##### Table of Contents



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 September 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(State or other jurisdiction of
incorporation or organization)
    
    43-1811130(I.R.S. Employer Identification No.)
 (Address of principal executive offices)(Zip Code)
 Registrants telephone number, including area code:
 þ o
 o þ
 o þ




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INDEX
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2005 and 2004 and the Nine Months Ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 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 INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 6. Exhibits
    
    
    41Certification of PEO Pursuant to Section 302Certification of PFO Pursuant to Section 302Statement Under Oath of PEO Pursuant to 18 U.S.C. Section 1350Statement Under Oath of PFO Pursuant to 18 U.S.C. Section 1350
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ARCH WESTERN RESOURCES, LLC
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS)
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    51
    
    
    $
    1,351Trade receivables
    
    
    116,623
    
    
    
    83,230Other receivables
    
    
    6,327
    
    
    
    5,691Inventories
    
    
    91,882
    
    
    
    78,372Prepaid royalties
    
    
    5,016
    
    
    
    7,792Other
    
    
    11,628
    
    
    
    11,529Total current assets
    
    
    231,527
    
    
    
    187,965Property, plant and equipment, net
    
    
    1,095,922
    
    
    
    1,101,674Other assetsReceivable from Arch Coal, Inc.
    
    
    749,187
    
    
    
    677,934Other
    
    
    47,418
    
    
    
    45,863Total other assets
    
    
    796,605
    
    
    
    723,797Total assets
    
    $
    2,124,054
    
    
    $
    2,013,436Liabilities and members equityCurrent liabilitiesAccounts payable
    
    $
    64,165
    
    
    $
    56,612Accrued expenses
    
    
    118,670
    
    
    
    129,435Total current liabilities
    
    
    182,835
    
    
    
    186,047Long-term debt
    
    
    960,588
    
    
    
    961,613Accrued postretirement benefits other than pension
    
    
    26,160
    
    
    
    24,643Asset retirement obligations
    
    
    132,055
    
    
    
    128,184Accrued workers compensation
    
    
    11,637
    
    
    
    12,749Other noncurrent liabilities
    
    
    40,424
    
    
    
    42,770Total liabilities
    
    
    1,353,699
    
    
    
    1,356,006Minority interest
    
    
    124,472
    
    
    
    109,401Redeemable equity interests
    
    
    5,460
    
    
    
    4,971Non-redeemable members equity
    
    
    640,423
    
    
    
    543,058Total liabilities, redeemable equity
interests and non-redeemable members
equity
    
    $
    2,124,054
    
    
    $
    2,013,436
  3




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ARCH WESTERN RESOURCES, LLC
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
 (UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004RevenuesCoal sales
    
    $
    291,286
    
    
    $
    208,579
    
    
    $
    843,402
    
    
    $
    490,200Costs and expensesCost of coal sales
    
    
    212,183
    
    
    
    169,155
    
    
    
    626,984
    
    
    
    390,205Depreciation, depletion and amortization
    
    
    28,032
    
    
    
    21,539
    
    
    
    77,868
    
    
    
    54,934Selling, general and administrative expenses
    
    
    5,741
    
    
    
    3,816
    
    
    
    16,623
    
    
    
    11,581245,956
    
    
    
    194,510
    
    
    
    721,475
    
    
    
    456,720Other operating incomeIncome from equity investments
    
    
    
    
    
    
    1,143
    
    
    
    
    
    
    
    8,410Other operating income
    
    
    835
    
    
    
    1,106
    
    
    
    3,571
    
    
    
    8,416835
    
    
    
    2,249
    
    
    
    3,571
    
    
    
    16,826Income from operations
    
    
    46,165
    
    
    
    16,318
    
    
    
    125,498
    
    
    
    50,306Interest expense, net:Interest expense
    
    
    (16,297
    )
    
    
    (14,061
    )
    
    
    (49,609
    )
    
    
    (39,906
    )Interest income primarily from Arch Coal, Inc.
    
