.6% -1.2% -0.7%

Central Appalachia 0.9% -1.1% -1.2%

Illinois Basin -0.9% -2.0% 1.6%

Powder River Basin 6.2% 6.4% 3.9%

Gulf Coast Lignite 0 7% -1 3% -2 1%

(CAPP), Northern Appalachian (NAPP) and Gulf Coast Lignite coal all declined.

Illinois Basin coal also grew, though from a much smaller base and at a

Gulf Coast Lignite 0.7% -1.3% -2.1%

Uinta Basin 2.8% 2.2% 0.0%

37

slower pace than PRB (~2%/year).

Source: MSHA, Tudor, Pickering, Holt & Co.

…Driven by Emissions Regulation…Demand for PRB began to accelerate after the 1990 Clean Air Act. The two methods for meeting new emissions guidelines were 1) install scrubbers to

% Total U.S. Coal Production, 1983-2008

80% guidelines were 1) install scrubbers to remove the sulfur or 2) burn low-sulfur coal.

For many utilities, burning low-sulfur PRB coal was a cheaper alternative to meet

i i id li h i lli 40%

50%

60%

70%

m t

ons

new emission guidelines than installing scrubbers.

The chart to the left shows the combination of Northern Appalachia and Illinois Basin coal (high-sulfur) declining

0%

10%

20%

30%

83 85 87 89 91 93 95 97 99 01 03 05 07

m

Illinois Basin coal (high sulfur) declining as a % of total U.S. production while production of lower sulfur coal (primarily PRB) production rises.

It is important to note that since 2000, th d li f hi h lf l h

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

NAPP, ILB PRB, CAPP, Uinta

the decline of high sulfur coal has stabilized (and absolute production has even increased), as more coal plants installed scrubbers, allowing them to use high sulfur coal and still meet EPA guidelines

Production Growth Rates Per YearRegion Since 1983 Since 1990 Since 2000High sulfur coal -0.7% -1.6% 0.3%

Low sulfur coal 3.6% 2.7% 1.8%

38

guidelines.


…And by Falling Transportation Rates

The Staggers Act of 1980 deregulated railroads, allowing railroads to reduce

Coal Transport Costs, by Route Length (1985-2008E)

$40

$50

250 miles 1,000 miles 2,000 miles

their freight rates. Declining freight rates reduced the cost of PRB coal and allowed it to more effectively compete with Eastern coal.

Recently freight rates have begun to $10

$20

$30

$40

$/to

n

Recently, freight rates have begun to rise again, as diesel and equipment costs have gone up.

Note that since 2005, even assuming the lowest transportation costs for CAPP Cost of Coal for Hypothetical Utility in Northeast U.S.*

$0

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

coal (zero) and the highest for PRB coal (2,000-mi freight rate) – PRB coal was still a bit cheaper than CAPP coal.

ILB and NAPP coal were also cheaper than CAPP coal For coal plants with

$12

$16

btu

NAPP CAPP ILB PRB

PRBCAPP

than CAPP coal. For coal plants with scrubbers, these coals could be preferred over CAPP coal.

$0

$4

$8

85 87 89 91 93 95 97 99 01 03 05 07

$/m

mb

39

Source: STB, MSHA, Tudor, Pickering, Holt & Co.

*Assumptions -- NAPP coal: 13,000 btu/lb, no transport costs. CAPP coal: 12,500 btu/lb, no transport costs. ILB coal: 11,800 mmbtu/lb, transport costs based on rates above (assume average distance 250 miles). PRB coal: 8,800 mmbtu/lb, transport costs based on rates above (average distance 2,000 miles). Minemouth prices based on weighted average of states.

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

The Decline of Central Appalachian Coal…

Central Appalachian coal is the second most-used coal in the U.S., making up

Annual Coal Production by Producing Region, 1983-2008

500

600

~20% of total production in 2008. That’s down from ~25% in 1983.

Production peaked at ~290 mm tons in 300

400

500

mm

ton

s

1997, and has been on a fairly steady decline since. Since 2000, it has declined at a rate of 1.2%/year.

0

100

200

3 5 7 9 1 3 5 7 9 1 3 5 7

Production Growth Rates Per YearRegion Since 1983 Since 1990 Since 2000

The biggest factors contributing to the decline of Central Appalachian coal vs. other coals are decreased productivity, a challenging permitting environment and increased price competition from

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007


Region Since 1983 Since 1990 Since 2000Northern Appalachia -0.6% -1.2% -0.7%

Central Appalachia 0.9% -1.1% -1.2%

Illinois Basin -0.9% -2.0% 1.6%

Powder River Basin 6.2% 6.4% 3.9%

Gulf Coast Lignite 0 7% -1 3% -2 1%

other coals (refer again to bottom graph on slide 39).

Gulf Coast Lignite 0.7% -1.3% -2.1%

Uinta Basin 2.8% 2.2% 0.0%

40Source: MSHA, Tudor, Pickering, Holt & Co.

…Driven by Declining Productivity…

Historically, the CAPP region has had the least productive mines (in terms of

Mine Productivity of Eastern U.S. Coals, 1983-2008

coal produced per employee). While increases in labor productivity kept pace with other Eastern U.S. regions through 2000, recently relative productivity has fallen.6,000

8,000

10,000

12,000

uced

per

Em

ploy

ee

Beginning in 2000, labor productivity for the CAPP region began to decline relatively quickly, at -2.2%/year vs. virtually flat NAPP (-0.2%/year) and ILB (+0.3%/year).

0

2,000

4,000

Coal

Ton

s Pr

odu

(+0.3%/year).

