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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission file number ___
 ARCH WESTERN RESOURCES, LLC
 (Exact name of registrant as specified in its charter)
 Delaware
    
    43-1811130(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 (Address of principal executive offices)(Zip Code)
 Registrants telephone number, including area code:
 þ o
 o þ




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##### Table of Contents



INDEX
 PAGEPART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2005 and 2004 and the Six Months Ended June 30, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATION
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 6. Exhibits
    
    
    41Certification of PEO Pursuant to Section 302Certification of PFO Pursuant to Section 302Statement of PEO Pursuant to 18 U.S.C. Section 1350Statement of PFO Pursuant to 18 U.S.C. Section 1350




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PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ARCH WESTERN RESOURCES, LLC
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS)
 June 30,
    
    December 31,2005
    

2004(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    482
    
    
    $
    1,351Trade receivables
    
    
    114,819
    
    
    
    83,230Other receivables
    
    
    4,987
    
    
    
    5,691Inventories
    
    
    82,831
    
    
    
    78,372Prepaid royalties
    
    
    5,066
    
    
    
    7,792Other
    
    
    12,003
    
    
    
    11,529Total current assets
    
    
    220,188
    
    
    
    187,965Property, plant and equipment, net
    
    
    1,088,603
    
    
    
    1,101,674Other assetsReceivable from Arch Coal, Inc.
    
    
    724,052
    
    
    
    677,934Other
    
    
    43,672
    
    
    
    45,863Total other assets
    
    
    767,724
    
    
    
    723,797Total assets
    
    $
    2,076,515
    
    
    $
    2,013,436Liabilities and members equityCurrent liabilitiesAccounts payable
    
    $
    51,998
    
    
    $
    56,612Accrued expenses
    
    
    133,362
    
    
    
    129,435Total current liabilities
    
    
    185,360
    
    
    
    186,047Long-term debt
    
    
    960,930
    
    
    
    961,613Accrued postretirement benefits other than pension
    
    
    25,920
    
    
    
    24,643Asset retirement obligations
    
    
    130,508
    
    
    
    128,184Accrued workers compensation
    
    
    12,058
    
    
    
    12,749Other noncurrent liabilities
    
    
    36,093
    
    
    
    42,770Total liabilities
    
    
    1,350,869
    
    
    
    1,356,006Minority interest
    
    
    119,879
    
    
    
    109,401Redeemable equity interests
    
    
    5,260
    
    
    
    4,971Non-redeemable members equity
    
    
    600,507
    
    
    
    543,058Total liabilities, redeemable equity interests and non-redeemable members equity
    
    $
    2,076,515
    
    
    $
    2,013,436
  1




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ARCH WESTERN RESOURCES, LLC
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN
THOUSANDS)
 (UNAUDITED)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004RevenuesCoal sales
    
    $
    274,700
    
    
    $
    141,773
    
    
    $
    552,116
    
    
    $
    281,622Costs and expensesCost of coal sales
    
    
    205,697
    
    
    
    109,956
    
    
    
    414,801
    
    
    
    221,051Depreciation, depletion and amortization
    
    
    24,316
    
    
    
    16,759
    
    
    
    49,835
    
    
    
    33,395Selling, general and administrative expenses
    
    
    5,192
    
    
    
    3,553
    
    
    
    10,883
    
    
    
    7,764235,205
    
    
    
    130,268
    
    
    
    475,519
    
    
    
    262,210Other operating incomeIncome from equity investments
    
    
    
    
    
    
    5,995
    
    
    
    
    
    
    
    7,267Other operating income
    
    
    442
    
    
    
    2,983
    
    
    
    2,735
    
    
    
    7,310442
    
    
    
    8,978
    
    
    
    2,735
    
    
    
    14,577Income from operations
    
    
    39,937
    
    
    
    20,483
    
    
    
    79,332
    
    
    
    33,989Interest expense, net:Interest expense
    
    
    (17,323
    )
    
    
    (12,946
    )
    
    
    (33,312
    )
    
    
    (25,845
    )Interest income primarily from Arch Coal, Inc.
    
    
    10,603
    
    
    
    3,873
    
    
    
    19,383
    
    
    
    7,575(6,720
    )
    
    
    (9,073
    )
    
    
    (13,929
    )
    
    
    (18,270
    )Other non-operating income (expense):Expenses resulting from early debt
extinguishment and termination of hedge
accounting for interest rate swaps
    
    
    (3,388
    )
    
    
    (3,388
    )
    
    
    (6,775
    )
    
    
    (6,775
    )Income before minority interest
    
    
    29,829
    
    
    
    8,022
    
    
    
    58,628
    
    
    
    8,944Minority interest
    
    
    (7,750
    )
    
    
    
    
    
    
    (10,478
    )
    
    
    Net income
    
    $
    22,079
    
    
    $
    8,022
    
    
    $
    48,150
    
    
    $
    8,944Net income attributable to redeemable
equity interests
    
    $
    110
    
    
    $
    40
    
    
    $
    240
    
    
    $
    45Net income attributable to
non-redeemable equity interests
    
    $
    21,969
    
    
    $
    7,982
    
    
    $
    47,910
    
    
    $
    8,899
  2




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ARCH WESTERN RESOURCES, LLC
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
(UNAUDITED)
 Six Months EndedJune 30,2005
    
    2004Operating activitiesNet income
    
    $
    48,150
    
    
    $
    8,944Adjustments to reconcile to cash provided by operating activities:Depreciation, depletion and amortization
    
    
    49,835
    
    
    
    33,395Prepaid royalties expensed
    
    
    12,726
    
    
    
    10,000Accretion on asset retirement obligations
    
    
    5,709
    
    
    
    4,155Net gain on disposition of assets
    
    
    (1,687
    )
    
    
    (115
    )Income from equity investment
    
    
    
    
    
    
    (7,267
    )Net (contributions) to equity investment
    
    
    
    
    
    
    (4,368
    )Minority interest
    
    
    10,478
    
    
    
    Other nonoperating expense
    
    
    6,775
    
    
    
    6,775Changes in:Receivables
    
    
    (30,885
    )
    
    
    461Inventories
    
    
    (4,458
    )
    
    
    (6,268
    )Accounts payable and accrued expenses
    
    
    (604
    )
    
    
    4,388Note receivable from Arch Coal, Inc.
    
