##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 3⁄43⁄43⁄43⁄43⁄4
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2006
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period fromto.
 Commission
file number: 333-107569-03
 Arch Western Resources, LLC
  Delaware
    
    43-1811130(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification NumberOne CityPlace Drive, Suite 300, St. Louis, Missouri
    
    63141(Address of principal executive offices)
    
    (Zip code)
  þ o
  o o þ
 o þ




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##### 



Table of Contents
 PagePart I Financial Information
    
    
    1Item 1.
    
    Financial Statements
    
    
    1Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    14Part II Other Information
    
    
    14Item 1.
    
    Legal Proceedings
    
    
    14Item 1A.
    
    Risk Factors
    
    
    14Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    14Item 3.
    
    Defaults Upon Senior Securities
    
    
    14Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    14Item 5.
    
    Other Information
    
    
    14Item 6.
    
    Exhibits
    
    
    14Rule 13a-14(a)/15d-14(a) Certification of Paul A. LangRule 13a-14(a)/15d-14(a) Certification of Robert J. MesseySection 1350 Certification of Paul A. LangSection 1350 Certification of Robert J. Messey
  i




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands)
 Three Months EndedMarch 31,2006
    
    
    2005(unaudited)RevenuesCoal sales
    
    $
    362,196
    
    
    $
    277,416Costs, expenses and otherCost of coal sales
    
    
    252,130
    
    
    
    209,105Depreciation, depletion and amortization
    
    
    23,576
    
    
    
    25,519Selling, general and administrative expenses
    
    
    5,489
    
    
    
    5,690Other operating income, net
    
    
    (475
    )
    
    
    (2,293
    )280,720
    
    
    
    238,021Income from operations
    
    
    81,476
    
    
    
    39,395Interest expense, netInterest expense
    
    
    (17,736
    )
    
    
    (15,989
    )Interest income primarily from Arch Coal, Inc.
    
    
    16,322
    
    
    
    8,781(1,414
    )
    
    
    (7,208
    )Other non-operating expenseExpenses resulting from early debt extinguishment and
termination of hedge accounting for interest rate swaps
    
    
    (2,718
    )
    
    
    (3,388
    )Income before minority interest
    
    
    77,344
    
    
    
    28,799Minority interest
    
    
    (13,367
    )
    
    
    (2,728
    )Net income
    
    $
    63,977
    
    
    $
    26,071Net income attributable to redeemable membership interests
    
    $
    320
    
    
    $
    130Net income attributable to non-redeemable membership interests
    
    $
    63,657
    
    
    $
    25,941
  1




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##### Table of Contents



Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    50
    
    
    $
    152Trade receivables
    
    
    191
    
    
    
    111,948Other receivables
    
    
    8,346
    
    
    
    5,469Inventories
    
    
    60,348
    
    
    
    98,478Prepaid royalties
    
    
    6,847
    
    
    
    Other
    
    
    14,435
    
    
    
    17,318Total current assets
    
    
    90,217
    
    
    
    233,365Property, plant and equipment, net
    
    
    1,100,708
    
    
    
    1,068,159Other assetsReceivable from Arch Coal, Inc.
    
    
    1,013,456
    
    
    
    869,056Other
    
    
    37,144
    
    
    
    44,796Total other assets
    
    
    1,050,600
    
    
    
    913,852Total assets
    
    $
    2,241,525
    
    
    $
    2,215,376Liabilities and Membership InterestsCurrent liabilitiesAccounts payable
    
    $
    79,313
    
    
    $
    89,632Accrued expenses
    
    
    96,970
    
    
    
    111,821Total current liabilities
    
    
    176,283
    
    
    
    201,453Long-term debt
    
    
    959,905
    
    
    
    960,247Asset retirement obligations
    
    
    138,628
    
    
    
    136,092Accrued postretirement benefits other than pension
    
    
    27,710
    
    
    
    27,016Accrued workers compensation
    
    
    11,997
    
    
    
    11,446Other noncurrent liabilities
    
    
    69,450
    
    
    
    62,060Total liabilities
    
    
    1,383,973
    
    
    