Labor productivity in Central Appalachia continues to decline as a consequence of thinning coal seams, which makes coal reserves in the region more diffi l ( d l ) i

CAPP NAPP ILB

difficult (and costly) to mine.Change in Annual Mine Labor ProductivityRegion Since 1983 Since 1990 Since 2000Northern Appalachia 4.4% 3.4% -0.2%

Central Appalachia 4.1% 2.2% -2.2%

Illinois Basin 3.8% 2.7% 0.3%


…And An Uncertain Regulatory Environment

In 1977, a number of acts passed that increased mining costs/time, including: the Clean Water Act – requires permits to fill valleys with the overburden from mining process (common practice q p y g p ( pof mountaintop removal mining), the Surface Mining Control and Reclamation Act (SMCRA) –requires reclamation of mined property and permits for surface mining, the Federal Mine Safety & Health Act – increased safety standards/enforcement/penalties, and the Black Lung Benefits Act – levied production tax on coal mines.

Mountaintop removal (MTR) mining has been on the rise in Central Appalachia, making up 25-40% of production of CAPP coal, compared with <5% of total U.S. By one estimate, mountaintop removal restrictions could reduce CAPP coal production by ~50%, absent alternate mining p y , goptions.

Currently, permitting new mines is extremely difficult in the CAPP basin. Even fully-permitted i ’ i i M h 2010 h EPA k d i f ACI’ S i f mines aren’t a given - in March 2010, the EPA revoked a permit from ACI’s Spruce mine…after

the permit had been issued following 10 years of review.


Utility Stockpiles of CoalThe majority of steam coal sales are tied to 1-3 year purchase contracts, generally with fixed volume commitments Fixed

200

Annual Utility Coal Stocks (December of Each Year, 1973 - 2009)

volume commitments. Fixed delivery schedules means short to mid-term supply demand imbalances show up as end-user inventory changes.

40

80

120

160

mm

ton

s

y g

Historically, coal electricity generators have maintained ~45 days of on-site coal supply, providing a buffer to any supply Monthly Utility Coal Stocks

0

40

providing a buffer to any supply disruptions.

Current stockpiles are ~176 MM tons representing ~60 days of inventory

160

200

240

s

Monthly Utility Coal Stocks (Jan. '07 to Jan. '10)

inventory

While down considerably from the 2009 peak of 203 MM tons, stockpiles are still 30% above the 10 f 135MM

0

40

80

120

mm

tons

43

10 year average of 135MM tons.

Source: EIA/DOE, Tudor, Pickering, Holt & Co.

Coal Consumption – Regional SnapshotNortheast & Southeast U.S. Coal Use, by Type*

(1990, 2000, 2008)

160

180

Midwest U.S. Coal Use, by Type* (1990, 2000, 2008)

280

320

1990 2000 2008

60

80

100

120

140

160

mm

ton

s

1990 2000 2008

80

120

160

200

240

mm

ton

s

0

20

40


Southwest and Western U.S. Coal Use, by Type*

0

40

80


In the last 20 years, PRB coal has taken significant market share across regions, in both traditionally Western coal and traditionally Eastern coal markets, as shown in the graphs on this slide.

The most striking shift to PRB coal has been in the

(1990, 2000, 2008)

120

160

200

ns

1990 2000 2008

gMidwest, where PRB coal went from 33% of regional consumption in 1990 to 63% in 2008.

Even in the Southeast region where CAPP coal is the primary coal consumed, PRB went from 1% of regional consumption in 1990 to 15% in 2008. During that same 0

40

80mm

ton

44

p gperiod, CAPP went from 54% of total to 49%.




Getting Coal Out of the GroundGround

454545

Mining Types - Surface MiningSurface mining (~70% of ’08 U.S. production)

□ Used when coal is near the surface.

Surface MiningShovels and trucks

remove coalReclaimed ground

Dragline excavates overburden

□ Explosives and heavy, earth moving equipment remove earth and rock covering coal (the “overburden”). Coal is then extracted. Mine is reclaimed with the replacement of h b d

overburden

Overburden dug by shovels and hauled

by dump trucks

Coal

the overburden.

Highwall mining

□ A type of surface mining.

□ After a vertical face is cut exposing

Direction of mining

Direction of pit

Topsoil and subsoil are removed by scrapers

and stored

coal seam, continuous mining machine cuts horizontally into coal seam. Horizontal penetrations up to 1,000 feet are possible. Overburden is supported by pillars left between mined areas

Highwall Mining

advancement

mined areas.

□ Useful in high overburden areas. Capital intensive, but low labor requirements.

46Source: Arch Coal, Terex, Tudor, Pickering, Holt & Co.

Mining Types - Underground MiningUnderground mining, room and pillar (~15% of ’08 U.S. production)

□ Coal mined from “rooms”, pillars support ceilings Rooms are ~20 feet

Room and Pillar Mining

Roof bolter

C ti i

Direction of mining

support ceilings. Rooms are 20 feet wide, pillars 40-100 feet.

□ Once end of panel reached, process retreats as pillars are mined, allowing ceiling to collapse.

Underground mining longwall ( 15% of

Continuous miner removes coal, leaving “pillars” that

support the roof

Coal pillar

Shuttle car

Coal

Shuttle Underground mining, longwall (~15% of ’08 U.S. production)

□ Coal is mined by shearing back and forth across a panel (the coal face). Hydraulic jacks (shields) support the roof as coal is cut from the face of

Conveyor belt

Feeder

S uttle car

the panel. Mine collapses as shields move forward.

□ After each coal face has been mined out, the machinery must be disassembled and reassembled at the

f ( ll ithi ti ht

Longwall MiningDirection of mining

Coal

Conveyor

Pillars support

roof

Longwall shearer cuts coal face

new face (all within a very tight space). This is called a longwall face move, and is very expensive and time-consuming. In a typical mine, a longwall face move usually takes place once each year.

Conveyor belt

Conveyor belt

Crusher

Collapsed roof material

Hydraulic roof supports

47

Pillars support

roof

Source: Arch Coal, Tudor, Pickering, Holt & Co.

