1

Building New Coal Generation/SNGRegulated vs Unregulated

August 22, 2006

2

World’s Largest Coal Company:Peabody’s Portfolio of Operations

Market position as of December 31, 2004. 2005 sales volume in millions of short tons. Venezuela sales volume for Paso Diablo Mine, of which Peabody owns a 25.5% interest. Reserves based on 2005 proven and probable for areas shown. Queensland market position represents met coal only. Source: Peabody analysis & industry reports.

St. Louis

DominionTerminal

Queensland

Dalrymple BayTerminal

Port ofNewcastle

Port ofBrisbane

Venezuela

Port ofSanta Cruz

MarketPosition Sales Reserves

Wyoming PRB #1 126 3,327Midwest #1 38 4,174Southwest #1 18 980Colorado #1 11 252Appalachia #6 14 584Queensland #5 8 289Venezuela #1 7 175

Millions of short tons

3

Peabody Participating in MultipleBtu Conversion Opportunities

30% ownership inEcono-Power InternationalPRB and Illinois Basin coal transformed into low-Btu gasCost effective at $5 to $6/mmBtu

Agreement with Arclight to evaluate Illinois location for pipeline-quality gasConocoPhillips and Fluor participating in technology and plant design Pipeline-quality natural gas competitive as low as $7 per mmBtu

Peabody part of FutureGen Industrial AllianceGoal: Generation and hydrogen; near-zero emissions; CO2 sequestrationAlliance includes Southern Company, AEP, Huaneng $700 million from DOE; $250 million from industry

High gas prices point to need for coal-to-liquidsCoal-to-liquids at $35 – $40/barrel oilPeabody partnership with Rentech for coal to liquids plant

Planned “Coal to Diesel” Plant in Erdos, China

LiquefactionLiquefaction HydrogenHydrogenGasificationGasification(Industrial or Pipeline)

4

Global Coal Use Soars 25%, or 1.1 Billion Tons, in 3 Years

ThreeThree--Year Percent Change in Global Energy ConsumptionYear Percent Change in Global Energy Consumption

Source: BP Statistical Review of World Energy, 2003, 2004 & 2005.

0 5 10 15 20 25

25.3%

2001

-20

04C

hang

e

9.1%

5.9%

7.6%

3.9%

Coal

Natural Gas

Oil

Hydro

Nuclear

5

IndiaChina

Mexico

RussiaSouth Korea

Australia

USA

UKItaly

Malaysia

0

3,000

6,000

9,000

12,000

15,000

0 10,000 20,000 30,000 40,000

GDP per Capita (in US$)

Kilo

wat

t-hou

rs p

er C

apita

Mexico

Russia

South Korea USA

Italy

IndiaChina

AustraliaUK

Malaysia

0

150

300

450

600

0 10,000 20,000 30,000 40,000

GDP per Capita (in US$)

Pass

enge

r Veh

icle

s pe

r 1,0

00 P

eopl

e

Electricity Usage per CapitaElectricity Usage per Capita Passenger Vehicles per CapitaPassenger Vehicles per Capita

Per-Capita Coal Use Just 1/3rd (China) and 1/9th (India) the U.S. Level

Developing Countries Will Greatly Expand Per-Capita Energy Use

Source: United Nations’ Human Development Report 2005, World Energy Outlook & ConocoPhillips.

6 Source: Energy Information Administration, August, 2006.

10.3¢ 28%

6.7¢65%

5.8¢95%

5.9¢10%

5.6¢67%

5.1¢96%

7.8¢72%

6.5¢7%

6.6¢75%

7.4¢89%

8.9¢46%

11.8¢1%

5.8¢96%

6.4¢46%

10.0¢38%

6.8¢78%

6.6¢63%

7.2¢53%

5.9¢85%

6.7¢48%

7.6¢39%

8.0¢70%

6.2¢49%

8.2¢ 25%

8.1¢58%

6.4¢94%

7.5¢87%

10.8¢2%

8.4¢37%

6.7¢57%

7.5¢65%

6.7¢ 39%

5.0¢ 91%

6.7¢45%

8.5¢56%

5.0¢98%

7.5¢61%

6.8¢ 61%

5.1¢1%

12.5¢10%

20.4¢14%

NH 14.3¢ 17%VT 11.4¢ 0% MA 15.5¢ 25% RI 14.1¢ 0%CT 14.1¢ 12%NY 13.1 ¢ 14%NJ 10.5¢ 19%DE 7.8¢ 60%MD 8.3¢ 56%

¢ = average retail price per kilowatt hour through 5/06

% = percent of total generation from coal for CY 2005 < 6.5¢

> 6.5¢ - < 8.0¢> 8.0¢ - < 9.5¢

> 9.5¢ - < 11.0¢

> 11.0¢Hydro

Retail Cost Per kWh & Percent of Coal GenerationRetail Cost Per kWh & Percent of Coal Generation

Over 51% of U.S. Electricity is from CoalSource of Low Cost Electricity in US

7Source: U.S. Environmental Protection Agency, IEA Annual Energy Outlook 2005.