    
    11,909
    
    
    
    4,812
    
    
    
    31,292
    
    
    
    12,387(4,388
    )
    
    
    (9,249
    )
    
    
    (18,317
    )
    
    
    (27,519
    )Other non-operating expense:Expenses resulting from early debt extinguishment and
termination of hedge accounting for interest rate swaps
    
    
    (3,195
    )
    
    
    (3,388
    )
    
    
    (9,970
    )
    
    
    (10,162
    )Income before minority interest
    
    
    38,582
    
    
    
    3,681
    
    
    
    97,211
    
    
    
    12,625Minority interest
    
    
    (4,593
    )
    
    
    (2,017
    )
    
    
    (15,072
    )
    
    
    (2,017
    )Net income
    
    $
    33,989
    
    
    $
    1,664
    
    
    $
    82,139
    
    
    $
    10,608Net income attributable to redeemable equity interests
    
    
    170
    
    
    
    8
    
    
    
    410
    
    
    
    53Net income attributable to non-redemable members equity
    
    $
    33,819
    
    
    $
    1,656
    
    
    $
    81,729
    
    
    $
    10,555
  4




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ARCH WESTERN RESOURCES, LLC
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)  (UNAUDITED)
 Nine Months EndedSeptember 30,2005
    
    
    2004Operating activitiesNet income
    
    $
    82,139
    
    
    $
    10,608Adjustments to reconcile to cash provided by operating
activities:Depreciation, depletion and amortization
    
    
    77,868
    
    
    
    54,934Prepaid royalties expensed
    
    
    12,776
    
    
    
    10,002Accretion on asset retirement obligations
    
    
    8,563
    
    
    
    6,590Net gain on disposition of assets
    
    
    (1,853
    )
    
    
    (93
    )Income from equity investment
    
    
    
    
    
    
    (8,410
    )Net distribution from equity investment
    
    
    
    
    
    
    16,049Minority interest
    
    
    15,072
    
    
    
    2,017Other nonoperating expense
    
    
    9,970
    
    
    
    10,162Changes in:Receivables
    
    
    (34,029
    )
    
    
    (4,341
    )Inventories
    
    
    (13,509
    )
    
    
    1,887Accounts payable and accrued expenses
    
    
    (3,129
    )
    
    
    (34,465
    )Note receivable from Arch Coal, Inc.
    
    
    (67,388
    )
    
    
    (132,706
    )Accrued postretirement benefits other than pension
    
    
    1,517
    
    
    
    782Asset retirement obligations
    
    
    (4,692
    )
    
    
    (4,800
    )Accrued workers compensation benefits
    
    
    (1,112
    )
    
    
    (949
    )Other
    
    
    5,468
    
    
    
    2,028Cash provided by (used in) operating activities
    
    
    87,661
    
    
    
    (70,705
    )Investing activitiesCapital expenditures
    
    
    (78,588
    )
    
    
    (52,626
    )Proceeds from dispositions of property, plant and equipment
    
    
    2,150
    
    
    
    133Additions to prepaid royalties
    
    
    (12,456
    )
    
    
    (11,688
    )Cash used in investing activities
    
    
    (88,894
    )
    
    
    (64,181
    )Financing activitiesProceeds from issuance of debt
    
    
    
    
    
    
    100,000Debt financing costs
    
    
    (67
    )
    
    
    (225
    )Cash provided by (used in) financing activities
    
    
    (67
    )
    
    
    99,775Decrease in cash and cash equivalents
    
    
    (1,300
    )
    
    
    (35,111
    )Cash and cash equivalents, beginning of period
    
    
    1,351
    
    
    
    35,171Cash and cash equivalents, end of period
    
    $
    51
    
    
    $
    60
  5




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ARCH WESTERN RESOURCES, LLC
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2005(UNAUDITED)
 Note A  General
     Note B  Recent Accounting Pronouncements
 Accounting for Stripping Costs in the
Mining Industry
 Note C  Contribution of North Rochelle Mine
  6




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Cash
    
    $
    407Accounts receivable
    
    
    14,233Materials and supplies
    
    
    4,161Coal inventory
    
    
    4,875Other 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
    
    $
    26,451
  Pro Forma Financial Information
  7




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Note D  Transactions or Events Affecting Comparability of Reported Results
     Note E  Investment in Canyon Fuel
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Condensed Income Statement Information
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004(in thousands)Revenues
    
    $
    
    
    