    
    (46,249
    )
    
    
    (44,178
    )Accrued postretirement benefits other than pension
    
    
    1,277
    
    
    
    633Asset retirement obligations
    
    
    (3,385
    )
    
    
    (2,860
    )Accrued workers compensation benefits
    
    
    (691
    )
    
    
    (131
    )Other
    
    
    4,634
    
    
    
    2,020Cash provided by operating activities
    
    
    51,625
    
    
    
    5,584Investing activitiesCapital expenditures
    
    
    (41,961
    )
    
    
    (30,621
    )Proceeds from dispositions of property, plant and equipment
    
    
    1,974
    
    
    
    118Additions to prepaid royalties
    
    
    (12,456
    )
    
    
    (10,000
    )Cash used in investing activities
    
    
    (52,443
    )
    
    
    (40,503
    )Financing activitiesDebt financing costs
    
    
    (51
    )
    
    
    (225
    )Cash used in financing activities
    
    
    (51
    )
    
    
    (225
    )Decrease in cash and cash equivalents
    
    
    (869
    )
    
    
    (35,144
    )Cash and cash equivalents, beginning of period
    
    
    1,351
    
    
    
    35,171Cash and cash equivalents, end of period
    
    $
    482
    
    
    $
    27
  3




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ARCH WESTERN RESOURCES, LLC
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2005
(UNAUDITED)
 Note A  General
     Note B  Recent Accounting Pronouncements
 Accounting for Stripping Costs in the
Mining Industry
 Accounting for Conditional Asset
Retirement Obligations
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Note C  Contribution of North Rochelle Mine
    Cash
    
    $
    407Accounts receivable
    
    
    14,233Materials and supplies
    
    
    4,161Coal inventory
    
    
    4,874Other current assets
    
    
    3,792Property, plant, equipment and mine development
    
    
    81,059Coal supply agreements
    
    
    8,486Accounts payable and accrued expenses
    
    
    (72,326
    )Other non-current assets and liabilities, net
    
    
    (18,236
    )Total contribution
    
    $
    26,450
   Pro Forma Financial Information
  5




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Note D - Transactions or Events Affecting Comparability of Reported Results
     Accounting for Derivative Instruments and
Hedging Activities
 Note E  Investment in Canyon Fuel
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Condensed Income Statement Information
    
    2005
    
    2004
    
    2005
    
    2004(in thousands)Revenues
    
    $
    
    
    
    $
    69,325
    
    
    $
    
    
    
    $
    122,708Total costs and expenses
    
    
    
    
    
    
    61,947
    
    
    
    
    
    
    
    114,756Net income before cumulative effect
of accounting change
    
    $
    
    
    
    $
    7,378
    
    
    $
    
    
    
    $
    7,95265% of Canyon Fuel net income before
cumulative effect of accounting
change
    
    $
    
    
    
    $
    4,796
    
    
    $
    
    
    
    $
    5,169Effect of purchase adjustments
    
    
    
    
    
    
    1,199
    
    
    
    
    
    
    
    2,098Arch Westerns income from its equity
investment in Canyon Fuel
    
    $
    
    
    
    $
    5,995
    
    
    $
    
    
    
    $
    7,267
  6




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Note F  Other Comprehensive Income
 Reporting Comprehensive Income,
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Net income
    
    $
    22,079
    
    
    $
    8,022
    
    
    $
    48,150
    
    
    $
    8,944Other comprehensive
income, net of income
taxes
    
    
    4,907
    
    
    
    3,392
    
    
    
    9,633
    
    
    
    8,287Total comprehensive income
    
    $
    26,986
    
    
    $
    11,414
    
    
    $
    57,783
    
    
    $
    17,231
  Note G  Employee Benefit Plans
 Defined Benefit Pension and Other Postretirement Benefit Plans
   Components of Net Periodic Benefit Cost
  Other postretirementPension benefits
    
    benefitsThree Months Ended June 30,
    
    2005
    
    2004
    
    2005
    
    2004(In thousands)Service cost
    
    $
    1,658
    
    
    $
    675
    
    
    $
    417
    
    
    $
    240Interest cost
    
    
    1,188
    
    
    
    962
    
    
    
    483
    
    
    
    239Expected return on plan assets*
    
    
    (312
    )
    
    
    (1,439
    )
    
    
    
    
    
    
    Other amortization and deferral
    
    
    423
    
    
    
    68
    
    
    
    337
    
    
    
    (6
    )$
    2,957
    
    
    $
    266
    
    
    $
    1,237
    
    
    $
    473
 7




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Other postretirementPension benefits
    
    benefitsSix Months Ended June 30,
    
    2005
    
    2004
    
    2005
    
    2004(In thousands)Service cost
    
    $
    3,264
    
    
    $
    1,450
    
    
    $
    922
    
    
    $
    480Interest cost
    
    
    2,051
    
    
    
    1,915
    
    
    
    923
    
    
    
    502Expected return on plan assets*
    
    
    (1,406
    )
    
    
    (2,459
    )
    
    
    
    
    
    
    Other amortization and deferral
    
    
    1,239
    
    
    
    443
    
    
    
    418
    
    
    
    (3
    )$
    5,148
    
    
    $
    1,349
    
    
    $
    2,263
    
    
    $
    979
 
 *
    
    The Company does not fund its other postretirement liabilities. Employer Contributions
  Note H  Inventories
  June 30,
    
    December 31,2005
    
    2004(in thousands)Coal
    
    $
    46,463
    
    
    $
    46,538Repair parts and supplies
    
    
    36,368
    
    
    
    31,834$
    82,831
    
    
    $
    78,372
 Note I  Debt
  Note J  Related Party Transactions
  Note K  Segment Information
  8




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9




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Three months ending June 30, 2005
 Corporate,Other and(Amounts in thousands, except per ton amounts)
    
    PRB
    
    WBIT
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    169,666
    
    
    $
    105,034
    
    
    $
    
    
    
    $
    274,700Income from operations
    
    
    17,924
    
    
    
    26,746
    
    
    
    (4,733
    )
    
    
    39,937Total assets
    
    
    1,182,995
    
    
    
    1,701,858
    
    
    
    (808,338
    )
    
    
    2,076,515Depreciation, depletion and amortization
    
    
    15,626
    
    
    
    8,690
    
    
    
    
    
    
    
    24,316Capital expenditures
    
    
    8,507
    
    
    
    11,541
    
    
    
    
    
    
    
    20,048Operating cost per ton
    
    
    7.17
    
    
    
    14.21
 10




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Three months ending June 30, 2004
 Corporate,Other and(Amounts in thousands, except per ton amounts)
    
    PRB
    
    WBIT
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    117,332
    
    
    $
    24,441
    
    
    $
    
    
    
    $
    141,773Income from equity investments
    
    
    
    
    