Coal Based Electricity Has Increased 80% Since ‘80Coal Based Electricity Has Increased 80% Since ‘80WhileWhile Emissions Have Been Significantly ImprovedEmissions Have Been Significantly Improved

actual forecast

Reductions continue with existing plants

8

Emissions from CoalEmissions from Coal--Fueled Generating PlantsFueled Generating Plants

* EstimateSource: EPA’s Clean Air Markets database; EIA 2005 Annual Energy Outlook; GE Energy; SFA Pacific.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Poun

ds P

er M

illio

n B

tu

Sulfur DioxideNitrogen Oxide

U.S.Average

2005

Clean AirInterstate

Rule2010

New MidwestPermit Limit

Clean AirInterstate

Rule2015

0.10

0.320.39

0.16

0.26

0.120.182

0.07 0.06

0.93

New PRB Plant Permit

Limit

Near-Zero

FutureGenGoals

0.030.06

New IGCCProjection

ExistingIGCC

(PermitLevel)

0.17

0.08

The Path Toward Near-Zero Emissionsfrom Coal-Fueled Generating Plants

9

Regulated vs Unregulated Coal Generation or SNGIt Matters How Much Risk You Can Manage

Capital costs risk – Coal project costs up by 30 – 50% over the last 2 years for steel, copper and labor - $1 – 3 billion in project size (600 – 1,600 MW)

– Regulated generation/SNG can pass risk to ratepayers with PUC approval– Unregulated generation/SNG needs capital cost “managed” much more tightly to

financeTechnology risk – Usually shows up in the form of operating performance risk – How do you manage operating availability if its only 70% versus 90% expected?

– Regulated generation/SNG can pass poor performance along to ratepayers with PUC approval

– Unregulated generation/SNG manage with performance guaranteePay higher capital costs (10 – 20%) for potential new regulations

– Regulated generation can pass along to ratepayers with PUC approval– Unregulated generation few avenues to offset unless legislation

Selling output– Regulated generation/SNG implies contract– Unregulated generation/SNG must be explicit long term agreement (15 -20 years)

Manage on going fuel cost fluctuations due to technology inflexibility – Some new technologies struggle with the low cost coalsPlant location/fuel source – if long term fuel cost an issue, tend to locate for fuel advantages, mine-mouth or on water

10

Major Coal Supply BasinsCost and Location Favor New Coal Plants in Illinois Basin

(East) and Western/PRB (West)

Northern AppalachiaMedium-High CostStable ReservesVery Transportable

Central AppalachiaHigh CostDeclining ReservesTransportable

Illinois BasinMedium CostAbundant ReservesLimited Transport

Northern LigniteLow-Medium CostStable ReservesNot Transportable

Western CoalsMedium CostSomewhat AbundantTransportable (Varies)

Powder River BasinLow CostAbundant ReservesVery Transportable

Southern LigniteMedium CostSomewhat AbundantNot Transportable

11

Thoughts on New Coal Generation Technology Choice

Do you have a large government subsidy or ratepayers “guaranteeing” payment of extra costs?IGCC hold great promise but not commercially viable at this time for unregulated generation without subsidiesIGCC technology has not been scaled up to large coal size > 1,200 MWIGCC costs significantly moreSupercritical units on most coals are more efficient than IGCC

– Illinois Basin, lignite and PRB (low cost coals) not fuels of choice for IGCC– Most IGCC run on expensive “designer” coals or petcoke (not coal)

Coals with high ash content (Illinois Basin and lignite) difficult for IGCC technology. Concerns exist about compatibility.

12

Net Export/Import of Electricity per StateNet Export/Import of Electricity per State

Major Electricity Export StatesAre Coal States

Source: Energy Information Administration, March 2006.

-26-11%

1392%

19157%

910%

15%

29189%

-3-6%

-2-4%

37%

1151%

411%

-83-30%

1036%

-4-40%

257%

-3-7%

-20-28%

1016%

23%

3522%

2634%

-17-22%

-3-5%

7 8%

00%

1311%

-18-10%

NewEngland

-4-3%-19

-11%

-5-11%

4040%

-12-8%

13 14%

-1%-1

-41-34%

5534%

60181%

-11-8%

-17 -15%

-13-55%

00%

00%

NJ -24 -29%DE -5 -39%MD -23 -30%

+/- = TWh of Electricity Exported or Imported per State

% (+/-) = Percent Export/Import versus Retail Sale & Loss

Large Exporter: >10 TWhSmall Exporter: 0 – 10 TWhSmall Importer: -10 – 0 TWhLarge Importer: < -10 TWhNeither: 0 TWh

