Coal & America’s Energy Future

Mike Quillen, Chairman & CEO Alpha Natural Resources, Inc.

National Conference of State Legislatures– Nov. 20, 2008

Today’s discussion

First … a little bit about Alpha• Headquartered in Abingdon, Virginia

• Went public in Feb. 2005; listed on NYSE (symbol: ANR)

• 62 mines (more than any other U.S. coal company),11 coal preparation plants & 3,800 employees in 4 states

• About $2 billion in annual revenues

• Supply about 30 million tons coal a year to approx. 120 customers

• Largest U.S. producer & exporter of metallurgical coal for the worldwide steel industry

• Also a major supplier of thermal coal to electric utilities

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The basics : how is coal mined?

Primary Underground Mining Methods

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– Truck & shovel

– Truck & loader

– Dragline

– Auger

– Highwall miner

The basics : how is coal mined?

Primary Surface Mining Methods

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Coal is the most abundant energy resource in the United States. The U.S. has more than 270 billion tons of recoverable coal, enough to fuel the nation’s energy needs for 240 years at the present consumption rate.

Coal: a case for energy security

Coal94%

Natural gas3%

Petroleum3%

Source: BP; Energy Information Administration

U.S. Fossil Energy Reserves – Btu Basis

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$28.3$43.9

$101.5 $110.5

7.5¢64%

6.4¢8%

6.5¢7%

5.1¢0%

12.8¢1%

10.0¢22%

5.3¢96%

7.7¢68%

6.4¢85%

8.5¢36% 7.4¢

77%

10.3¢40%

7.3¢47%

6.9¢73%

6.2¢60%

6.8¢47%

6¢94%

7.4¢60%

6.8¢76%

6.5¢82%

6.9¢48%

8.4¢35%

8.1¢36%

7.1¢64%

8.6¢47%

8.4¢64%

8.6¢60%

6.5¢96%

5.8¢94%

7.9¢86%

9.1¢55%

7.1¢46%

5.3¢98%

7.8¢62%

7.2¢41%

7.8¢64%

7.5¢56%

10.3¢31%

13.3¢1%

14.4¢15%

21.3 ¢14%

20.7¢14%

NH 14.0¢ 17%VT 12.0¢ 0%MA 15.2¢ 25%RI 13.2¢ 0%CT 16.2¢ 11%NJ 11.9¢ 17%DE 11.4¢ 74%MD 11.4¢ 60%

¢ = average retail price per kilowatt hour, 2007

% = percent of total generation from coal, 2007

SOURCE: Energy Information Administration, March 2008

Cost per kWh & Percentage of Electricity Generated by Coal, by State - 2007

Coal provides low-cost electricity

< 8.0¢

> 8.0 ¢ – 10.0¢

> 10.0¢

Hydro

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Energy costs : coal vs. other fuels

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$28.3

$101.5 $110.5

Electric Utility Fuel Price Increases, 2002-2007

SOURCE: U.S. DOE/EIA (November 2007)

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Master HeaderEnergy costs : an unequal burden

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$28.3$43.9

$101.5 $110.5

10% 11%

19%

5%4%

8%

0%

5%

10%

15%

20%

25%

1997 2001 2007

Family Energy Costs as % of After-Tax Income, 1997 - 2007

SOURCE: U.S. DOE

Under $50K/yr Over $50K/yr

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Master HeaderEnergy costs : coal vs. other fuels

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$28.3$43.9

$101.5 $110.539%

66%

121%

91%

51%

0%

20%

40%

60%

80%

100%

120%

140%

Electricity Natural gas Fuel oil Propane AVERAGE

Change in Household Energy Expenses By Fuel Source - 1997 to 2007

•Costs by fuel are averages for households using that type of fuel.

SOURCE: Americans for Balanced Energy Choices

If not coal … then what?

Percentage of Electricity Generation, by Fuel Type - 2006

COAL50%

RENEWABLES/OTHER

2%

OIL2%HYDRO

7%

NAT GAS19%

NUCLEAR20%

SOURCE: U.S. Energy Information Administration; National Mining Association

Replacing 50% of the fuel used to power America is not feasible in the near term.

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If not coal … then what?

Natural gas $0.25

Coal $0.44

Hydroelectric $0.67

Nuclear $1.59

Wind $23.37

Solar $24.32

Federal Subsidies by Resource Per Megawatt Hour Produced

SOURCE: U.S. Energy Information Administration

Cost of renewables is expensive, meaning states have to mandate use (RPS)… and the charge gets hidden in utility bills.

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If not coal … then what?

Source ChallengeNuclear • 35-50 plants needed by 2030 just to maintain contribution

• Credit crisis may stall development

Solar • Best technology today is expensive and only 40% efficient

• Big issues with power storage, polysilicon supply

Wind • Wind generators typical output is only 25-35% of rated capacity

• An energy “source” rather than baseload capacity resource

Transmission • High voltage projects can take 7-10+ years from design to construction

• In Southeast (SERC) , large # of proposed power plants are in areas with inadequate transmission

SOURCE: North American Electric Reliability Corp.

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Electricity demand grows with the overall economy—and should continue doing so.