    
    5,995
    
    
    
    
    
    
    
    5,995Income from operations
    
    
    13,771
    
    
    
    8,936
    
    
    
    (2,224
    )
    
    
    20,483Total assets
    
    
    1,016,134
    
    
    
    939,508
    
    
    
    (522,643
    )
    
    
    1,432,999Equity investments
    
    
    
    
    
    
    158,042
    
    
    
    
    
    
    
    158,042Depreciation, depletion and amortization
    
    
    12,912
    
    
    
    3,847
    
    
    
    
    
    
    
    16,759Capital expenditures
    
    
    11,342
    
    
    
    2,324
    
    
    
    
    
    
    
    13,666Operating cost per ton
    
    
    6.02
    
    
    
    15.85
 Six months ending June 30, 2005
 Corporate,Other and(Amounts in thousands, except per ton amounts)
    
    PRB
    
    WBIT
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    349,373
    
    
    $
    202,743
    
    
    $
    
    
    
    $
    552,116Income from operations
    
    
    51,584
    
    
    
    39,106
    
    
    
    (11,358
    )
    
    
    79,332Depreciation, depletion and amortization
    
    
    32,815
    
    
    
    17,020
    
    
    
    
    
    
    
    49,835Capital expenditures
    
    
    16,998
    
    
    
    24,963
    
    
    
    
    
    
    
    41,961Operating cost per ton
    
    
    6.75
    
    
    
    14.71
 Six months ending June 30, 2004
 Corporate,Other and(Amounts in thousands, except per ton amounts)
    
    PRB
    
    WBIT
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    227,579
    
    
    $
    54,043
    
    
    $
    
    
    
    $
    281,622Income from equity investments
    
    
    
    
    
    
    7,267
    
    
    
    
    
    
    
    7,267Income from operations
    
    
    28,838
    
    
    
    11,457
    
    
    
    (6,306
    )
    
    
    33,989Depreciation, depletion and amortization
    
    
    25,463
    
    
    
    7,932
    
    
    
    
    
    
    
    33,395Capital expenditures
    
    
    27,583
    
    
    
    3,038
    
    
    
    
    
    
    
    30,621Operating cost per ton
    
    
    6.01
    
    
    
    16.40
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Total segment income from operations
    
    $
    39,937
    
    
    $
    20,483
    
    
    $
    79,332
    
    
    $
    33,989Interest expense
    
    
    (17,323
    )
    
    
    (12,946
    )
    
    
    (33,312
    )
    
    
    (25,845
    )Interest income
    
    
    10,603
    
    
    
    3,873
    
    
    
    19,383
    
    
    
    7,575Other non-operating expense
    
    
    (3,388
    )
    
    
    (3,388
    )
    
    
    (6,775
    )
    
    
    (6,775
    )Income before minority interest
    
    $
    29,829
    
    
    $
    8,022
    
    
    $
    58,628
    
    
    $
    8,944
 Note L - Reclassifications
 11




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Note M  Supplemental Condensed Consolidating Financial Information
  12




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BALANCE SHEETS
June 30, 2005
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    Guarantor
    
    Non-GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    
    
    
    $
    
    
    

    $
    461
    
    
    $
    21
    
    
    $
    
    
    
    $
    482Trade accounts receivable
    
    
    91,705
    
    
    
    
    
    
    
    148
    
    
    
    22,966
    
    
    
    
    
    
    
    114,819Other receivables
    
    
    
    
    
    
    
    
    
    
    834
    
    
    
    4,153
    
    
    
    
    
    
    
    4,987Inventories
    
    
    
    
    
    
    
    
    
    
    62,039
    
    
    
    20,792
    
    
    
    
    
    
    
    82,831Prepaid royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,066
    
    
    
    
    
    
    
    5,066Other current assets
    
    
    2,518
    
    
    
    
    
    
    
    2,312
    
    
    
    7,173
    
    
    
    
    
    
    
    12,003Total current assets
    
    
    94,223
    
    
    
    
    
    
    
    65,794
    
    
    
    60,171
    
    
    
    
    
    
    
    220,188Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    820,417
    
    
    
    268,186
    
    
    
    
    
    
    
    1,088,603Investment in subsidiaries
    
    
    1,484,869
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,484,869
    )
    
    
    Receivable from Arch Coal, Inc.
    
    
    724,052
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    724,052Intercompanies
    
    
    (1,544,737
    )
    
    
    972,589
    
    
    
    534,284
    
    
    
    37,864
    
    
    
    
    
    
    
    Other
    
    
    332
    
    
    
    17,127
    
    
    
    26,213
    
    
    
    
    
    
    
    
    
    
    
    43,672Total other assets
    
    
    664,516
    
    
    
    989,716
    
    
    
    560,497
    
    
    
    37,864
    
    
    
    (1,484,869
    )
    
    
    767,724Total assets
    
    $
    758,739
    
    
    $
    989,716
    
    
    $
    1,446,708
    
    
    $
    366,221
    
    
    $
    (1,484,869
    )
    
    $
    2,076,515Accounts payable
    
    
    3,264
    
    
    
    
    
    
    
    34,328
    
    
    
    14,406
    
    
    
    
    
    
    
    51,998Accrued expenses
    
    
    5,722
    
    
    
    32,063
    
    
    
    87,380
    
    
    
    8,197
    
    
    
    
    
    
    
    133,362Total current liabilities
    
    
    8,986
    
    
    
    32,063
    
    
    
    121,708
    
    
    
    22,603
    
    
    
    
    
    
    
    185,360Long-term debt
    
    
    
    
    
    
    960,930
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960,930Accrued postretirement benefits other
than pension
    
    
    15,391
    
    
    
    
    
    
    
    2,485
    
    
    
    8,044
    
    
    
    
    
    
    
    25,920Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    118,420
    
    
    
    12,088
    
    
    
    
    
    
    
    130,508Accrued workers compensation
    
    
    6,249
    
    
    
    
    
    
    
    1,182
    
    
    
    4,627
    
    
    
    
    
    
    
    12,058Other noncurrent liabilities
    
    
    2,467
    
    
    
    
    
    
    
    5,128
    
    
    
    28,498
    
    
    
    
    
    
    
    36,093Total liabilities
    
    
    33,093
    
    
    
    992,993
    
    
    
    248,923
    
    
    
    75,860
    
    
    
    
    
    
    
    1,350,869Minority interest
    
    
    119,879
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,879Redeemable equity interests
    
    
    5,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,260Non-redeemable members equity
    
    
    600,507
    
    
    
    (3,277
    )
    
    
    1,197,785
    
    
    