Coal Transportation

484848

International Transport – Freight Rates

Russia toEurope:

B.C. to Japan: $22/ton

p$13/ton

U.S. (Gulf) t E

U.S. (NE) to Europe:

$21/ton

Indonesia

to Europe: $28/ton

Columbiato Europe:

Australia to

Australia toJapan: $16/ton

to Europe: $26/ton

South Africato Europe:

$

to Europe: $25/ton

Europe: $31/ton

$16/ton$21/ton

49Source: Bloomberg, Tudor, Pickering, Holt & Co.

U.S. Transportation of CoalTransport expense is a meaningful component of delivered U.S. coal cost. In the U.S., coal is usually sold at the mine, with the buyer bearing the cost of transport. Export coal is usually sold at the loading port, with the buyer

US Coal Transportation, by Type (2007)

Conveyor7% y g p , y

bearing the shipping cost from port to final destination, though the producer usually pays for transport from mine to port.

Transport costs vary by heat content (lower heat content is more expensive since it

Truck11%

Barge11%

prequires more tons per btu), distance to market and method of transport.

Most coal is transported by rail…rail provides ~70% of domestic coal transport. Coal is the rail industry’s most important customer making

Rail71%

y p gup ~25% of revenues.

The Staggers Act of 1980 – deregulated the railroad industry, allowing railroads to compete, decreasing freight rates.

T ki i hibi i d h f d $40

$50

US Coal Transport Costs, by Route Length (1985-2008E)

250 miles 1,000 miles 2,000 miles

Trucking is cost prohibitive and therefore used for only very short distances. Makes up ~10% of domestic coal transport.

Transport by barge has a lower cost but is only available along limited routes. Water transport

k 10% f l U S l $0

$10

$20

$30

$/to

n

50

makes up ~10% of total U.S. coal transportation.

Source: NMA, STB, Tudor, Pickering, Holt & Co.

$0

Consumption of Powder River Basin Coal

The majority of PRB coal consumption takes place in the Midwest region, which

PRB Coal Consumption by Region and Top 10 Consuming States (2008)PRB Consumed PRB as % Total Consumptionin Region/State Coal Consumed of PRB as % of

accounted for 54% of total PRB coal consumed in the U.S. in 2008. The Southwest accounted for another 23%, the West 13%, the Southeast 9% and the Northeast the rest.

(mm tons) in Region/State U.S. TotalRegions

Midwest 268 63% 54%

Southwest 113 71% 23%

West 66 49% 13%

PRB is the primary coal used in the Midwest, Southwest and West regions. 18 states meet >50% of their coal needs with PRB coal.

Southeast 44 15% 9%

Northeast 6 8% 1%

Total U.S. 497 46% 100%

Top 10 StatesT 64 61% 13% Even though Northeast consumption is

small, it is important to note that parts of the Northeast often rely heavily on PRB coal. New York, for example, had ~40% of its coal needs met by PRB coal i 2008

Texas 64 61% 13%

Illinois 55 89% 11%

Missouri 43 93% 9%

Wyoming 29 100% 6%

Michigan 29 71% 6%

Iowa 27 93% 5% in 2008.Iowa 27 93% 5%

Wisconsin 24 89% 5%

Oklahoma 22 96% 5%

Kansas 21 98% 4%

Indiana 20 29% 4%

Other states 162 26% 33%




Consumption of Central Appalachian Coal

The majority of CAPP coal consumption takes place in the Southeast region,

CAPP Coal Consumption by Region and Top 10 Consuming States (2008)CAPP Consumed CAPP as % Total Consumptionin Region/State Coal Consumed of CAPP as % of

which accounted for 76% of total CAPP coal consumed in the U.S. in 2008. The Midwest accounted for another 18% and the Northeast the balance.

CAPP is the primary coal used in the


Southeast 146 49% 76%

Midwest 35 8% 18%

Northeast 11 14% 5%CAPP is the primary coal used in the Southeast region. 7 states meet >50% of their coal needs with CAPP coal.

Consumption of CAPP coal is more geographically concentrated than PRB

Southwest 0 0% 0%

West 0 0% 0%

Total U.S. 192 18% 100%

Top 10 StatesN th C li 30 95% 16% coal. The top ten states account for

85% of total CAPP coal consumption, compared to 67% for PRB coal.

North Carolina 30 95% 16%

Georgia 23 59% 12%

Ohio 19 30% 10%

West Virginia 18 45% 9%

Florida 16 63% 8%

Virginia 15 98% 8%Virginia 15 98% 8%

South Carolina 13 80% 7%

Kentucky 12 28% 6%

Tennessee 9 30% 5%

Michigan 9 22% 5%


52




Consumption of Northern Appalachian Coal

The majority of NAPP coal consumption takes place in the Northeast region

NAPP Coal Consumption by Region and Top 10 Consuming States (2008)NAPP Consumed NAPP as % Total Consumptionin Region/State Coal Consumed of NAPP as % of

(mainly Pennsylvania). The Northeast accounted for 57% of total NAPP coal consumed in the U.S. in 2008. The Southeast accounted for another 27% and the Midwest the rest.


Northeast 55 76% 57%

Southeast 26 9% 27%

Midwest 15 3% 15%

Coal demand in the Northeast is met primarily by NAPP coal (~75% of coal demand).

Consumption of NAPP coal is very

West 0 0% 0%

Southwest 0 0% 0%

Total U.S. 96 9% 100%

Top 10 StatesP l i 47 82% 49% concentrated, with the top ten states

accounting for 96% of NAPP coal consumption.