    1,398,314Minority interest
    
    
    146,987
    
    
    
    133,620Redeemable membership interests
    
    
    5,782
    
    
    
    5,647Non-redeemable membership interests
    
    
    704,783
    
    
    
    677,795Total liabilities and membership interests
    
    $
    2,241,525
    
    
    $
    2,215,376
  2




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##### Table of Contents



Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
 Three Months EndedMarch 31,2006
    
    
    2005(unaudited)Operating activitiesNet income
    
    $
    63,977
    
    
    $
    26,071Adjustments to reconcile to cash provided by operating activitiesDepreciation, depletion and amortization
    
    
    23,576
    
    
    
    25,519Prepaid royalties expensed
    
    
    103
    
    
    
    5,617Net gain on disposition of assets
    
    
    
    
    
    
    (1,646
    )Minority interest
    
    
    13,367
    
    
    
    2,728Other non-operating expense
    
    
    2,718
    
    
    
    3,388Changes in:Trade receivables
    
    
    112,854
    
    
    
    (30,963
    )Inventories
    
    
    576
    
    
    
    1,165Accounts payable and accrued expense
    
    
    (25,171
    )
    
    
    (5,855
    )Other
    
    
    13,021
    
    
    
    4,227Cash provided by operating activities
    
    
    205,021
    
    
    
    30,251Investing activitiesCapital expenditures
    
    
    (61,096
    )
    
    
    (21,913
    )Note receivable from Arch Coal, Inc.
    
    
    (144,027
    )
    
    
    (1,227
    )Proceeds from dispositions of property, plant and equipment
    
    
    
    
    
    
    1,933Additions to prepaid royalties
    
    
    
    
    
    
    (10,000
    )Cash used in investing activities
    
    
    (205,123
    )
    
    
    (31,207
    )Financing activitiesDebt financing costs
    
    
    
    
    
    
    (51
    )Cash used in financing activities
    
    
    
    
    
    
    (51
    )Decrease in cash and cash equivalents
    
    
    (102
    )
    
    
    (1,007
    )Cash and cash equivalents, beginning of period
    
    
    152
    
    
    
    1,351Cash and cash equivalents, end of period
    
    $
    50
    
    
    $
    344
  3




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Arch Western Resources, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
 1. Basis of Presentation
    2. Recent Accounting Pronouncements
 Accounting for Stripping Costs in the Mining Industry .
 3. Recent Events
   4




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4. Inventories
  March 31,
    
    
    December 31,2006
    
    
    2005(in thousands)Coal
    
    $
    9,959
    
    
    $
    49,144Repair parts and supplies
    
    
    50,389
    
    
    
    49,334$
    60,348
    
    
    $
    98,478
  5. Comprehensive Income
  Three Months EndedMarch 31,2006
    
    
    2005(in thousands)Net income
    
    $
    63,977
    
    
    $
    26,071Other comprehensive income
    
    
    2,718
    
    
    
    4,726Total comprehensive income
    
    $
    66,695
    
    
    $
    30,797
  6. Related Party Transactions
     7. Segment Information
  5




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##### Table of Contents



Three Months Ended March 31, 2006Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands, except per ton data)Coal sales
    
    $
    252,389
    
    
    $
    109,807
    
    
    $
    
    
    
    $
    362,196Income from operations
    
    
    62,213
    
    
    
    25,713
    
    
    
    (6,450
    )
    
    
    81,476Total assets
    
    
    1,373,537
    
    
    
    1,722,528
    
    
    
    (854,540
    )
    
    
    2,241,525Depreciation, depletion and amortization
    
    
    14,598
    
    
    
    8,978
    
    
    
    
    
    
    
    23,576Capital expenditures
    
    
    39,155
    
    
    
    21,941
    
    
    
    
    
    
    
    61,096Operating cost per ton
    
    $
    8.54
    
    
    $
    17.03
 Three Months Ended March 31, 2005Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands, except per ton data)Coal sales
    
    $
    179,706
    
    
    $
    97,710
    
    
    $
    
    
    