    290,361
    
    
    
    (1,484,869
    )
    
    
    600,507Total liabilities, redeemable
equity interests and
non-redeemable members
equity
    
    $
    758,739
    
    
    $
    989,716
    
    
    $
    1,446,708
    
    
    $
    366,221
    
    
    $
    (1,484,869
    )
    
    $
    2,076,515
 13




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##### Table of Contents



STATEMENTS OF OPERATIONS
Quarter ended June 30, 2005
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    Guarantor
    
    Non-GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    209,479
    
    
    $
    65,221
    
    
    $
    
    
    
    $
    274,700Cost of coal sales
    
    
    42
    
    
    
    
    
    
    
    163,729
    
    
    
    41,926
    
    
    
    
    
    
    
    205,697Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    19,774
    
    
    
    4,542
    
    
    
    
    
    
    
    24,316Selling, general and administrative
    
    
    5,192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,1925,234
    
    
    
    
    
    
    
    183,503
    
    
    
    46,468
    
    
    
    
    
    
    
    235,205Income from equity investment
    
    
    43,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,859
    )
    
    
    Other operating income
    
    
    25
    
    
    
    
    
    
    
    357
    
    
    
    60
    
    
    
    
    
    
    
    44243,884
    
    
    
    
    
    
    
    357
    
    
    
    60
    
    
    
    (43,859
    )
    
    
    442Income from operations
    
    
    38,650
    
    
    
    
    
    
    
    26,333
    
    
    
    18,813
    
    
    
    (43,859
    )
    
    
    39,937Interest expense
    
    
    (16,036
    )
    
    
    (15,873
    )
    
    
    (1,446
    )
    
    
    
    
    
    
    16,032
    
    
    
    (17,323
    )Interest income primarily from Arch Coal, Inc.
    
    
    10,603
    
    
    
    16,032
    
    
    
    
    
    
    
    
    
    
    
    (16,032
    )
    
    
    10,603(5,433
    )
    
    
    159
    
    
    
    (1,446
    )
    
    
    
    
    
    
    
    
    
    
    (6,720
    )Other non-operating expense
    
    
    (3,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )Minority interest
    
    
    (7,750
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,750
    )Net income (loss)
    
    $
    22,079
    
    
    $
    159
    
    
    $
    24,887
    
    
    $
    18,813
    
    
    $
    (43,859
    )
    
    $
    22,079
 14




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##### Table of Contents



STATEMENTS OF OPERATIONS
Six Months ended June 30, 2005
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    Guarantor
    
    Non-GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    428,253
    
    
    $
    123,863
    
    
    $
    
    
    
    $
    552,116Cost of coal sales
    
    
    980
    
    
    
    
    
    
    
    321,385
    
    
    
    92,436
    
    
    
    
    
    
    
    414,801Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    41,064
    
    
    
    8,771
    
    
    
    
    
    
    
    49,835Selling, general and administrative
    
    
    10,883
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,88311,863
    
    
    
    
    
    
    
    362,449
    
    
    
    101,207
    
    
    
    
    
    
    
    475,519Income from equity investment
    
    
    89,865
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    (89,865
    )
    
    
    Other operating income
    
    
    30
    
    
    
    
    
    
    
    2,308
    
    
    
    397
    
    
    
    
    
    
    
    2,73589,895
    
    
    
    
    
    
    
    2,308
    
    
    
    397
    
    
    
    (89,865
    )
    
    
    2,735Income from operations
    
    
    78,032
    
    
    
    
    
    
    
    68,112
    
    
    
    23,053
    
    
    
    (89,865
    )
    
    
    79,332Interest expense
    
    
    (32,012
    )
    
    
    (31,866
    )
    
    
    (1,446
    )
    
    
    
    
    
    
    32,012
    
    
    
    (33,312
    )Interest income primarily from Arch Coal, Inc.
    
    
    19,383
    
    
    
    32,012
    
    
    
    
    
    
    
    
    
    
    
    (32,012
    )
    
    
    19,383(12,629
    )
    
    
    146
    
    
    
    (1,446
    )
    
    
    
    
    
    
    
    
    
    
    (13,929
    )Other non-operating expense
    
    
    (6,775
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,775
    )Minority interest
    
    
    (10,478
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,478
    )Net income (loss)
    
    $
    48,150
    
    
    $
    146
    
    
    $
    66,666
    
    
    $
    23,053
    
    
    $
    (89,865
    )
    
    $
    48,150
 15




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##### Table of Contents



STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    Guarantor
    
    Non-GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    ConsolidatedOperating ActivitiesCash provided by operating activities
    
    $
    51
    
    
    $
    
    
    
    $
    36,275
    
    
    $
    15,299
    
    
    $
    51,625Investing ActivitiesCapital expenditures
    
    
    
    
    
    
    
    
    
    
    (26,514
    )
    
    
    (15,447
    )
    
    
    (41,961
    )Proceeds from dispositions of capital assets
    
    
    
    
    
    
    
    
    
    
    1,971
    
    
    
    3
    
    
    
    1,974Additions to prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (12,456
    )
    
    
    
    
    
    
    (12,456
    )Cash (used in) investing activities
    
    
    
    
    
    
    
    
    
    
    (36,999
    )
    
    
    (15,444
    )
    
    
    (52,443
    )Financing ActivitiesDebt financing costs
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )Cash (used in) financing activities
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (724
    )
    
    
    (145
    )
    
    
    (869
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    166
    
    
    
    1,351Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    461
    
    
    $
    21
    
    
    $
    482
 16




---



##### Table of Contents



BALANCE SHEETS
December 31, 2004
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    Guarantor
    
    Non-GuarantorCompany

    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    1,185
    
    
    $
    166
    
    
    $
    
    
    
    $
    1,351Trade accounts receivable
    
    
    70,443
    
    
    
    
    
    
    
    449
    
    
    
    12,338
    
    
    
    
    
    
    
    83,230Other receivables
    
    
    
    
    
    
    
    
    
    
    1,040
    
    
    
    4,651
    
    
    
    
    
    
    
    5,691Inventories
    
    
    
    
    
    
    
    
    
    
    58,815
    
    
    
    19,557
    
    
    
    
    
    
    
    78,372Prepaid royalties
    
    
    
    
    
    
    
    
    
    
    2,660
    
    
    
    5,132
    
    
    
    
    
    
    
    7,792Other current assets
    
    
    4,894
    
    
    
    
    
    
    
    2,034
    
    
    
    4,601
    
    
    
    
    
    
    
    11,529Total current assets
    
    
    75,337
    
    
    
    
    
    
    
    66,183
    
    
    
    46,445
    
    
    
    
    
    
    
    187,965Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    834,265
    
    
    
    267,409
    
    
    
    
    
    
    
    1,101,674Investment in subsidiaries
    
    
    1,393,809
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,393,809
    )
    
    
    Receivable from Arch Coal, Inc.
    