Pennsylvania 47 82% 49%

West Virginia 14 33% 14%

Ohio 10 16% 10%

Maryland 5 45% 5%

New York 5 50% 5%

Indiana 3 5% 3%Indiana 3 5% 3%

South Carolina 3 16% 3%

Kentucky 2 5% 2%

New Jersey 2 59% 2%

North Carolina 2 5% 2%


53




Consumption of Illinois Basin Coal

The majority of ILB coal consumption takes place in the Midwest region

ILB Coal Consumption by Region and Top 10 Consuming States (2008)ILB Consumed ILB as % Total Consumptionin Region/State Coal Consumed of ILB as % of

(mainly Indiana). The Midwest accounted for 58% of total ILB coal consumed in the U.S. in 2008, with the Southeast (mainly Kentucky) making up the remainder.


Midwest 55 13% 58%

Southeast 40 14% 42%

West 0 0% 0%

ILB coal is the primary coal used in only two states – Indiana (54%) and Kentucky (50%).

Consumption of ILB coal is very

Northeast 0 0% 0%

Southwest 0 0% 0%

Total U.S. 96 9% 100%

Top 10 StatesI di 39 54% 40% concentrated, with the top ten states

accounting for 99% of ILB coal consumption.

Indiana 39 54% 40%

Kentucky 22 50% 23%

Florida 7 30% 8%

Tennessee 7 24% 8%

Illinois 6 10% 7%

Ohio 5 9% 6%Ohio 5 9% 6%

Alabama 3 10% 3%

Missouri 2 4% 2%

Iowa 2 6% 2%

Wisconsin 1 3% 1%


54




Consumption of Uinta Basin Coal

The majority of Uinta Basin coal consumption takes place in the West

Uinta Coal Consumption by Region and Top Consuming States (2008)Uinta Consumed Uinta as % Total Consumptionin Region/State Coal Consumed of Uinta as % of

region. The West accounted for 63% of total Uinta coal consumed in the U.S. in 2008, the Southeast 26% and the Midwest and Southwest the rest.

Four states rely on Uinta Basin coal as


West 37 27% 63%

Southeast 15 5% 26%

Midwest 5 1% 8%Four states rely on Uinta Basin coal as their primary fuel for coal-fired generation – California (100% of a very small amount of consumption), Utah (97%), Nevada (69%) and Colorado (60%).

Northeast 0 0% 0%

Southwest 2 1% 3%

Total U.S. 58 5% 100%

Top 10 StatesUt h 18 97% 31%Utah 18 97% 31%

Colorado 12 60% 20%

Alabama 5 14% 8%

Kentucky 3 8% 6%

Tennessee 3 10% 5%

California 3 100% 5%California 3 100% 5%

Nevada 3 69% 5%

Mississippi 2 22% 3%

Arizona 2 7% 3%

Wisconsin 2 6% 3%


55




Consumption of Gulf Coast Lignite

The Gulf Coast Lignite market is almost completely confined to Texas, Louisiana

Gulf Coast Lignite Consumption by Region & Consuming States (2008)GCL Consumed GCL as % Total Consumption

for Elec Gen Coal Consumed of GCL as % of

and Mississippi. Texas consumes almost all of this lignite (85%), which meets roughly 40% of its coal needs.

(mm tons) for Elec Gen U.S. TotalRegions

Southwest 43 27% 94%

Southeast 3 1% 6%

Midwest 0 0% 0%

West 0 0% 0%

Northeast 0 0% 0%

Total U.S. 45 4% 100%

Top 10 StatesT 39 38% 86%Texas 39 38% 86%

Louisiana 4 25% 8%

Mississippi 3 37% 6%



Coal Pricing

575757

Pricing – InternationalSpot prices have minimal impact on company earnings in the short term as >90% of coal sales are done through long-term contracts. However, spot prices are a good indicator of future contract pricing

$200

$250

Steam Coal Spot Prices (Sep-07 to Present)

API #2 API #4 Newcastle

pricing.

Contracting season for met coal is in the spring, for annual contract terms. Steam coal contracting takes place year-round, and contract terms are usually for two or three years.

Th h t th l ft h th th t li id $50

$100

$150

$/to

n

The graph to the left shows the three most liquid global pricing points. Two in the Atlantic Basin: 1) API#2, which is the price of steam coal delivered to Northwest Europe, including cost, transport and insurance and 2) API#4, which is steam coal delivered from South Africa, free on board (meaning transport paid by the consumer and so

$0

$50

Atlantic Basin Shipping Rates (Sep-07 to Present)(meaning transport paid by the consumer and so not included in price). It also shows the most frequently quoted Pacific Basin price – the Newcastle (Australia) thermal coal price.

As transport costs make up ~20% of total coal cost and ~90% of international coal trade is seaborne

$40

$50

$60

$70South Africa to Europe Columbia to Europe

(water-transported), shipping rates directly affect coal prices.

In ’07/’08, high demand for coal and reduced ship availability sent both freight rates and coal prices higher.

$0

$10

$20

$30

$40

$/to

n

58Source: Bloomberg, Tudor, Pickering, Holt & Co.

$0

Historical U.S. Coal Prices

Coal pricing reflects quality, distance to market and ease of adding supply to a given region $140

Domestic Coal Spot Prices (1998-Present)

adding supply to a given region.

CAPP attracts premium pricing given its quality (high heat/low sulfur content), proximity to

l fi d i d $80

$100

$120

$

on

coal-fired generation and increasingly constrained supply picture.

PRB is priced at a discount due to $

$20

$40

$60$/t

distance to market, lower heat content and a market demand limited by the willingness of generators to burn coal that doesn’t match the facilities’

$0

CAPP PRB Illinois Uinta

doesn’t match the facilities’ design specifications.


Historical Steam Coal vs. Natural Gas Price

$8

$10

Coal vs. US Natural Gas Prices (1967-2009)From the 1950’s through the 1970’s, coal-fired generation satisfied the majority of that period’s robust increase in power

Nat gas price deregulation

beginsCoal-fired

Build out of gas-fired

generationNuclear b ild t

$0

$2

$4

$6

$

$/m

mbt

u

p pdemand, pressuring coal prices upward. Natural gas prices were regulated, and coal and gas traded near parity on an mmbtu basis.