    $
    277,416Income from operations
    
    
    33,660
    
    
    
    12,360
    
    
    
    (6,625
    )
    
    
    39,395Total assets
    
    
    1,200,686
    
    
    
    1,657,317
    
    
    
    (819,004
    )
    
    
    2,038,999Depreciation, depletion and amortization
    
    
    17,189
    
    
    
    8,330
    
    
    
    
    
    
    
    25,519Capital expenditures
    
    
    8,493
    
    
    
    13,420
    
    
    
    
    
    
    
    21,913Operating cost per ton
    
    $
    6.36
    
    
    $
    14.59
  Three Months EndedMarch 31,2006
    
    
    2005(in thousands)Income from operations
    
    $
    81,476
    
    
    $
    39,395Interest expense
    
    
    (17,736
    )
    
    
    (15,989
    )Interest income
    
    
    16,322
    
    
    
    8,781Other non-operating expense
    
    
    (2,718
    )
    
    
    (3,388
    )Income before minority interest
    
    $
    77,344
    
    
    $
    28,799
 8. Supplemental Condensed Consolidating Financial Information
  6




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Balance Sheets
March 31, 2006
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    38
    
    
    $
    12
    
    
    $
    
    
    
    $
    50Trade accounts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    
    
    
    
    191Other receivables
    
    
    955
    
    
    
    
    
    
    
    6,198
    
    
    
    1,193
    
    
    
    
    
    
    
    8,346Inventories
    
    
    
    
    
    
    
    
    
    
    42,402
    
    
    
    17,946
    
    
    
    
    
    
    
    60,348Prepaid royalties
    
    
    
    
    
    
    
    
    
    
    1,530
    
    
    
    5,317
    
    
    
    
    
    
    
    6,847Other current assets
    
    
    4,257
    
    
    
    2,151
    
    
    
    5,028
    
    
    
    2,999
    
    
    
    
    
    
    
    14,435Total current assets
    
    
    5,212
    
    
    
    2,151
    
    
    
    55,196
    
    
    
    27,658
    
    
    
    
    
    
    
    90,217Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    801,493
    
    
    
    299,215
    
    
    
    
    
    
    
    1,100,708Investment in subsidiaries
    
    
    1,653,690
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,653,690
    )
    
    
    Receivable from Arch Coal, Inc.
    
    
    981,922
    
    
    
    
    
    
    
    32
    
    
    
    31,502
    
    
    
    
    
    
    
    1,013,456Intercompanies
    
    
    (1,738,971
    )
    
    
    958,222
    
    
    
    722,132
    
    
    
    58,617
    
    
    
    
    
    
    
    Other
    
    
    1,981
    
    
    
    13,371
    
    
    
    23,980
    
    
    
    (2,188
    )
    
    
    
    
    
    
    37,144Total other assets
    
    
    898,622
    
    
    
    971,593
    
    
    
    746,144
    
    
    
    87,931
    
    
    
    (1,653,690
    )
    
    
    1,050,600Total assets
    
    $
    903,834
    
    
    $
    973,744
    
    
    $
    1,602,833
    
    
    $
    414,804
    
    
    $
    (1,653,690
    )
    
    $
    2,241,525Accounts payable
    
    
    12,175
    
    
    
    
    
    
    
    50,923
    
    
    
    16,215
    
    
    
    
    
    
    
    79,313Accrued expenses
    
    
    4,871
    
    
    
    16,032
    
    
    
    69,430
    
    
    
    6,637
    
    
    
    
    
    
    
    96,970Total current liabilities
    
    
    17,046
    
    
    
    16,032
    
    
    
    120,353
    
    
    
    22,852
    
    
    
    
    
    
    
    176,283Long-term debt
    
    
    
    
    
    
    959,905
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959,905Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    128,558
    
    
    
    10,070
    
    
    
    
    
    
    
    138,628Accrued postretirement benefits
other than pension
    
    
    16,179
    
    
    
    
    
    
    
    2,485
    
    
    
    9,046
    
    
    
    
    
    
    
    27,710Accrued workers compensation
    
    
    5,996
    
    
    