    
    677,934
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    677,934Intercompanies
    
    
    (1,451,422
    )
    
    
    973,310
    
    
    
    449,449
    
    
    
    28,663
    
    
    
    
    
    
    
    Other
    
    
    1,225
    
    
    
    18,246
    
    
    
    26,392
    
    
    
    
    
    
    
    
    
    
    
    45,863Total other assets
    
    
    621,546
    
    
    
    991,556
    
    
    
    475,841
    
    
    
    28,663
    
    
    
    (1,393,809
    )
    
    
    723,797Total assets
    
    $
    696,883
    
    
    $
    991,556
    
    
    $
    1,376,289
    
    
    $
    342,517
    
    
    $
    (1,393,809
    )
    
    $
    2,013,436Accounts payable
    
    
    8,854
    
    
    
    
    
    
    
    35,942
    
    
    
    11,816
    
    
    
    
    
    
    
    56,612Accrued expenses
    
    
    4,482
    
    
    
    33,360
    
    
    
    84,660
    
    
    
    6,933
    
    
    
    
    
    
    
    129,435Total current liabilities
    
    
    13,336
    
    
    
    33,360
    
    
    
    120,602
    
    
    
    18,749
    
    
    
    
    
    
    
    186,047Long-term debt
    
    
    
    
    
    
    961,613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    961,613Accrued postretirement benefits other
than pension
    
    
    14,576
    
    
    
    
    
    
    
    2,485
    
    
    
    7,582
    
    
    
    
    
    
    
    24,643Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    116,627
    
    
    
    11,557
    
    
    
    
    
    
    
    128,184Accrued workers compensation
    
    
    6,018
    
    
    
    
    
    
    
    1,527
    
    
    
    5,204
    
    
    
    
    
    
    
    12,749Other noncurrent liabilities
    
    
    5,523
    
    
    
    
    
    
    
    5,128
    
    
    
    32,119
    
    
    
    
    
    
    
    42,770Total liabilities
    
    
    39,453
    
    
    
    994,973
    
    
    
    246,369
    
    
    
    75,211
    
    
    
    
    
    
    
    1,356,006Minority interest
    
    
    109,401
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,401Redeemable equity interests
    
    
    4,971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,971Non-redeemable members equity
    
    
    543,058
    
    
    
    (3,417
    )
    
    
    1,129,920
    
    
    
    267,306
    
    
    
    (1,393,809
    )
    
    
    543,058Total liabilities, redeemable
equity interests and
non-redeemable members
equity
    
    $
    696,883
    
    
    $
    991,556
    
    
    $
    1,376,289
    
    
    $
    342,517
    
    
    $
    (1,393,809
    )
    
    $
    2,013,436
 17




---



##### Table of Contents



STATEMENTS OF OPERATIONS
Quarter ended June 30, 2004
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    Guarantor
    
    Non-GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    141,773
    
    
    $
    
    
    
    $
    
    
    
    $
    141,773Cost of coal sales
    
    
    24
    
    
    
    
    
    
    
    109,932
    
    
    
    
    
    
    
    
    
    
    
    109,956Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    16,759
    
    
    
    
    
    
    
    
    
    
    
    16,759Selling, general and administrative
    
    
    3,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,5533,577
    
    
    
    
    
    
    
    126,691
    
    
    
    
    
    
    
    
    
    
    
    130,268Income from equity investment
    
    
    20,605
    
    
    
    
    
    
    
    
    
    
    
    5,995
    
    
    
    (20,605
    )
    
    
    5,995Other operating income
    
    
    2,737
    
    
    
    
    
    
    
    246
    
    
    
    
    
    
    
    
    
    
    
    2,98323,342
    
    
    
    
    
    
    
    246
    
    
    
    5,995
    
    
    
    (20,605
    )
    
    
    8,978Income from operations
    
    
    19,765
    
    
    
    
    
    
    
    15,328
    
    
    
    5,995
    
    
    
    (20,605
    )
    
    
    20,483Interest expense
    
    
    (12,228
    )
    
    
    (12,925
    )
    
    
    
    
    
    
    
    
    
    
    12,207
    
    
    
    (12,946
    )Interest income primarily from Arch Coal, Inc.
    
    
    3,873
    
    
    
    12,207
    
    
    
    
    
    
    
    
    
    
    
    (12,207
    )
    
    
    3,873(8,355
    )
    
    
    (718
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,073
    )Other non-operating expense
    
    
    (3,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )Net income (loss)
    
    $
    8,022
    
    
    $
    (718
    )
    
    $
    15,328
    
    
    $
    5,995
    
    
    $
    (20,605
    )
    
    $
    8,022
 18




---



##### Table of Contents



STATEMENTS OF OPERATIONS
Six Months ended June 30, 2004
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    Guarantor
    
    Non-GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    281,622
    
    
    $
    
    
    
    $
    
    
    
    $
    281,622Cost of coal sales
    
    
    2,562
    
    
    
    
    
    
    
    218,489
    
    
    
    
    
    
    
    
    
    
    
    221,051Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    33,395
    
    
    
    
    
    
    
    
    
    
    
    33,395Selling, general and administrative
    
    
    7,764
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,76410,326
    
    
    
    
    
    
    
    251,884
    
    
    
    
    
    
    
    
    
    
    
    262,210Income from equity investment
    
    
    36,991
    
    
    
    
    
    
    
    
    
    
    
    7,267
    
    
    
    (36,991
    )
    
    
    7,267Other operating income
    
    
    6,027
    
    
    
    
    
    
    
    1,283
    
    
    
    
    
    
    
    
    
    
    
    7,31043,018
    
    
    
    
    
    
    
    1,283
    
    
    
    7,267
    
    
    
    (36,991
    )
    
    
    14,577Income from operations
    
    
    32,692
    
    
    
    
    
    
    
    31,021
    
    
    
    7,267
    
    
    
    (36,991
    )
    
    
    33,989Interest expense
    
    
    (24,548
    )
    
    
    (25,409
    )
    
    
    
    
    
    
    
    
    
    
    24,112
    
    
    
    (25,845
    )Interest income primarily from Arch Coal, Inc.
    