In the 1980’s natural gas prices were

Coal fired generation additions

peak in the 70’s

build out

$0

Coal Nat Gas

C l US N t l G P i (J '07 A il '10)

In the 1980 s, natural gas prices were deregulated, and gas prices increased while the build-out of nuclear generation put downward pressure on coal-fired generation.

$9

$12

$15

mbt

u

Coal vs. US Natural Gas Prices (Jan '07 - April '10) Then came the natural gas plant overbuild in the late 1990’s/early 2000’s, and along with it climbing nat gas prices.

During the recent recession, nat gas prices

$0

$3

$6

$/m

g , g pfell faster than coal, narrowing the $/mmbtu spread between the two fuels –and resulting in coal-to-gas switching (~80 mm tons or 8% of total consumption).

Coal Nat Gas


Coal/Gas Electricity Production Parity

$8

Coal/Gas Parity Coal has consistently been significantly less expensive than

$4

$6

Gas

($/

mm

btu)

natural gas on a mmbtu basis.

However, the advent of the higher efficiency, gas-fired combined cycle generator (CCGT) power

Coal cheaper

Gas

$0

$2 Nat

G plants has narrowed the spread by reducing the amount of natural gas required to produce a MWh of electricity.

Gas cheaper

CAPP ($/ton)

Fuel Price($/mmbtu)

Heat Rate (btu/kWh)

Generation Cost

Parity Chart□ Marginal gas plant is an efficient

Combined Cycle unit (CCGT).

□ Marginal coal plant is also relatively efficient with full environmental ($/MWh)

Gas Unit $5.00 7,000 $35

Coal Unit $3.50 (~$70/ton) 10,000 $35

efficient with full environmental controls.

□ Note that actual facilities vary by region and demand (time of day and weather).

61Source: Tudor, Pickering, Holt & Co.

Coal/Natural Gas Switching

Coal-fired generation has historically enjoyed higher gross margins vs. gas-fired generation.

Gas - Coal Spread ($/MWh), Trailing 8 Weeks

$3

MW

h) Coal favored

Higher gross margins are justified by the higher cost of building coal-fired generation. The long-run, all-in costs of coal and gas-fired CCGT generation are roughly the same (operating costs

$(3)

$-

Gas

-Co

al S

prea

d ($

/M

Gas favored

are roughly the same (operating costs plus capital expense). Coal generation construction costs are twice that of a CCGT facility ($2,000/kW vs $1,000/kW).

D i th i f 2001 02 d Gas - Coal Spread ($/MWh) 1999 - Present

$(6)

During the recession of 2001-02 and again in 2008-09, it was less expensive to generate a MWh of electricity from an efficient gas-fired generation than from a coal-fired facility.

Gas Coal Spread ($/MWh), 1999 Present

$60

$80

$100

d ($

/MW

h)

Coal favored

Recently, the relative strength of coal prices and robust supply of natural gas have again closed the coal-gas generation spread.

$(20)

$-

$20

$40

Gas

-Co

al S

prea

Gas favored

favored

62Source: Bloomberg; Tudor, Pickering, Holt

$(40)

Coal Demand Forecast

Coal-fired power generation is THE driver of U.S. coal consumption, accounting for 94% f l d d i 2009

Power 90.3%Heating/Process 4.7%

2009

1 100

1,150

1,200

of total demand in 2009.

A 2009 recession-driven power demand decrease, compounded by coal-to-gas switching reduced coal demand by 11%.

Metallurgical 1.5%Net Exports 3.5%Total 100.0%

900

950

1,000

1,050

1,100

Mmtons

coal demand by 11%.

Going forward, post-recession power demand increases should push coal demand up, but 2013 overall demand will still be b l i l l

750

800

850 below pre-recession levels.

Beyond our 2013 forecast period, an acceleration of older power plant retirements, along with limited new construction

Power Heating/Process Metallurgical Exports

will likely drive further demand declines.

2010 Exports are on-track for a record year – currently at a 55MMt l t 10

63

55MMton annual run rate vs. 10 year average of 28MMtons.

Coal Supply Forecast

Our coal production forecast shows a muted rebound from 2009 lows,

d b 2013 i ill 4% 1 200

1,400

and by 2013 is still 4% or 50MMtons below 2008 the production peak.

CAPP forecasted as not being able to rebound from 800

1,000

1,200

ns being able to rebound from price-driven declines of 2009. Further declines as surface mine permitting and cost issues come into play.

400

600 MM to

p y

PRB continues growth but from lower 2009 level…reaching peak 2008 production levels by 20132000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E

CAPP 264 271 255 236 237 241 242 232 240 192 186 176 166 166

‐

200

In “Other” production, increases in NAPP and ILB partially offset by declines in Gulf Coast and Unitabasins.

CAPP 264 271 255 236 237 241 242 232 240 192 186 176 166 166

PRB 377 408 411 413 435 445 487 495 511 470 469 484 499 509

Other 432 447 427 421 437 446 432 418 420 411 412 424 436 448

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013ETotal 1,126 1,092 1,070 1,109 1,132 1,161 1,145 1,171 1,073 1,066 1,083 1,100 1,122 % Change 4 9% ‐3 0% ‐2 0% 3 7% 2 0% 2 6% ‐1 4% 2 2% ‐8 4% ‐0 6% 1 6% 1 6% 2 0%

64

% Change 4.9% 3.0% 2.0% 3.7% 2.0% 2.6% 1.4% 2.2% 8.4% 0.6% 1.6% 1.6% 2.0%

Coal Supply Demand Balance

Although our overall demand forecast is soft, supply will struggle to keep up with any 5001 400 gg p p ypost-recession demand rebound.