    
    
    
    
    1,340
    
    
    
    4,661
    
    
    
    
    
    
    
    11,997Other noncurrent liabilities
    
    
    7,061
    
    
    
    
    
    
    
    46,180
    
    
    
    16,209
    
    
    
    
    
    
    
    69,450Total liabilities
    
    
    46,282
    
    
    
    975,937
    
    
    
    298,916
    
    
    
    62,838
    
    
    
    
    
    
    
    1,383,973Minority interest
    
    
    146,987
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146,987Redeemable membership interests
    
    
    5,782
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,782Non-redeemable membership interests
    
    
    704,783
    
    
    
    (2,193
    )
    
    
    1,303,917
    
    
    
    351,966
    
    
    
    (1,653,690
    )
    
    
    704,783Total liabilities, redeemable
membership interests and
non-redeemable membership
interests
    
    $
    903,834
    
    
    $
    973,744
    
    
    $
    1,602,833
    
    
    $
    414,804
    
    
    $
    (1,653,690
    )
    
    $
    2,241,525
 Statements of Operations
Three Months Ended March 31, 2006
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Coal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    263,005
    
    
    $
    99,191
    
    
    $
    
    
    
    $
    362,196Cost of coal sales
    
    
    979
    
    
    
    
    
    
    
    192,126
    
    
    
    59,025
    
    
    
    
    
    
    
    252,130Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    17,706
    
    
    
    5,870
    
    
    
    
    
    
    
    23,576Selling, general and administrative
    
    
    5,489
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,489Other operating income
    
    
    (18
    )
    
    
    
    
    
    
    (288
    )
    
    
    (169
    )
    
    
    
    
    
    
    (475
    )6,450
    
    
    
    
    
    
    
    209,544
    
    
    
    64,726
    
    
    
    
    
    
    
    280,720Income from equity investment
    
    
    88,004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,004
    )
    
    
    Income from operations
    
    
    81,554
    
    
    
    
    
    
    
    53,461
    
    
    
    34,465
    
    
    
    (88,004
    )
    
    
    81,476Interest expense
    
    
    (17,432
    )
    
    
    (15,501
    )
    
    
    (271
    )
    
    
    (530
    )
    
    
    15,998
    
    
    
    (17,736
    )Interest income primarily from Arch
Coal, Inc.
    
    
    15,940
    
    
    
    15,998
    
    
    
    121
    
    
    
    261
    
    
    
    (15,998
    )
    
    
    16,322(1,492
    )
    
    
    497
    
    
    
    (150
    )
    
    
    (269
    )
    
    
    
    
    
    
    (1,414
    )Other non-operating expense
    
    
    (2,718
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,718
    )Minority interest
    
    
    (13,367
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,367
    )Net income
    
    $
    63,977
    
    
    $
    497
    
    
    $
    53,311
    
    
    $
    34,196
    
    
    $
    (88,004
    )
    
    $
    63,977
 7




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##### Table of Contents



Statements of Cash Flows
Three Months Ended March 31, 2006
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)Operating ActivitiesCash provided by operating activities
    
    $
    112,493
    
    
    $
    
    
    
    $
    42,151
    
    
    $
    50,377
    
    
    $
    205,021Investing ActivitiesNote Receivable from Arch Coal
    
    
    (112,493
    )
    
    
    
    
    
    
    (32
    )
    
    
    (31,502
    )
    
    
    (144,027
    )Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (42,207
    )
    
    
    (18,889
    )
    
    
    (61,096
    )Cash used in investing activities
    
    
    (112,493
    )
    
    
    
    
    
    
    (42,239
    )
    
    
    (50,391
    )
    
    
    (205,123
    )Financing ActivitiesCash used in financing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (88
    )
    
    
    (14
    )
    
    
    (102
    )Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    26
    
    
    
    152Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    38
    
    
    $
    12
    
    
    $
    50
 Balance Sheets
December 31, 2005
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    126
    
    
    $
    26
    
    
    $
    
    
    
    $
    152Trade accounts receivable
    
    
    87,012
    
    
    
