US Coal Markets: Looking Abroad

Presentation to:

Jackson Kelly Coal Summit Lexington, Kentucky

By

Jamie Heller
April 15, 2011 Hellerworx, Inc. 301-654-1980 jamie@hellerworx.com

Agenda

Review of 2008 - Present Coal Market Global Market Drivers Key Drivers of Coal Price Volatility Coal Transportation Changes Closing Observations

Review of 2008 - Present Coal Market Movements

US Coal Production, 2008 - Jan 22, 2011

2008-2010 Totals
(millions of tons) Coal Supply Region Central Appalachia (CAPP) Northern Appalachia (NAPP) Illinois Basin (ILB) Powder River Basin (PRB) Colorado and Utah Other Regions Total 2008 232 134 100 512 56 137 1,171 2009 192 125 104 470 50 132 1,073 2010 (DTC 2009-2010 est.) % chg. 183 127 106 484 44 131 1,075 -4.7% 1.6% 1.9% 3.0% -12.0% -0.8% 0.2%

Sources: 2008-2009 EIA data; 2010-YTD 2011 Doyle Trading Consultants estimates.

Volatility of Coal Prices Has Increased Dramatically (2000 through late Feb 2011)

Coal Price Spreads Are Unstable

Summer 2008 Coal Supply Situation

No spare production capacity US Central Appalachian region hitting serious supply limits Strong demand for export coal Australian coal mines flooded Coal stockpiles low at eastern utilities Railroad network congested and pricing to match

Summer 2009 Coal Supply Situation

Excess production in major basins CAPP prices falling below production costs Export demand shrinking dramatically Strong demand shifts in US market driven by FGD installations Natural gas displacing coal Stockpiles overflowing Railroads experiencing major traffic declines
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Early 2010 Coal Supply Situation

Coal production levels close to expected 2010 demand Coal prices beginning to recover, but still below expected long-term equilibrium levels 2010 coal exports and imports expected to be close to 2009 levels Natural gas prices increasing as economy begins to recover Coal stockpiles still high Aussie vessel queues but no price spikes
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April 2011 Coal Supply Situation

Coal demand partially recovered from 2009 lows, showing limits of natural gas displacement of coal. Declines in CAPP and CO/UT coal production have almost completely offset cautious expansions in other regions. Mining costs continue to increase, especially in CAPP (impact of new environmental and mine safety regulations, plus increased enforcement of new regulations) Strong market for exports of metallurgical coal Coal stockpiles built up during 2009 are being drawn down Service issues on some railroads as available crews, locomotives and railcars fail to keep pace with recovery in demand
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Coal Supply-Demand Forecast

Doyle Trading Consultants Forecast of U.S. Coal Supply and Demand (Feb 2011)
(millions of short tons)

2006
CAPP NAPP ILB PRB Colorado/Utah Other Regions Total U. S. Coal Production Consumption for Electricity Generation Coke Plants Other Industrial Plants Residential and Commercial Total Domestic Consumption Exports (Metallurgical Coal) Exports (Steam Coal) Total Exports Imports Net Exports Total Demand for U.S. Coal Coal Supply Surplus (or Deficit) 234 135 95 489 62 148 1,163 1,027 23 60 3 1,113 28 22 50 36 14 1,127 36

2007
224 131 96 497 61 138 1,147 1,046 23 57 3 1,129 33 27 60 36 24 1,153 (6)

2008
232 134 100 512 56 137 1,171 1,044 22 55 3 1,124 43 39 82 34 48 1,172 (1)

2009
192 125 104 470 50 132 1,073 937 15 45 3 1,000 37 22 59 23 36 1,036 37

2010
183 127 106 484 44 131 1,075 981 20 48 3 1,052 58 24 82 19 63 1,115 (40)

2011
174 129 111 493 44 132 1,083 1,001 22 50 3 1,076 57 25 82 17 65 1,141 (58)

Sources: 2006-2009 EIA; 2010-2011 Doyle Trading Consultants estimates.

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Global Market Drivers

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Global Market Fundamentals: Large Expected Increases in Coal Demand

According to the EIAs International Energy Outlook 2010, global coal consumption is expected to grow 55% between 2009 and 2035 (an increase of about 4.2 billion short tons per year, from about 7.6 billion short tons/year currently to 11.8 billion short tons/year by 2035), with most of the increase occurring in China and India. Demand for metallurgical coal will likely increase even faster. Peabody Energy expects global steel production to increase 66% between 2010 and 2020 (an increase of almost 900 million metric tonnes/year), leading to a 33% increase in demand for metallurgical coal (an increase of about 400 million metric tonnes/year) over this ten-year period. Most of this increase is expected to occur in China and India.

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US Steam Coal Exports 1991-2011

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US Coking Coal Exports 1991-2011

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Strong Growth in Asian Coal Demand Expected to Continue Over Long Term

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Expected Coal Import/Export Trends

Exports of metallurgical coal from the U.S. increased by more than 20 million short tons during 2010 (from about 37 million short tons in 2009 to about 58 million short tons in 2010), and may increase further during 2011 due to strong global demand for, and tight global supplies of, metallurgical coal. The Queensland Resources Council estimates that flooding in the Australian state of Queensland earlier this year may reduce total Australian coal production (including steam coal and metallurgical coal ) by 30 to 50 million metric tonnes during 2011. In Europe: German nukes shutdown, Gazprom reliability issues; limitations on South African and Russian exports Increased export opportunities for Illinois Basin steam coal, shipped via the Gulf of Mexico. Coal imports into the U.S. (which are primarily steam coal) are likely to contract in the near term due to high international coal prices, and competition between coal and natural gas.
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Capacity at Major U.S. Coal Export Terminals