U.S. Electricity Consumption vs. GDP(Actual 1950-2006 / EIA Forecast 2007-2030)

US GDP ($B 2000)SOURCES:(1) Actual EIA, CEA(2) Forecast: EIA 2007 Reference Case.

0

1000

2000

3000

4000

5000

6000

0 5000 10000 15000 20000 25000

TwH

1950

2006

2030

NOTE: FORECAST ASSUMESTHAT THE REAL PRICE OF ELECTRICITY REMAINS FLAT

Electricity demand is increasing

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America’s electric reliability is squarely at risk.

Our electric grid is in perilEnergy demand is growing faster than supply…

• Oil use is up 15% since 1973 energy crisis…but electricityuse is up 115%

• Peak demand for electricity in the U.S. is projected to increase by more than 135 Gw (17.7%) in the next 10 years, while committed resources are projected to increase 77 Gw (8.4%)

… leaving capacity margins dangerously low

• Baseload generating capacity margins dropped to 17% last year from 30-40% in the early 1990s

• California, other areas face potentially crippling blackouts as early as next year

SOURCE: North American Electric Reliability Corp.; NextGen Energy Council; Forbes magazine

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Forecasted U.S. Electricity Capacity Margins

2007 2016Available Capacity Margin

SOURCE: North American Electric Reliability Corp

Our electric grid is in peril

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“ We’re to the point where we need

every possible resource:

renewables, demand response

and energy efficiency, nuclear,

clean coal – you name it, we need it.”

Rick Sergel, President

North American Electric Reliability Corp.

Our electric grid is in peril

Coal : our challenges

But …

America’s most abundant and

economical source of

electricity faces

numerous challenges

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Coal : our challenges

• Mine productivity is steadily declining

• Costs are steadily rising

• 50,000 new miners are needed over the next 10 years

• Regulatory oversight has intensified

• Permits are difficult to obtain, and costly

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Mining Permit

Circa 1983

Prep time: ~ 6 Months Cost: ~$10,000

Challenge : permitting

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Mining Permit

Circa 1983

Prep time: ~ 6 Months Cost: ~$10,000

Mining Permit Circa 2005

Prep time: 3 + Years Cost: ~$750,000

Challenge : permitting

• Clean Air Act• Clean Water Act• Safe Water Drinking Act• Solid Waste Disposal Act• Federal Land Policy and Management Act• Surface Mining Control and Reclamation Act• Comprehensive Environmental Response, Compensation andLiability Act (CERCLA)

• Toxic Substances Control Act• Resource Conservation and Recovery Act• Migratory Bird Treaty Act• Endangered Species Act

… and then there are state regulations.

Challenge : the environment

Federal Environmental Laws That Govern Coal Operations

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Coal : our challenges

• Mine productivity is steadily declining

• Costs are steadily rising

• 50,000 new miners are needed over the next 10 years

• Regulatory oversight has intensified

• Permits are difficult to obtain, and costly

• Carbon regulation is on the way

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Carbon legislation is on the way

“There are ominous signs that the earth’s weather patterns have begun

to change dramatically.”

“…after three quarters of a century of extraordinarily mild conditions, the

earth’s climate seems to be cooling.”

“…satellite photos indicated a sudden, large increase in Northern Hemisphere snow cover in the winter of 1971-72.”

“Others regard the cooling as a reversion to ‘little ice age’…”

“Some of the more spectacular solutions proposed (include) melting

the arctic ice cap..”

Newsweek magazine – April 28, 1975

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The Virginia Energy Plan sets out four broad energy goals for the Commonwealth over the next 10 years:

1. Increase energy independence• Virginia is a net importer of energy• Increase Virginia indigenous energy production by 20%• Reduce growth rate of energy use by 40%, with a focus on energy conservation

2. Expand consumer energy education• Overcome barriers to energy efficiency and conservation actions• Goal of 10% reduction in electricity use from such actions

3. Increase energy R&D • Alternate fuels• Nuclear technology• Coastal energy production• Carbon capture & storage (CCS)

4. Reduce greenhouse gas emissions 30% by 2025• Reduce emissions to 2000 levels• Plan to be developed by Governor’s Commission on Climate Change

Carbon legislation is on the way

Carbon legislation is on the way

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President-Elect Obama

• Supports cap-and-trade system to cut U.S. carbon dioxide emissions 80% below 1990 levels by 2050.

• 100% of emission credits auctioned.

• Provide incentives to accelerate private sectorinvestment in clean coal technology.

• Instruct DOE to develop 5 commercial-scale coal fired power plants with carbon capture & storage.

• Industrial scale CCS has been commercially deployed :• StatoilHydro (Norway) has been operating more than 12 years• Power station projects in Germany and France will be operational shortly• 10-12 commercial scale CCS power plans expected in Europe by 2015

• The European Commission estimates that the cost of meeting its climate change commitments to 2030 would be 40% higher (60 billion Euros) if CCS is not included in the response.

• The Pew Center estimates that building 30 CCS demonstration projects would save the U.S. $80-100 billion in subsequent CO2 mitigation costs.

Concluding thoughts about CCS

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Concluding thoughts about CCS

“We conclude that CCS is the critical enabling

technology that would reduce CO2 emissions

significantly while also allowing coal to meet the world’s

pressing energy needs.”

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2007 MIT Study – “The Future of Coal”

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www.alphanr.com