    
    
    
    
    31
    
    
    
    24,905
    
    
    
    
    
    
    
    111,948Other receivables
    
    
    1,072
    
    
    
    
    
    
    
    673
    
    
    
    3,724
    
    
    
    
    
    
    
    5,469Inventories
    
    
    
    
    
    
    
    
    
    
    78,993
    
    
    
    19,485
    
    
    
    
    
    
    
    98,478Other current assets
    
    
    6,947
    
    
    
    2,146
    
    
    
    3,212
    
    
    
    5,013
    
    
    
    
    
    
    
    17,318Total current assets
    
    
    95,031
    
    
    
    2,146
    
    
    
    83,035
    
    
    
    53,153
    
    
    
    
    
    
    
    233,365Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    778,945
    
    
    
    289,214
    
    
    
    
    
    
    
    1,068,159Investment in subsidiaries
    
    
    1,604,489
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,604,489
    )
    
    
    Receivable from Arch Coal, Inc.
    
    
    869,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    869,056Intercompanies
    
    
    (1,702,182
    )
    
    
    973,558
    
    
    
    687,985
    
    
    
    40,639
    
    
    
    
    
    
    
    Other
    
    
    1,865
    
    
    
    13,916
    
    
    
    25,210
    
    
    
    3,805
    
    
    
    
    
    
    
    44,796Total other assets
    
    
    773,228
    
    
    
    987,474
    
    
    
    713,195
    
    
    
    44,444
    
    
    
    (1,604,489
    )
    
    
    913,852Total assets
    
    $
    868,259
    
    
    $
    989,620
    
    
    $
    1,575,175
    
    
    $
    386,811
    
    
    $
    (1,604,489
    )
    
    $
    2,215,376Accounts payable
    
    
    18,499
    
    
    
    
    
    
    
    51,980
    
    
    
    19,153
    
    
    
    
    
    
    
    89,632Accrued expenses
    
    
    3,862
    
    
    
    32,063
    
    
    
    67,919
    
    
    
    7,977
    
    
    
    
    
    
    
    111,821Total current liabilities
    
    
    22,361
    
    
    
    32,063
    
    
    
    119,899
    
    
    
    27,130
    
    
    
    
    
    
    
    201,453Long-term debt
    
    
    
    
    
    
    960,247
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960,247Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    126,255
    
    
    
    9,837
    
    
    
    
    
    
    
    136,092Accrued postretirement benefits
other than pension
    
    
    15,826
    
    
    
    
    
    
    
    2,486
    
    
    
    8,704
    
    
    
    
    
    
    
    27,016Accrued workers compensation
    
    
    5,947
    
    
    
    
    
    
    
    1,325
    
    
    
    4,174
    
    
    
    
    
    
    
    11,446Other noncurrent liabilities
    
    
    7,063
    
    
    
    
    
    
    
    35,748
    
    
    
    19,249
    
    
    
    
    
    
    
    62,060Total liabilities
    
    
    51,197
    
    
    
    992,310
    
    
    
    285,713
    
    
    
    69,094
    
    
    
    
    
    
    
    1,398,314Minority interest
    
    
    133,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,620Redeemable membership interests
    
    
    5,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,647Non-redeemable membership interests
    
    
    677,795
    
    
    
    (2,690
    )
    
    
    1,289,462
    
    
    
    317,717
    
    
    
    (1,604,489
    )
    
    
    677,795Total liabilities, redeemable
membership interests and
non-redeemable membership
interests
    
    $
    868,259
    
    
    $
    989,620
    
    
    $
    1,575,175
    
    
    $
    386,811
    
    
    $
    (1,604,489
    )
    
    $
    2,215,376
 8




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##### Table of Contents



Statements of Operations
Three Months Ended March 31, 2005
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Coal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    218,774
    
    
    $
    58,642
    
    
    $
    
    
    
    $
    277,416Cost of coal sales
    
    
    939
    
    
    
    
    
    
    
    157,656
    
    
    
    50,510
    
    
    
    
    
    
    
    209,105Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    21,290
    
    
    