    $
    20,186

    
    $
    
    
    
    $
    142,893Total costs and expenses
    
    
    
    
    
    
    18,791

    
    
    
    
    
    
    133,546Net income before cumulative effect of accounting change
    
    $
    
    
    
    $
    1,395

    
    $
    
    
    
    $
    9,34765% of Canyon Fuel net income before cumulative effect of
accounting change
    
    $
    
    
    
    $
    906

    
    $
    
    
    
    $
    6,075Effect of purchase adjustments
    
    
    
    
    
    
    237

    
    
    
    
    
    
    2,335Arch Westerns income from its equity investment in Canyon Fuel
    
    $
    
    
    
    $
    1,143

    
    $
    
    
    
    $
    8,410
  8




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Note F  Other Comprehensive Income
 Reporting Comprehensive Income,
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Net income
    
    $
    33,989
    
    
    $
    1,664
    
    
    $
    82,139
    
    
    $
    10,608Other comprehensive
income, net of income
taxes
    
    
    6,031
    
    
    
    3,390
    
    
    
    15,664
    
    
    
    11,677Total comprehensive income
    
    $
    40,020
    
    
    $
    5,054
    
    
    $
    97,803
    
    
    $
    22,285
  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 September 30,
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Service cost
    
    $
    1,140
    
    
    $
    1,324
    
    
    $
    509
    
    
    $
    387Interest cost
    
    
    300
    
    
    
    1,033
    
    
    
    513
    
    
    
    349Expected return on plan assets*
    
    
    (554
    )
    
    
    (1,348
    )
    
    
    
    
    
    
    Other amortization and deferral
    
    
    913
    
    
    
    519
    
    
    
    298
    
    
    
    (32
    )$
    1,799
    
    
    $
    1,528
    
    
    $
    1,320
    
    
    $
    704
 Other postretirementPension benefits
    
    
    benefitsNine Months Ended September 30,
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Service cost
    
    $
    4,404
    
    
    $
    2,774
    
    
    $
    1,431
    
    
    $
    872Interest cost
    
    
    1,067
    
    
    
    2,948
    
    
    
    1,436
    
    
    
    851Expected return on plan assets*
    
    
    (1,963
    )
    
    
    (3,807
    )
    
    
    
    
    
    
    Other amortization and deferral
    
    
    2,152
    
    
    
    962
    
    
    
    716
    
    
    
    (35
    )$
    5,660
    
    
    $
    2,877
    
    
    $
    3,583
    
    
    $
    1,688
 
 *
    
    The Company does not fund its other postretirement liabilities. 9




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Contributions
  Note H  Inventories
  September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)Coal
    
    $
    49,592
    
    
    $
    46,538Repair parts and supplies
    
    
    42,290
    
    
    
    31,834$
    91,882
    
    
    $
    78,372
 Note J  Related Party Transactions
  Note K  Segment Information
   10




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Three months ending September 30, 2005
 Corporate,Other and(Amounts in thousands, except per ton amounts)
    
    PRB
    
    WBIT
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    184,292
    
    
    $
    106,994
    
    
    $
    
    
    
    $
    291,286Income from operations
    
    
    23,062
    
    
    
    28,882
    
    
    
    (5,779
    )
    
    
    46,165Total assets
    
    
    1,213,821
    
    
    
    1,716,482
    
    
    
    (806,249
    )
    
    
    2,124,054Depreciation, depletion and amortization
    
    
    16,177
    
    
    
    11,855
    
    
    
    
    
    
    
    28,032Capital expenditures
    
    
    13,330
    
    
    
    23,295
    
    
    
    2
    
    
    
    36,627Operating cost per ton
    
    
    7.20
    
    
    
    14.62Three months ending September 30, 2004Corporate,Other and(Amounts in thousands, except per ton amounts)
    
    PRB
    
    WBIT
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    144,431
    
    
    $
    64,148
    
    
    $
    
    
    
    $
    208,579Income from equity investments
    
    
    
    
    
    
    1,143
    
    
    
    
    
    
    
    1,143Income from operations
    
    
    14,092
    
    
    
    5,889
    
    
    
    (3,663
    )
    