We are forecasting current oversupply to move to a slight deficit by year end 2010 This

Total Demand

200

300

400

500

1 100

1,200

1,300

1,400

(MMtons)

Mtons)

deficit by year end 2010. This will then move to a significant supply deficit by year end 2011.

Any pricing benefit of a tight Cummulative

Total Supply

0

100

200

900

1,000

1,100

ulative Inbalance

pply/D

emand (M

M

y p g g2011 market will be capped by continued moderate natural gas prices.

Flattish demand post a 2010 recovery allows for measured

Cummulative Imbalance

‐300

‐200

‐100

600

700

800

CummSup

recovery allows for measured supply response.

65

TPH Coal Price Forecast

Eastern Steam

□ Demand augmented by pull into met market

□ Supply constrained by declining reserves permit Eastern Steam (NYMEX Spec), $/ton

2010□ Supply constrained by declining reserves, permit challenges and safety concerns

□ Price capped by competition from natural gas

Power River Basin

□ Demand benefits from continued shift to lower cost

1Q 2Q 3Q 4Q 2010 2011 2012 201357 61 63 65 62 68 68 70

% ∆ y/y 9% 0% 4%

2010

□ Demand benefits from continued shift to lower cost western coals

□ Low $/mmbtu prices allow headroom for price increases under moderate long-term natural gas prices

□ Supply easy to increase – large, easy to access reserves

Power River Basin (8,800 btu/lb) , $/ton

1Q 2Q 3Q 4Q 2010 2011 2012 201311 12 14 14 13 14 14 15

2010

makes supply increases a risk to long-term pricing above $15

Metallurgical

□ Demand driven by emerging market steel consumption, th ti

% ∆ y/y 8% 0% 7%

assumes growth continues

□ U.S. supply faces same constraints as Eastern steam coal

□ Near-term lower-quality steam coals selling into met market provides relief valve….though may not be sufficient to avoid some incremental 2012 market

Metallurgical (FOB AUS port) , $/ton

1Q 2Q 3Q 4Q 2010 2011 2012 2013175 200 200 200 194 200 215 200

% ∆ y/y 3% 8% -7%

2010

66

tightening .

□ Longer-term new supply development will happen given big margins…but not likely to outpace demand

∆ y/y

What We’re Watching

676767

Environmental Matters

Key rules coming up

□ SO2, NOx, and Mercury: New EPA regulations in process for setting stricter limits. Each in or near public hearing phase. Final rules could be established as early as 2011.

□ Mountaintop removal mining: In Mar. ’10, the EPA announced new standards for water quality for acquiring Section 404 fill permits. Currently in comment period.

□ Coal ash: In May ’10, the EPA announced that it would begin regulating coal ash, using one of two proposed alternatives. Currently in comment period.

□ CO2: Proposals for regulation of CO2 emissions are currently stalled in Congress, □ CO2: Proposals for regulation of CO2 emissions are currently stalled in Congress, and are unlikely to be reopened until 2011 or 2012. Regulation of CO2 could take the form of a tax or a cap-and-trade program, and may or may not include a national renewable energy standard (which would require a certain % of generation for electricity to come from renewables, incenting renewable energy t t k k t h f l fi d g ti )to take market share from coal-fired generation).

□ Safety: After the UBB Mine tragedy in Apr. ’10, federal regulation of mine safety likely to be modified and strengthened.

6868Source: Tudor, Pickering, Holt & Co.

Utility Stockpiles of Coal

Historically, coal-fired generators have maintained ~45 days of on-site supply providing a buffer to any

Power Generation Coal Inventories (2005-2010)

80

90

1005-Yr High

2009

supply providing a buffer to any supply-related disruptions.

Coal stockpiles shot up in early 2009 as contracted deliveries continued in h f f h i d i

30

40

50

60

70

80

Day

s of

Con

sum

ptio

n

2010

5-Yr Average

5-Yr Low

2010 Forecast

the face of a sharp recession-driven decrease in demand. Inventory levels continued to set records into early 2010.

0

10

20

Contract restructuring, production cuts and weather-driven demand have helped to bring inventory levels down.

Despite the record inventory levels,

Eastern Coal Prices (CSX Rail) ($/ton)

$70

$90

n p y ,prices have been moving higher off of summer 2009 lows.

$30

$50

$/to

n

69Source: EIA/DOE, Bloomberg, Tudor, Pickering, Holt & Co.

Coal Railcar Loadings

Early indication of customer near-term consumption expectations Driven by end user

AAR Weekly Coal Car Loadings

150,000

160,000

10-Yr Average10-Yr High

expectations. Driven by end-user desire to maintain desired inventory levels (45-60 days of supply), railcar loadings fall off rapidly when stockpiles get too

120,000

130,000

140,000

Car

Loa

ding

s

10-Yr Low p y p ghigh and utilities negotiate to take less coal.

Late 2008 railcar loadings fell quickly as stockpiles built 2000 - Present (Coal Carloads Four-Week Total)

100,000

110,000 10 Yr Low

2010

quickly as stockpiles built, eventually reaching 10-year lows.

In 2010, cold winter weather and a hot summer brought stockpiles down Railcar loadings briefly

2000 Present (Coal Carloads, Four Week Total)

600,000

650,000

s down. Railcar loadings briefly returned to 10-year averages. Most recent data indicating another drop in shipments.

450,000

500,000

550,000

Car

Load

ing

70Source: Association of America Railroads, Tudor, Pickering, Holt & Co.

U.S. Coal Production

U S production essentially flat

28,000

Weekly U.S. Coal Production (2000-Present)

U.S. production essentially flat over last 10 years. 21,000

14,000

Weekly U.S. Coal Production

Early 2010 pullback as producers matched production to demand realities of ‘09.