    4,229
    
    
    
    
    
    
    
    25,519Selling, general and administrative
    
    
    5,690
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,690Other operating income
    
    
    (5
    )
    
    
    
    
    
    
    (1,951
    )
    
    
    (337
    )
    
    
    
    
    
    
    (2,293
    )6,624
    
    
    
    
    
    
    
    176,995
    
    
    
    54,402
    
    
    
    
    
    
    
    238,021Income from equity investment
    
    
    46,006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,006
    )
    
    
    Income from operations
    
    
    39,382
    
    
    
    
    
    
    
    41,779
    
    
    
    4,240
    
    
    
    (46,006
    )
    
    
    39,395Interest expense
    
    
    (15,976
    )
    
    
    (15,993
    )
    
    
    
    
    
    
    
    
    
    
    15,980
    
    
    
    (15,989
    )Interest income primarily from Arch
Coal, Inc.
    
    
    8,781
    
    
    
    15,980
    
    
    
    
    
    
    
    
    
    
    
    (15,980
    )
    
    
    8,781(7,195
    )
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,208
    )Other non-operating expense
    
    
    (3,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )Minority interest
    
    
    (2,728
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,728
    )Net income (loss)
    
    $
    26,071
    
    
    $
    (13
    )
    
    $
    41,779
    
    
    $
    4,240
    
    
    $
    (46,006
    )
    
    $
    26,071
 Statements of Cash Flows
Three Months Ended March 31, 2005
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)Operating ActivitiesCash provided by (used in) operating
activities
    
    $
    1,278
    
    
    $
    
    
    
    $
    21,425
    
    
    $
    7,548
    
    
    $
    30,251Investing ActivitiesNote receivable from Arch Coal Inc.
    
    
    (1,227
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,227
    )Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (14,207
    )
    
    
    (7,706
    )
    
    
    (21,913
    )Proceeds from dispositions of capital
assets
    
    
    
    
    
    
    
    
    
    
    1,933
    
    
    
    
    
    
    
    1,933Additions to prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    
    
    
    
    (10,000
    )Cash used in investing activities
    
    
    (1,227
    )
    
    
    
    
    
    
    (22,274
    )
    
    
    (7,706
    )
    
    
    (31,207
    )Financing ActivitiesDebt financing costs
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )Cash provided by (used in) financing
activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (849
    )
    
    
    (158
    )
    
    
    (1,007
    )Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    166
    
    
    
    1,351Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    336
    
    
    $
    8
    
    
    $
    344
 9




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 This document contains forward-looking statements  that is, statements related to future,
not past, events. In this context, forward-looking statements often address our expected future
business and financial performance, and often contain words such as expects, anticipates,
intends, plans, believes, seeks, or will. Forward-looking statements by their nature
address matters that are, to different degrees, uncertain. For us, particular uncertainties arise
from changes in the demand for our coal by the domestic electric generation industry; from
legislation and regulations relating to the Clean Air Act and other environmental initiatives; from
operational, geological, permit, labor and weather-related factors; from fluctuations in the amount
of cash we generate from operations; from future integration of acquired businesses; and from
numerous other matters of national, regional and global scale, including those of a political,
economic, business, competitive or regulatory nature. These uncertainties may cause our actual
future results to be materially different than those expressed in our forward-looking statements.
We do not undertake to update our forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required by law. For a description of
some of the risks and uncertainties that may affect our future results, see Risk Factors under
Part II, Item 1A of this report and Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2005.
 Executive Overview
    Recent Developments
  Results of Operations
 Items Affecting Comparability of Reported Results
  10




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##### Table of Contents



Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
  Revenues
 Three months ended March 31,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    362,196
    
    
    $
    277,416
    
    
    $
    84,780
    
    
    
    30.6
    %Tons sold
    
    
    26,234
    
    
    
    27,916
    
    
    
    (1,682
    )
    
    
    (6.0
    )%Coal sales realization per ton sold
    
    $
    13.81
    
    
    $
    9.94
    
    
    $
    3.87
    
    
    