    
    16,318Total assets
    
    
    1,129,833
    
    
    
    1,373,331
    
    
    
    (698,881
    )
    
    
    1,804,283Depreciation, depletion and amortization
    
    
    14,688
    
    
    
    6,850
    
    
    
    
    
    
    
    21,538Capital expenditures
    
    
    13,692
    
    
    
    8,326
    
    
    
    
    
    
    
    22,018Operating cost per ton
    
    
    6.53
    
    
    
    15.30Nine months ending September 30, 2005Corporate,Other and(Amounts in thousands, except per ton amounts)
    
    PRB
    
    WBIT
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    533,638
    
    
    $
    309,737
    
    
    $
    
    
    
    $
    843,402Income from operations
    
    
    74,647
    
    
    
    67,988
    
    
    
    (17,137
    )
    
    
    125,498Depreciation,
depletion and
amortization
    
    
    48,993
    
    
    
    28,875
    
    
    
    
    
    
    
    77,868Capital expenditures
    
    
    30,331
    
    
    
    48,258
    
    
    
    
    
    
    
    78,588Operating cost per ton
    
    
    6.90
    
    
    
    14.68Nine months ending September 30, 2004Corporate,Other and(Amounts in thousands, except per ton amounts)
    
    PRB
    
    WBIT
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    372,009
    
    
    $
    118,191
    
    
    $
    
    
    
    $
    490,200Income from equity investments
    
    
    
    
    
    
    8,410
    
    
    
    
    
    
    
    8,410Income from operations
    
    
    49,929
    
    
    
    17,346
    
    
    
    (9,969
    )
    
    
    50,306Depreciation, depletion and amortization
    
    
    40,151
    
    
    
    14,783
    
    
    
    
    
    
    
    54,934Capital expenditures
    
    
    41,270
    
    
    
    11,356
    
    
    
    
    
    
    
    52,626Operating cost per ton
    
    
    6.21
    
    
    
    15.82
 11




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Total income from operations
    
    $
    46,165
    
    
    $
    16,318
    
    
    $
    125,498
    
    
    $
    50,306Interest expense
    
    
    (16,297
    )
    
    
    (14,061
    )
    
    
    (49,609
    )
    
    
    (39,906
    )Interest income
    
    
    11,909
    
    
    
    4,812
    
    
    
    31,292
    
    
    
    12,387Other non-operating expense
    
    
    (3,195
    )
    
    
    (3,388
    )
    
    
    (9,970
    )
    
    
    (10,162
    )Income before minority interest
    
    $
    38,582
    
    
    $
    3,681
    
    
    $
    97,211
    
    
    $
    12,625
 Note L  Subsequent events
 West Elk mine evacuation
   Note M  Reclassifications
  Note N  Supplemental Condensed Consolidating Financial Information
  12




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BALANCE SHEETS
September 30, 2005
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    44
    
    
    $
    7
    
    
    $
    
    
    
    $
    51Trade accounts receivable
    
    
    95,207
    
    
    
    
    
    
    
    54
    
    
    
    21,362
    
    
    
    
    
    
    
    116,623Other receivables
    
    
    
    
    
    
    
    
    
    
    805
    
    
    
    5,522
    
    
    
    
    
    
    
    6,327Inventories
    
    
    
    
    
    
    
    
    
    
    69,019
    
    
    
    22,863
    
    
    
    
    
    
    
    91,882Prepaid royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,016
    
    
    
    
    
    
    
    5,016Other current assets
    
    
    3,428
    
    
    
    
    
    
    
    1,925
    
    
    
    6,275
    
    
    
    
    
    
    
    11,628Total current assets
    
    
    98,635
    
    
    
    
    
    
    
    71,847
    
    
    
    61,045
    
    
    
    
    
    
    
    231,527Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    820,548
    
    
    
    275,374
    
    
    
    
    
    
    
    1,095,922Investment in subsidiaries
    
    
    1,537,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,537,569
    )
    
    
    Receivable from Arch Coal.
    