    
    7,575
    
    
    
    24,112
    
    
    
    
    
    
    
    
    
    
    
    (24,112
    )
    
    
    7,575(16,973
    )
    
    
    (1,297
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,270
    )Other non-operating expense
    
    
    (6,775
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,775
    )Net income (loss)
    
    $
    8,944
    
    
    $
    (1,297
    )
    
    $
    31,021
    
    
    $
    7,267
    
    
    $
    (36,991
    )
    
    $
    8,944
 19




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##### Table of Contents



STATEMENTS OF CASH FLOWS
Six Months ended June 30, 2004
(in thousands of dollars)
(Unaudited)
 Guarantor
    
    Non-GuarantorParent Company
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    ConsolidatedOperating ActivitiesCash provided by (used in) operating activities
    
    $
    4,593
    
    
    $
    
    
    
    $
    5,359
    
    
    $
    (4,368
    )
    
    $
    5,584Investing ActivitiesCapital expenditures
    
    
    
    
    
    
    
    
    
    
    (30,621
    )
    
    
    
    
    
    
    (30,621
    )Proceeds from dispositions of capital assets
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    118Additions to prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    
    
    
    
    (10,000
    )Cash (used in) investing activities
    
    
    
    
    
    
    
    
    
    
    (40,503
    )
    
    
    
    
    
    
    (40,503
    )Financing Activities Debt financing costs
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (225
    )Transactions with affiliates
    
    
    (4,368
    )
    
    
    
    
    
    
    
    
    
    
    4,368
    
    
    
    Cash provided by (used in) financing activities
    
    
    (4,593
    )
    
    
    
    
    
    
    
    
    
    
    4,368
    
    
    
    (225
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (35,144
    )
    
    
    
    
    
    
    (35,144
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    
    
    
    
    35,171
    
    
    
    
    
    
    
    35,171Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    27
    
    
    $
    
    
    
    $
    27
 20




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    our expectation of continued growth in the demand for our coal by the domestic
electric generation industry;
    
    our belief that legislation and regulations relating to the Clean Air Act and
other proposed environmental initiatives and the relatively higher costs of competing fuels
will increase demand for our compliance and low sulfur coal;
    
    our expectations regarding incentives to generators of electricity to minimize
their fuel costs as a result of electric utility deregulation;
    
    our expectation that we will continue to have adequate liquidity from cash flow from operations;
    
    a variety of market, operational, geologic, permitting, labor, transportation and weather related factors;
    
    our expectations regarding any synergies to be derived from the Triton acquisition; and
    
    the other risks and uncertainties which are described below under
Contingencies and Certain Trends and Uncertainties, including, but not limited to, the
following:
 °
    
    Due to the significant amount of our debt, a downturn in economic or
industry conditions could materially affect our ability to meet our future financial
and liquidity obligations.°
    
    A reduction in consumption by the domestic electric generation industry may cause our profitability to decline.°
    
    Extensive environmental laws and regulations could cause the volume of our sales to decline.°
    
    The coal industry is highly regulated, which restricts our ability to
conduct mining operations and may cause our profitability to decline.°
    
    We may not be able to obtain or renew our surety bonds on acceptable terms.°
    
    Unanticipated mining conditions may cause profitability to fluctuate.°
    
    Intense competition and excess industry capacity in the coal producing
regions has adversely affected our revenues and may continue to do so in the future.°
    
    Deregulation of the electric utility industry may cause customers to be
more price-sensitive, resulting in a potential decline in our profitability.°
    
    Our profitability may be adversely affected by the status of our long-term coal supply contracts.°
    
    Decreases in purchases of coal by our largest customers could adversely affect our revenues.°
    
    An unavailability of coal reserves would cause our profitability to decline.
 21




---



##### Table of Contents



°
    
    Disruption in, or increased costs of, transportation services could adversely affect our profitability.°
    
    Numerous uncertainties exist in estimating our economically recoverable
coal reserves, and inaccuracies in our estimates could result in lower revenues,
higher costs or decreased profitability.°
    
    Title defects or loss of leasehold interests in our properties could
result in unanticipated costs or an inability to mine these properties.°
    
    All acquisitions involve a number of inherent risks, any of which could
cause us not to realize the benefits anticipated to result.°
    
    Our expenditures for postretirement medical and pension benefits have
increased in recent periods and could further increase in the future.°
    
    Any inability to comply with restrictions imposed by the Indenture
governing our debt could result in a default under this agreement.
   22




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##### Table of Contents



RESULTS OF OPERATIONS
 Items Affecting Comparability of Reported Results
  Quarter Ended
    
    Six MonthsJune 30,
    
    Ended June 30,(Amounts in millions)
    
    2005
    
    2004
    
    2005
    
    2004Operating IncomeGain from equipment sale
    
    $
    
    
    
    $
    
    
    
    $
    1.6
    
    
    $
    Reclamation fee assessment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )Severance costs  Skyline Mine
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    (2.1
    )Wyoming severance tax assessment
    
    
    (2.6
    )
    
    
    
    
    
    
    (2.6
    )
    
    
    Net decrease in operating income
    
    $
    (2.6
    )
    
    $
    (0.9
    )
    
    $
    (1.0
    )
    
    $
    (3.4
    )OtherExpenses resulting from early debt extinguishment and termination of
hedge accounting for interest rate swaps
    
    
    (3.4
    )
    
    
    (3.4
    )
    
    
    (6.8
    )
    
    
    (6.8
    )Wyoming severance tax assessment  interest portion
    
    
    (1.4
    )
    
    
    
    
    
    
    (1.4
    )
    
    
    Reclamation fee assessment  interest portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Net decrease in pre-tax income
    
    $
    (7.4
    )
    
    $
    (4.3
    )
    
    $
    (9.2
    )
    
    $
    (10.4
    )
 Gain from equipment sale
  Reclamation fee assessment
  Wyoming severance tax assessment
  Severance costs  Skyline Mine
  Expenses resulting from early debt extinguishment and termination of hedge accounting for interest
rate swaps
 Accounting for Derivative
Instruments and
 23




---



##### Table of Contents



Hedging Activities
 Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004
 Revenues
 Three Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    274,700
    
    
    $
    141,773
    
    
    $
    132,927
    
    
    
    93.8
    %Tons sold
    
    
    25,718
    
    
    
    18,572
    
    
    
    7,146
    
    
    
    38.5
    %Coal sales realization per ton sold
    
    $
    10.68
    
    
    $
    7.63
    
    
    $
    3.05
    
    
    
    39.9
    %
 Tons sold by operating segment
 Tons Sold
    
    % of TotalJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004(Amounts in thousands)Powder River Basin
    
    
    21,040
    
    
    