22

25

ton

s

10-Yr High

16

19mm

sho

rt

2010

10-Yr Low


16

Electricity Output

Accounted for 94% of domestic U.S. coal demand in 2009. 5,000

h)

U.S. Electricity Generation vs. GDP (1950-2009)

Historically, electricity output and GDP tightly correlated.

2009 drop in-line with historic GDP/demand relationship

R2 = 0.99

2,000

3,000

4,000

erat

ion

(Tho

usan

d G

Wh

2009

GDP/demand relationship.

From 2008 to 2009; demand fell by 4%, led by an 11% drop in industrial demand, as well as a 2.4% drop in commercial and a 1 1% drop in

0

1,000

$0 $2 $4 $6 $8 $10 $12 $14

Gen

e

GDP (2005 Dollars), $ Trillions

US Electricity Output (GWh) (8/7/2010) commercial and a 1.1% drop in residential demand.

2010 YTD demand up 3% on colder than normal weather.

US Electricity Output (GWh) (8/7/2010)

60 000

70,000

80,000

90,000

100,000

GW

h

30,000

40,000

50,000

60,000G

Week

72Source: Bloomberg - Edison Electrical Institute, Tudor, Pickering, Holt & Co.

Week

2010 2009 3-yr avg

U.S. Steel Production

Industrial demand accounted for 6% of total U.S. coal demand in

80%

100%

Weekly U.S. Steel Plant Utilization (1980-Present)

6% of total U.S. coal demand in 2009. Of that 6%; steelmaking is the primary use.

0%

20%

40%

60%

In 2008, the massive drop in steel plant utilization was the largest since the early 1980s, falling from 90% in August to 33% just fo r months later

0%

Weekly U S Steel Plant Utilization (Last 8 Weeks) four months later.

So far, 2010 has shown strong recovery with year-to-date 70%

72%

74%

76%

78%

80%

Weekly U.S. Steel Plant Utilization (Last 8 Weeks)

recovery with year to date average steel plant utilization ~70%. Better, but still well below pre-recession levels of 87% 60%

62%

64%

66%

68%


Appendix

747474

U.S. Reserves, by Heat Content

Coal produced in the U.S. is of the second highest quality in the

U.S. Coal Reserves, by Coal Type

the second highest quality in the world (after Columbia), averaging ~11,450 mmbtu/lb.

Sub-Bituminous

Lignite

Bituminous (Med/High Volatility)

Bituminous (Low Volatility)

Anthracite

Heat ContentLow Rank Coal

46%Hard Coal

54%stra

ted

2008

)

46% 54%

Lignite9%

Sub-Bituminous37%

Bituminous53%

Anthracite1%

Thermal Coal Metallurgical Coal

% o

f U

.S.

Dem

onRe

serv

e Ba

se (

75Source: IISI, EIA/DOE, Tudor, Pickering, Holt & Co.

Prim

ary

Use Electric

generationElectric

generationElectric

generationDomestic

fuelSteel

Production

Powder River Basin (PRB)

Consists of 17 mines in Wyoming and Montana, which make up ~40% of production and 35% of reserves in the pU.S. (’08).

Compared to the other four regions, the PRB has the lowest coal prices (at the mine), a low btu content and widely varied transport distances to market varied transport distances to market (100 - 1,500+ miles).

The coal here is sub-bituminous, with average heat content of 8,800 btu/lb.

All i h fAll mines here are surface.

In ’08, 95+% of coal volumes from PRB were transported by rail.

Major public players here are BTU (~30% f ’08 d ti i PRB) Ri Ti t of ’08 production in PRB), Rio Tinto

(~30%), ACI (~25%), ANR (~10%)and WLB (~5%).

76Source: BNSF Corporation, Tudor, Pickering, Holt & Co.

Appalachian BasinThe most fragmented region from a supply standpoint with ~1,300 mines (88% of total U.S.) which make up roughly 1/3 of production and 20% of reserves in the U S (’08)and 20% of reserves in the U.S. ( 08).

Three sub-regions: North, Central & Southern.

Compared to the other four regions, the Appalachian Basin has the highest coal prices (at the mine) the highest btu content of coal (at the mine), the highest btu content of coal and short transport distance to markets.

The coal here is bituminous, with average heat content of 12,500 btu/lb (for Central, regional range 10,500-13,500 btu/lb).

~60% of mines here are surface and 40% are underground.

Transportation is varied…in ’08, ~50% of supply was transported by rail, 25% by truck, 20% by barge and 5% by other means.

Major public players here are CNX (~15% ’08 production in this region), MEE (~10%), ANR (~5%), PCX (~5%), ICO (~5%), ACI, ARLP, JRCC and WLT (each <5%)

77

and WLT (each <5%).

Source: BNSF Corporation, Tudor, Pickering, Holt & Co.

Illinois Basin

Consists of 72 mines in Illinois, Indiana and Kentucky, which make up ~10% of production and 25% of preserves in the U.S. (’08).

The coal here is bituminous, with average heat content of 11,800 btu/lb.


Transportation here is varied…in ’08, ~45% of coal was transported by rail, 30% b b d 25% b t k30% by barge and 25% by truck.

Major public players here are BTU (~30% of ’08 production in region), ARLP (~20%), PCX (~10%), JRCC (~3%) and ICO (~2%).( )

Coal Fired Power PlantCoal Fired Power Plant with scrubbers

Coal Mine

River Terminal


Uinta Region

Consists of 17 mines in Utah and Colorado, which make up ~5% of production and 4% of reserves in pthe U.S. (’08).

The coal here is mostly bituminous, with an average heat content of 11,700 btu/lb.


In ’08, ~75% of Uinta coal was transported by rail, 20% by truck

d 5% b th and 5% by other means.

Major public players here are ACI (~35% ’08 production in region), Rio Tinto (~10%) and CNX (~2%).