Capacity Utilization And Available Capacity at Major U.S. Coal Export Terminals
(loading & capacity data in millions of short tons) 2010 Loadings (export + coastwise) Hampton Roads Lamberts Point DTA Pier IX Subtotal for Hampton Roads Baltimore CNX Marine (Consol) Chesapeake Bay Subtotal for Baltimore Gulf Coast (New Orleans + Mobile) Total 16.7 14.0 7.3 38.0 10.8 4.5 15.3 24.6 77.9 Estimated Total Capacity (best month 2010 x 12) 21.6 18.0 11.6 51.2 15.6 7.0 22.6 36.5 110.3 Estimated Capacity Utilization (%) 77% 78% 63% 74% 69% 64% 68% 67% 71%

Estimated Available Capacity 4.9 4.0 4.3 13.2 4.8 2.5 7.3 11.9 32.4

Data source: T. Parker Host presentation to Coaltrans USA conference, February 4, 2011

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Key Drivers of Coal Price Volatility

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Key Drivers of Coal Price Volatility

Coal production capacity planned to meet rather than exceed demand worldwide U.S. Central Appalachian region hitting serious supply limits Depletion of existing mines Long permitting cycle and smaller reserve blocks for new mines Production impact of valley fill issue and new safety regulations

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Key Drivers of Coal Price Volatility (contd)

U.S. coal prices affected by volatility in international coal markets Economic cycles Industrial demand Natural gas prices SO2 emission allowance prices Stockpile Levels Transport Pricing and Service
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Historical Natural Gas Prices (prompt month contract) (1994-Present)

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Natural Gas Futures Prices

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Recent Coal Price Volatility (And Soft Demand) Appears To Have Reversed 2002-2006 Decline in Stockpiles

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D. Coal Transportation

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Rail Rate Increases for PRB Coal Shipments

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Rail Rate Increases for Domestic Shipments of CAPP Steam Coal

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Rail Rate Increases for Steam Coal Exports

CSX Tariff Rates for Steam Coal Exports, 2007-2011
Rate Rate Rate % Effective Effective Effective Rates change June 2, April 1, April 1, Effective 20072007 2009 2010 April 1, 2011 2009 % change 20092010

Origin

Destination Baltimore, MD (Chesapeake Bay Piers or CNX Coal Terminal)

% change 2010-2011

% change 2007-2011

MGA District

Base Rate (US$/short ton) Fuel Surcharge (US$/short ton) Total (US$/short ton)

$18.84 $0.84 $19.68

$33.60 $0.00 $33.60

$34.58 $0.80 $35.38

$40.79 $1.40 $42.19

70.7%

5.3%

19.2%

114.4%

Newport News, VA (Dominion Terminal or Kanawha District Pier IX Terminal)

Base Rate (US$/short ton) Fuel Surcharge (US$/short ton) Total (US$/short ton)

$20.45 $1.19 $21.64

$35.00 $0.00 $35.00

$36.10 $1.14 $37.24

$43.05 $1.99 $45.04

61.7%

6.4%

21.0%

108.1%

MGA District

Baltimore, MD (Chesapeake Bay Piers or CNX Coal Terminal)

Base Rate (mills/ton-mile) Fuel Surcharge (mills/ton-mile) Total (mills/ton-mile)

47.1 2.1 49.2

84.0 0.0 84.0

86.5 2.0 88.5

102.0 3.5 105.5

Newport News, VA (Dominion Terminal or Kanawha District Pier IX Terminal)

Base Rate (mills/ton-mile) Fuel Surcharge (mills/ton-mile) Total (mills/ton-mile)

36.0 2.1 38.1

61.6 0.0 61.6

63.6 2.0 65.6

75.8 3.5 79.3

Notes: 1. The base rates shown above assume 10,000 ton unit trains. 2. CSX switched from a revenue-based to a mileage based fuel surcharge effective April 23, 2007. The mileage-based fuel surcharge was 22 cents per carload per mile effective June 2, 2007. All fuel surcharges have been converted to $/ton to facilitate comparisons across periods. The mileage-based fuel surcharges were computed based on shipments originating at Bailey, PA (for the MGA district) or Harris, WV (for the Kanawha district) in 100-ton cars. Sources: CSX Transportation Tariffs 4734-I, 4734-M, 4734-O, 4734-P and Publication 8661.

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Current Rail Rate and Service Trends

Rail rates for coal shipments to both captive and competitively-served destinations are approaching the Surface Transportation Board (STB) maximums for movements to captive destinations. Thus far, the railroads appear willing to accept some loss of volume in return for higher margins, rather than structuring rates to improve dispatch at coal plants affected by coal vs. gas competition. Service on some railroads has suffered as the rebound in coal demand has outstripped the available supply of railcars, train crews, and locomotives.

Closing Observations

Key Observations

US coal growth will slow: limited new plants, strong competition in near term from low-priced natural gas Scrubber installations will drive increased use of high-sulfur Illinois Basin and Northern Appalachian coal (often as a substitute for CAPP coal. The Illinois Basin will likely be the next new major coal growth area For structural reasons coal prices are likely to remain volatile Non - US coal demand will increase over long term Mine permitting issues, rising mining costs, and difficult economics vs. natural gas generation will likely lead to continued declines in CAPP coal production in the near term. The high coal inventories built up during 2009 are being drawn down. Both Hazardous Air Pollutants (HAPs) regulations and potential CO2 emissions regulations are significant sources of uncertainty for coal-fired generation, and will likely be key drivers of coal vs. gas economics, and planning decisions for new generation, for the foreseeable future.