    
    749,187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    749,187Intercompanies
    
    
    (1,576,929
    )
    
    
    956,969
    
    
    
    579,506
    
    
    
    40,454
    
    
    
    
    
    
    
    Other
    
    
    343
    
    
    
    16,602
    
    
    
    30,473
    
    
    
    
    
    
    
    
    
    
    
    47,418Total other assets
    
    
    710,170
    
    
    
    973,571
    
    
    
    609,979
    
    
    
    40,454
    
    
    
    (1,537,569
    )
    
    
    796,605Total assets
    
    $
    808,805
    
    
    $
    973,571
    
    
    $
    1,502,374
    
    
    $
    376,873
    
    
    $
    (1,537,569
    )
    
    $
    2,124,054Accounts payable
    
    
    11,522
    
    
    
    
    
    
    
    37,839
    
    
    
    14,804
    
    
    
    
    
    
    
    64,165Accrued expenses
    
    
    4,506
    
    
    
    16,031
    
    
    
    90,586
    
    
    
    7,547
    
    
    
    
    
    
    
    118,670Total current liabilities
    
    
    16,028
    
    
    
    16,031
    
    
    
    128,425
    
    
    
    22,351
    
    
    
    
    
    
    
    182,835Long-term debt
    
    
    
    
    
    
    960,588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960,588Accrued postretirement benefits other
than pension
    
    
    15,364
    
    
    
    
    
    
    
    2,486
    
    
    
    8,310
    
    
    
    
    
    
    
    26,160Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    119,707
    
    
    
    12,348
    
    
    
    
    
    
    
    132,055Accrued workers compensation
    
    
    6,313
    
    
    
    
    
    
    
    1,189
    
    
    
    4,135
    
    
    
    
    
    
    
    11,637Other noncurrent liabilities
    
    
    745
    
    
    
    
    
    
    
    12,125
    
    
    
    27,554
    
    
    
    
    
    
    
    40,424Total liabilities
    
    
    38,450
    
    
    
    976,619
    
    
    
    263,932
    
    
    
    74,698
    
    
    
    
    
    
    
    1,353,699Minority interest
    
    
    124,472
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,472Redeemable equity interests
    
    
    5,460
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,460Non-redeemable members
equity
    
    
    640,423
    
    
    
    (3,048
    )
    
    
    1,238,442
    
    
    
    302,175
    
    
    
    (1,537,569
    )
    
    
    640,423Total liabilities,
redeemable equity
interests and non-
redeemable members equity
    
    $
    808,805
    
    
    $
    973,571
    
    
    $
    1,502,374
    
    
    $
    376,873
    
    
    $
    (1,537,569
    )
    
    $
    2,124,054
 13




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##### 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
    
    
    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
 14




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##### Table of Contents



STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2005
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    228,429
    
    
    $
    62,857
    
    
    $
    
    
    
    $
    291,286Cost of coal sales
    
    
    586
    
    
    
    
    
    
    
    167,436
    
    
    
    44,161
    
    
    
    
    
    
    
    212,183Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    20,994
    
    
    
    7,038
    
    
    
    
    
    
    
    28,032Selling, general and administrative
    
    
    5,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,7416,327
    
    
    
    
    
    
    
    188,430
    
    
    
    51,199
    
    
    
    
    
    
    
    245,956Income from equity investment
    
    
    52,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,143
    )
    
    
    Other operating income
    
    
    72
    
    
    
    
    
    
    
    608
    
    
    
    155
    
    
    
    
    
    
    
    83552,215
    
    
    
    
    
    
    
    608
    
    
    
    155
    
    
    
    (52,143
    )
    
    
    835Income from operations
    
    
    45,888
    
    
    
    
    
    
    
    40,607
    
    
    
    11,813
    
    
    
    (52,143
    )
    
    
    46,166Interest expense
    
    
    (16,020
    )
    
    
    (15,801
    )
    
    
    (500
    )
    
    
    
    
    
    
    16,024
    
    
    
    (16,297
    )Interest income primarily from Arch Coal
    
    
    11,909
    
    
    
    16,024
    
    
    
    
    
    
    
    
    
    
    
    (16,024
    )
    
    
    11,909(4,111
    )
    
    
    223
    
    
    
    (500
    )
    
    
    
    
    
    
    
    
    
    
    (4,388
    )Other non-operating expense
    
    
    (3,195
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,195
    )Minority interest
    