    17,125
    
    
    
    81.8
    %
    
    
    92.2
    %Western Bituminous Region
    
    
    4,678
    
    
    
    1,447
    
    
    
    18.2
    %
    
    
    7.8
    %Total operating regions
    
    
    25,718
    
    
    
    18,572
    
    
    
    100.0
    %
    
    
    100.0
    %
 Coal sales.
   Costs and Expenses
 Three Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Cost of coal sales
    
    $
    205,697
    
    
    $
    109,956
    
    
    $
    95,741
    
    
    
    87.1
    %Depreciation, depletion and amortization
    
    
    24,316
    
    
    
    16,759
    
    
    
    7,557
    
    
    
    45.1
    %Selling, general and administrative expenses
    
    
    5,192
    
    
    
    3,553
    
    
    
    1,639
    
    
    
    46.1
    %$
    235,205
    
    
    $
    130,268
    
    
    $
    104,937
    
    
    
    80.6
    %
 Cost of coal sales.
 24




---



##### Table of Contents




    
    Production taxes and coal royalties (which are incurred as a percentage of coal
sales realization) increased $30.0 million during the second quarter of 2005 compared to
the same period in the prior year.
    
    Repairs and maintenance costs increased $14.5 million compared to the same
period in the prior year.
    
    Costs for diesel fuel, explosives and utilities increased $4.1 million, $2.0
million and $1.9 million, respectively, compared to the same period in the prior year.
    
    Costs for operating supplies increased $9.0 million due partially to increased
steel prices during the current quarter compared to the prior years comparable quarter.
 Depreciation, depletion and amortization.
 25




---



##### Table of Contents



Three Months Ended June 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %Powder River Basin
    
    $
    7.17
    
    
    $
    6.02
    
    
    $
    1.15
    
    
    
    19.1
    %Western Bituminous Region
    
    $
    14.21
    
    
    $
    15.85
    
    
    $
    (1.64
    )
    
    
    (10.3
    )%
   Selling, general and administrative expenses.
 Other Operating Income
 Three Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Income from equity investment
    
    $
    
    
    
    $
    5,995
    
    
    $
    (5,995
    )
    
    
    (100.0
    )%Other operating income
    
    
    442
    
    
    
    2,983
    
    
    
    (2,541
    )
    
    
    (85.2
    )%$
    442
    
    
    $
    8,978
    
    
    $
    (8,536
    )
    
    
    (95.1
    )%
 Other operating income.
 Interest Expense, Net
 Three Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Interest expense
    
    $
    (17,323
    )
    
    $
    (12,946
    )
    
    $
    (4,377
    )
    
    
    33.8
    %Interest income
    
    
    10,603
    
    
    
    3,873
    
    
    
    6,730
    
    
    
    173.8
    %$
    (6,720
    )
    
    $
    (9,073
    )
    
    $
    2,353
    
    
    
    (25.9
    )%
 Interest expense.
 Interest Income
 26




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##### Table of Contents



Other Non-operating Income and Expense
 Three Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Expenses
resulting from
early debt
extinguishment and
termination of
hedge accounting
for interest rate
swaps
    
    $
    (3,388
    )
    
    $
    (3,388
    )
    
    $
    
    
    
    
    N/A
  Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
 Revenues
 Six Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    552,116
    
    
    $
    281,622
    
    
    $
    270,494
    
    
    
    96.0
    %Tons sold
    
    
    53,634
    
    
    
    36,475
    
    
    
    17,159
    
    
    
    47.0
    %Coal sales realization per ton sold
    
    $
    10.29
    
    
    $
    7.72
    
    
    $
    2.57
    
    
    
    33.3
    %
 Tons sold by operating segment
 Tons Sold
    
    % of TotalJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004(Amounts in thousands)Powder River Basin
    
    
    44,157
    
    
    
    33,284
    
    
    
    82.3
    %
    
    
    91.3
    %Western Bituminous Region
    
    
    9,477
    
    
    
    3,191
    
    
    
    17.7
    %
    
    
    8.7
    %Total operating regions
    
    
    53,634
    
    
    
    36,475
    
    
    
    100.0
    %
    
    
    100.0
    %
 Coal sales.
   Costs and Expenses
 Six Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Cost of coal sales
    
    $
    414,801
    
    
    $
    221,051
    
    
    $
    193,750
    
    
    
    87.6
    %Depreciation, depletion and amortization
    
    
    49,835
    
    
    
    33,395
    
    
    
    16,440
    
    
    
    49.2
    %Selling, general and administrative expenses
    
    
    10,883
    
    
    
    7,764
    
    
    
    3,119
    
    
    
    40.2
    %$
    475,519
    
    
    $
    262,210
    
    
    $
    213,309
    
    
    
    81.4
    %
 27




---



##### Table of Contents



Cost of coal sales.
 
    
    Production taxes and coal royalties (which are incurred as a percentage of coal
sales realization) increased $54.2 million during the first half of 2005 compared to the
first half of 2004.
    
    Repairs and maintenance costs increased $27.8 million compared to the same period in the prior year.
    
    Costs for diesel fuel, explosives and utilities increased $9.7 million, $3.6 million and $4.4 million, respectively, compared to the same period in the prior year.
    
    Costs for operating supplies increased $18.1 million due partially to increased
steel prices during the first half of 2005 compared to the same period in the prior year.
 Depreciation, depletion and amortization.
 28




---



##### Table of Contents



Six Months Ended June 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %Powder River Basin
    
    $
    6.75
    
    
    $
    6.01
    
    
    $
    .74
    
    
    
    12.3
    %Western Bituminous Region
    
    $
    14.71
    
    
    $
    16.40
    
    
    $
    (1.69
    )
    
    
    (10.3
    )%
   Selling, general and administrative expenses.
 Other Operating Income
 Six Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Income from equity investment
    
    $
    
    
    
    $
    7,267
    
    
    $
    (7,267
    )
    
    
    (100.0
    )%Other operating income
    
    
    2,735
    
    
    
    7,310
    
    
    
    (4,575
    )
    
    
    (62.6
    )%$
    2,735
    
    
    $
    14,577
    
    
    $
    (11,842
    )
    
    
    (81.2
    )%
 Other operating income.
 Interest Expense, Net
 Six Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Interest expense
    
    $
    (33,312
    )
    
    $
    (25,845
    )
    
    $
    (7,467
    )
    
    
    28.9
    %Interest income
    
    
    19,383
    
    
    
    7,575
    
    
    
    11,808
    
    
    
    155.9
    %$
    (13,929
    )
    
    $
    (18,270
    )
    