Gulf Coast LigniteConsists of 13 mines primarily in Texas and Louisiana, which make up ~4% of production and 3% of reserves in the U S (’08)U.S. ( 08).

Compared to the other four regions, the Gulf Coast has low mine prices and low transport costs.

These reserves are generally lignite These reserves are generally lignite, and has the lowest heat content of any of the five regions, averaging 7,000 btu/lb.

All mines here are surface.

Transportation here is varied…in ’08, ~65% of coal was transported by truck, 15% by rail, 15% by tram, conveyor or slurry and 5% by barge.

The biggest players here are private –Luminant Mining (~50% of ’08 production in region) and the North American Coal Corporation (~20%). A major public player here is WLB

Coal Fired Power PlantCoal Fired Power Plant with scrubbers

Coal Mine

River Terminal


(~15%).River Terminal

Top 20 Coal Mines, Ranked by ’07 Production

Freedom (ND)15 mm tons

Falkirk (ND)

Rosebud (MT)13 mm tons

Absaloka (MT)8 mm tons

Spring Creek (MT)16 mm tons

Decker (MT)8 mm tons

Buckskin (WY)25 mm tons

Falkirk (ND)9 mm tonsRawhide (WY)

17 mm tons Coal Creek (WY)10 mm tons

Bl k Th d (WY)

Jacobs Ranch (WY)38 mm tons

8 mm tons

Belle Ayr (WY)27 mm tons

Caballo (WY)31 mm tons

Eagle Butte (WY)25 mm tons

Navajo (NM)10 mm tons

Black Thunder (WY)86 mm tons

North Antelope/ Rochelle (WY)92 mm tons

27 mm tons

Cordero (WY)40 mm tons

Antelope (WY)34 mm tons

Martin Lake (TX)11 mm tons

Kayenta (AZ)10 mm tons

81Source: BNSF Corporation, National Mining Association, Tudor, Pickering, Holt & Co.

Definitions/Conversion Factors

Coking or Met coal – bituminous coal that meets certain specifications (e.g. low ash content) and is used as fuel and/or a reducing agent in the process of making steel. Before it can fuel a blast furnace, the coal is ‘coked’ – a process that removes volatile components.

F b d (FOB) b f t t/ t ibilit f Free-on-board (FOB) – buyer pays for transport/accepts responsibility of cargo once loaded on transportation vessel.

Pig iron – produced by a blast furnace product of smelting iron ore with coke Pig iron – produced by a blast furnace, product of smelting iron ore with coke. Predecessor to steel.

Conversion factors

□ 1 metric tonne = 1.1023 short tons (or 2,205 lbs)

□ 1 tonne of oil equivalent (toe) = 1.5 metric tonnes of hard coal (1.653 short tons)

□ 1 tonne of oil equivalent (toe) = 3 metric tonnes of lignite (3.307 short tons)

82

Analyst Certification:

We, Brandon Blossman, Jessica Chipman, and George O’Leary do hereby certify that, to the best of our knowledge, the views and opinions in this research report accurately reflect our personal views about the company and its securities. We have not nor will not receive direct or indirect compensation in return for expressing specific recommendations or viewpoints in this reportrecommendations or viewpoints in this report.

Important Disclosures:

The analysts above (or members of their household) do not own any securities mentioned in this report.

Analysts’ compensation is not based on investment banking revenue and the analysts are not compensated by the subject companies. In the past 12 months, Tudor, Pickering, Holt & Co. Securities, Inc. has not received investment banking or other revenue from any of the companies mentioned within this report. In the next three months we intend to seek compensation for investment banking services from the companies mentioned within this report.

For detailed rating information, distribution of ratings, price charts and other important disclosures, please visit our website at www.tudorpickering.com. To request a written copy of the disclosures please call 713-333-2960 or write to Tudor Pickering Holt & Co Securities Inc 1111 Bagby Suite 5000 Houston TX 77002Tudor, Pickering, Holt & Co. Securities, Inc. 1111 Bagby, Suite 5000, Houston, TX 77002.

Ratings: B = buy, A = accumulate, H = hold, T = trim, S = sell, NR = not rated

This communication is based on information which Tudor, Pickering, Holt & Co. Securities, Inc. believes is reliable. However, Tudor, Pickering, Holt & Co. Securities, Inc. does not represent or warrant its accuracy. The viewpoints and opinions expressed in this communication represent the views of Tudor, Pickering, Holt & Co. Securities, Inc. as of the date of this report. These viewpoints and opinions may be subject to change without notice and Tudor, Pickering, Holt & Co. Securities, Inc. will not be responsible for any consequences associated with reliance on any statement or opinion contained in this communication. This communication is confidential and may not be reproduced in whole or in part without prior written permission from Tudor, Pickering, Holt & Co. Securities, Inc.

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RESEARCH

Oil ServiceDan [email protected]

TRADING 800.507.2400SALES

HoustonTom [email protected]

Michael du [email protected]

Scott McGarvey

DenverChuck [email protected]

MacroDave [email protected]

Jeff [email protected]

Joe [email protected]

M B tt

PK [email protected]

Mike Bradley713.333.2968mbradley@tudorpickering com

[email protected]

Seth [email protected]

Jason [email protected]

Win Oberlin303.300.6637woberlin@tudorpickering com

Jon [email protected]

Gas/PowerBrandon Blossman

Max [email protected]

E&PDavid [email protected]

[email protected]

Clay [email protected]

Mike Davis713 333 2971

[email protected]@tudorpickering.com

George O’[email protected]

DEBT SALES & TRADING

Clay Border 713.333.2974cborder@tudorpickering comBrian Lively

[email protected]

Brad [email protected]

Jessica Chipman

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Leah [email protected]

Josh Martin

[email protected]

Jessica [email protected]

Oliver [email protected]

Josh [email protected]

Paige [email protected]

coal industry primer

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