    38.9
    %
   Three months ended March 31,
    
    
    Increase (decrease)2006
    
    
    2005
    
    
    Tons
    
    
    %(Amounts in thousands)Powder River Basin
    
    
    22,174
    
    
    
    23,117
    
    
    
    (943
    )
    
    
    (4.1
    )%Western Bituminous Region
    
    
    4,060
    
    
    
    4,799
    
    
    
    (739
    )
    
    
    (15.4
    )%Total
    
    
    26,234
    
    
    
    27,916
    
    
    
    (1,682
    )
    
    
    (6.0
    )%
   Three months ended March 31,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    11.34
    
    
    $
    7.73
    
    
    $
    3.61
    
    
    
    46.7
    %Western Bituminous Region
    
    
    23.31
    
    
    
    17.08
    
    
    
    6.23
    
    
    
    36.5
    %
   11




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##### Table of Contents



Operating costs and expenses
 Increase (decrease)Three months ended March 31,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Cost of coal sales
    
    $
    252,130
    
    
    $
    209,105
    
    
    $
    (43,025
    )
    
    
    (20.6
    )%Depreciation, depletion and amortization
    
    
    23,576
    
    
    
    25,519
    
    
    
    1,943
    
    
    
    7.6
    %Selling, general and administrative expenses
    
    
    5,489
    
    
    
    5,690
    
    
    
    201
    
    
    
    3.5
    %Other operating income, net
    
    
    (475
    )
    
    
    (2,293
    )
    
    
    (1,818
    )
    
    
    (79.3
    )%$
    280,720
    
    
    $
    238,021
    
    
    $
    (42,699
    )
    
    
    (17.9
    )%
 Operating margins.
 Three months ended March 31,
    
    Increase2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    2.79
    
    
    $
    1.37
    
    
    $
    1.42
    
    
    
    103.4
    %Western Bituminous Region
    
    
    6.28
    
    
    
    2.49
    
    
    
    3.79
    
    
    
    151.6
    %
   Net interest expense
 Increase (decrease)Three months ended March 31,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Interest expense
    
    $
    (17,736
    )
    
    $
    (15,989
    )
    
    $
    (1,747
    )
    
    
    (11.0
    )%Interest income
    
    
    16,322
    
    
    
    8,781
    
    
    
    7,541
    
    
    
    85.9
    %$
    (1,414
    )
    
    $
    (7,208
    )
    
    $
    5,794
    
    
    
    80.4
    %
 Interest expense
 Interest income.
 Liquidity and Capital Resources
  12




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##### Table of Contents



Three months ended March 31,2006
    
    2005(in thousands)Cash provided by (used in):Operating activities
    
    $
    205,021
    
    
    $
    30,251Investing activities
    
    
    (205,123
    )
    
    
    (31,207
    )Financing activities
    
    
    
    
    
    
    (51
    )
      Contingencies
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  13




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##### Table of Contents



Item 4. Controls and Procedures.
  
 PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
  Exhibit
    
    Description3.1
    
    Certificate of Formation (incorporated herein by reference to
Exhibit 3.3 to the Form S-4 (File No. 333-107569) filed on August
1, 2003 by Arch Western Finance, LLC, Arch Western Resources, LLC,
Arch of Wyoming, LLC, Mountain Coal Company, L.L.C., and Thunder
Basin Coal Company, L.L.C.).3.2
    
    Limited Liability Company Agreement (incorporated herein by
reference to Exhibit 3.4 to the Form S-4 (File No. 333-107569)
filed on August 1, 2003 by Arch Western Finance, LLC, Arch Western
Resources, LLC, Arch of Wyoming, LLC, Mountain Coal Company,
L.L.C., and Thunder BasinCoal Company, L.L.C.).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Paul A. Lang.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Robert J. Messey.32.1
    
    Section 1350 Certification of Paul A. Lang.32.2
    
    Section 1350 Certification of Robert J. Messey.
 14




---



##### Table of Contents



Signatures
  Arch Coal, Inc.By:
    
    /s/ Robert J. MesseyRobert J. MesseyVice PresidentMay 15, 2006
 15