    $
    4,341
    
    
    
    (23.8
    )%
 Interest expense.
 Interest Income
 29




---



##### Table of Contents



Other Non-operating Income and Expense
 Six Months EndedJune 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Expenses
resulting from
early debt
extinguishment and
termination of
hedge accounting
for interest rate
swaps
    
    $
    (6,775
    )
    
    $
    (6,775
    )
    
    $
    
    
    
    
    N/A
  DISCLOSURE AND INTERNAL CONTROLS
  OUTLOOK
 Railroad Transportation Disruptions.
 Expenses Related to Interest Rate Swaps.
 30




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  2005
    
    2004(in thousands)Cash provided by (used in):Operating activities
    
    $
    51,625
    
    
    $
    5,584Investing activities
    
    
    (52,443
    )
    
    
    (40,503
    )Financing activities
    
    
    (51
    )
    
    
    (225
    )
          31




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##### Table of Contents



CONTINGENCIES
 Reclamation
 Accounting for Asset Retirement Obligations
  Legal Contingencies
  Certain Trends and Uncertainties
 Substantial Leverage  Covenants
  
    
    making it more difficult for us to satisfy our debt covenants and debt service, lease payment and other obligations;
    
    increasing our vulnerability to general adverse economic and industry conditions;
    
    limiting our ability to obtain additional financing to fund future
acquisitions, working capital, capital expenditures or other general operating
requirements;
    
    reducing the availability of cash flow from operations to fund acquisitions,
working capital, capital expenditures or other general operating purposes;
 32




---



##### Table of Contents




    
    limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
    
    placing us at a competitive disadvantage when compared to competitors with less relative amounts of debt.
  
    
    incur more debt;
    
    make distributions;
    
    make investments;
    
    create liens;
    
    issue and sell capital stock of subsidiaries;
    
    sell assets;
    
    enter into restrictions affecting the ability of restricted subsidiaries to make distributions, loans or advances to us;
    
    engage in transactions with affiliates;
    
    enter into sale and leasebacks; and
    
    merge or consolidate or transfer and sell assets.
  Profitability
  
    
    continued high pricing environment for our raw materials, including, among
other things, diesel fuel, explosives and steel;
    
    expiration or termination of, or sales price predeterminations or suspension of deliveries under, coal supply agreements;
    
    disruption or increases in the cost of transportation services;
    
    changes in laws or regulations, including permitting requirements;
    
    litigation;
    
    work stoppages or other labor difficulties;
    
    labor shortages;
    
    mine worker vacation schedules and related maintenance activities; and
 33




---



##### Table of Contents




    
    changes in coal market and general economic conditions.
 Environmental and Regulatory Factors
  
    
    the discharge of materials into the environment;
    
    employee health and safety;
    
    mine permits and other licensing requirements;
    
    reclamation and restoration of mining properties after mining is completed;
    
    management of materials generated by mining operations;
    
    surface subsidence from underground mining;
    
    water pollution;
    
    legislatively mandated benefits for current and retired coal miners;
    
    air quality standards;
    
    protection of wetlands;
    
    endangered plant and wildlife protection;
    
    limitations on land use;
    
    storage of petroleum products and substances that are regarded as hazardous under applicable laws; and
    
    management of electrical equipment containing polychlorinated biphenyls, or PCBs.
   Clean Air Act.
  34




---



##### Table of Contents



2.5 2.5
     35




---



##### Table of Contents




    
    burning lower sulfur coal, either exclusively or mixed with higher sulfur coal;
    
    installing pollution control devices such as scrubbers, which reduce the emissions from high sulfur coal;
    
    reducing electricity generating levels; or
    
    purchasing or trading emissions credits.
  Mine Health and Safety Laws.
 Surface Mining Control and Reclamation Act.
   Framework Convention on Global Climate Change.
 36




---



##### Table of Contents



Comprehensive Environmental Response, Compensation and Liability Act.
 Mining Permits and Approvals.
     Surety Bonds.
 37




---



##### Table of Contents



Endangered Species.
 Other Environmental Laws Affecting Us.
 Competition
  Electric Industry Factors
   Terms of Long-Term Coal Supply Contracts
  Reserve Depletion
  38




---



##### Table of Contents



Potential Fluctuations in Operating Results  Factors Routinely Affecting Results of Operations
   Transportation
  Reserves  Title; Leasehold Interests
    39




---



##### Table of Contents



Acquisitions
  
    
    uncertainties in assessing the value, strengths, weaknesses, contingent and
other liabilities and potential profitability of acquisition or other transaction
candidates;
    
    the potential loss of key personnel of an acquired business;
    
    the ability to achieve identified operating and financial synergies anticipated
to result from an acquisition or other transaction;
    
    problems that could arise from the integration of the acquired business;
    
    unanticipated changes in business, industry or general economic conditions that
affect the assumptions underlying the acquisition or other transaction rationale; and
    
    unexpected development costs, such as those related to the development of the
Little Thunder reserves, that adversely affect our profitability.
  Certain Contractual Arrangements
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  40




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 6. EXHIBITS
  3.1
    
    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 Basin Coal
Company, L.L.C.).4.1
    
    Indenture, dated June 25, 2003, by and among Arch Western Finance, LLC, Arch Western Resources,
LLC, Arch of Wyoming, LLC, Mountain Coal Company, L.L.C. Thunder Basin Coal Company, L.L.C. and
The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.1 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.).4.2
    
    First Supplemental Indenture, dated October 22, 2004, by and among Arch Western Finance, LLC,
Arch Western Resources, LLC, Arch Western Bituminous Group, LLC, Arch of Wyoming, LLC, Mountain
Coal Company, L.L.C., Thunder Basin Coal Company, L.L.C., Triton Coal Company, LLC and The Bank
of New York, as trustee (incorporated herein by reference to Exhibit 4.4 to the Current Report
on Form 8-K filed by Arch Coal, Inc. and Arch Western Resources, LLC on October 23, 2004).4.3
    
    Form of 6 3/4% Senior Notes due 2013 (included in Exhibit 4.1).4.4
    
    Form of Guarantee of 6 3/4% Senior
Notes due 2013 (included in Exhibit 4.1).31.1
    
    Certification of Principal Executive Officer Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to § 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Statement Under Oath of Principal Executive Officer Pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Statement Under Oath of Principal Financial Officer Pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
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##### Table of Contents



SIGNATURES
  ARCH WESTERN RESOURCES, LLC(Registrant)Date: August 12, 2005
    
    /s/ Robert J. MesseyRobert J. MesseyVice President(Chief Accounting Officer)
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