13 Source: DOE/NETL 6/21/06

3, 900

2,500 500

3,100

900

1,200

2,400

500

2,100

3,300

5,000

2,5002,100

600

10,900

1,900

1,500

2,400

1,200

10,400

800

2,500

700

1,300

400

1,7004,300

0

40

400 0 1,200

2,700

4,9002,200

3,200

2,100

8001,000

500

700

0

NH 0VT 0MA 0RI 0CT 0NJ 0DE 0MD 200

> 4,0002,000 – 4,0001,000 – 1,999100 – 9990 – 99

MW of Announced Coal Plants

New Coal DevelopmentCentered Around Coal Producing States

14

Cost of Capital Var. O&M Fixed O&M Coal Gas

$0

$10

$20

$30

$40

$50

$60

$70

$80

Mine-Mouth LargeNew Coal

$0.95/ MMBtu

Utility Site LargeExisting Coal$1.80/ MMBtu

Retrofit LargeExisting Coal$1.80/ MMBtu

Retrofit SmallExisting Coal$2.40/ MMBtu

Gas CC $6.00/ MMBtu

Gas CC $9.00/ MMBtu

Source: Energy Information Administration Annual Energy Outlook 2005 & Peabody analysis; assumes 90% capacity factor, 10.8% weighted cost of capital, 30-year investment life, delivered fuel cost as shown above, latest environmental technologies & EIA’s estimates of capital and non-fuel costs

Req

uire

d 20

10 P

rice

($ /

MW

h, in

clud

ing

retu

rn) $57.63

$48.97

$79.37

2010 Delivered Fuel Prices

New Gas

$54.89

Lowest Cost Baseload Option Location Matters – Mine Mouth

$33.29

$57.40

Michigan Delivered Coal

15

PRAIRIE STATE ENERGY CAMPUSPRAIRIE STATE ENERGY CAMPUSNew LowNew Low--Cost, Clean Coal GenerationCost, Clean Coal Generation

− 40 miles Southeast of St. Louis in Illinois

− 1,600 MW supercritical generating plant fueled by 6+ million ton/year adjacent mine

− Final air permit received April 2005, now in appeal process expecting US EPA Board of Appeals decision within a month

− All other permits needed to operate have been issued by the initial permitting agency

− Cleanest coal Plant in Illinois and 7% – 20% more CO2 efficient than existing coal fleet

− 47% of project owned by a group of Midwestern municipals & cooperatives

− Additional 6% of ownership is committed

− Targeting generation in the 2011 timeframe

Prairie State Energy CampusWashington County, Illinois

16

1. Wolverine Power Supply Cooperative, Inc.

– Abbreviation: WPSC– 400,000 people served

2. Northern Illinois Municipal Power Agency

– Abbreviation: NIMPA– 52,000 people served

3. Missouri Joint Municipal Electric Utility Commission

– Abbreviation: MJMEUC– 800,000 people served

4. Soyland Power Cooperative, Inc.– Abbreviation: Soyland– 156,000 people served

5. Indiana Municipal Power Agency– Abbreviation: IMPA– 340,000 people served

6. Kentucky Municipal Power Agency– Abbreviation: KMPA– 54,000 people served

1

2

3

45

6

Prairie State Partners Serve Nearly 2 Million PeoplePrairie State Partners Serve Nearly 2 Million PeopleIn 5 States, Almost All in the Midwest ISOIn 5 States, Almost All in the Midwest ISO

17

Supercritical Pulverized Coal vs. IGCCAnalogy to the Family Car

Family of 6 needs a new car and has annual income of $60,000 and lives in rural area with few neighbors so the car must run wellDecision tried and true Chrysler/Ford/GM minivan or new type of van with new type of engineIssues

– Tried and true van costs 20% less ($30,000 versus $36,000)– Spouse has to use van to get kids to school everyday as well as run errands, little or no

alternatives if van does not run.– Operating history shows “new van with new engine” 15 – 30% more unavailable than tried

and true model.– Mechanics for tried and true model all over, new van with new engine requires specialty

maintenance that only a few in the US can do– Operating the new van is very different than tried and true to the point that spouse must take

special driving classes to operate– Tried and true van has complete warranty for 10 years and 100,000 miles; new van has 60

day warranty– Tried and true gets 15% better gas mileage than old cars, is equal to “new van” and in many

cases better gas mileage except when using the designer gas that only a few stations carry– Both cars have great environmental performance – 70% lower than average today and

exceed 2015 government standards with new van being slightly better– New van will perform better if all tail-pipe emissions must be captured and stored, but in both

cases it will double the cost of operating the vehicle to the point you are unsure that vans make sense

Which car is your spouse going to let you buy?