    
    (4,593
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,593
    )Net income
    
    $
    33,989
    
    
    $
    223
    
    
    $
    40,107
    
    
    $
    11,813
    
    
    $
    (52,143
    )
    
    $
    33,989
 15




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##### Table of Contents



STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2005
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    656,682
    
    
    $
    186,720
    
    
    $
    
    
    
    $
    843,402Cost of coal sales
    
    
    1,567
    
    
    
    
    
    
    
    488,821
    
    
    
    136,596
    
    
    
    
    
    
    
    626,984Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    62,059
    
    
    
    15,809
    
    
    
    
    
    
    
    77,868Selling, general and administrative
    
    
    16,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,62318,190
    
    
    
    
    
    
    
    550,880
    
    
    
    152,405
    
    
    
    
    
    
    
    721,475Income from equity investment
    
    
    142,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142,008
    )
    
    
    Other operating income
    
    
    103
    
    
    
    
    
    
    
    2,916
    
    
    
    552
    
    
    
    
    
    
    
    3,571142,111
    
    
    
    
    
    
    
    2,916
    
    
    
    552
    
    
    
    (142,008
    )
    
    
    3,571Income from operations
    
    
    123,921
    
    
    
    
    
    
    
    108,718
    
    
    
    34,867
    
    
    
    (142,008
    )
    
    
    125,498Interest expense
    
    
    (48,032
    )
    
    
    (47,667
    )
    
    
    (1,946
    )
    
    
    
    
    
    
    48,036
    
    
    
    (49,609
    )Interest income primarily from Arch Coal
    
    
    31,292
    
    
    
    48,036
    
    
    
    
    
    
    
    
    
    
    
    (48,036
    )
    
    
    31,292(16,740
    )
    
    
    369
    
    
    
    (1,946
    )
    
    
    
    
    
    
    
    
    
    
    (18,317
    )Other non-operating expense
    
    
    (9,970
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,970
    )Minority interest
    
    
    (15,072
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,072
    )Net income
    
    $
    82,139
    
    
    $
    369
    
    
    $
    106,772
    
    
    $
    34,867
    
    
    $
    (142,008
    )
    
    $
    82,139
 16




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##### Table of Contents



STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2005
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating ActivitiesCash provided by operating activities
    
    $
    67
    
    
    $
    
    
    
    $
    55,956
    
    
    $
    31,638
    
    
    $
    87,661Investing ActivitiesCapital expenditures
    
    
    
    
    
    
    
    
    
    
    (46,788
    )
    
    
    (31,800
    )
    
    
    (78,588
    )Proceeds from dispositions of capital assets
    
    
    
    
    
    
    
    
    
    
    2,147
    
    
    
    3
    
    
    
    2,150Additions to prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (12,456
    )
    
    
    
    
    
    
    (12,456
    )Cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (57,097
    )
    
    
    (31,797
    )
    
    
    (88,894
    )Financing ActivitiesDebt financing costs
    
    
    (67
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )Cash used in financing activities
    
    
    (67
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (1,141
    )
    
    
    (159
    )
    
    
    (1,300
    )Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    166
    
    
    
    1,351Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    44
    
    
    $
    7
    
    
    $
    51
 17




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##### Table of Contents



STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2004
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    171,327
    
    
    $
    37,252
    
    
    $
    
    
    
    $
    208,579Cost of coal sales
    
    
    359
    
    
    
    
    
    
    
    138,262
    
    
    
    30,534
    
    
    
    
    
    
    
    169,155Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    18,464
    
    
    
    3,075
    
    
    
    
    
    
    
    21,539Selling, general and administrative
    
    
    3,816
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,8164,175
    
    
    
    
    
    
    
    156,725
    
    
    
    33,609
    
    
    
    
    
    
    
    194,510Income from equity investment
    
    
    18,932
    
    
    
    
    
    
    
    
    
    
    
    1,143
    
    
    
    (18,932
    )
    
    
    1,143Other operating income
    
    
    948
    
    
    
    
    
    
    
    109
    
    
    
    49
    
    
    
    
    
    
    
    1,10619,880
    
    
    
    
    
    
    
    108
    
    
    
    1,192
    
    
    
    (18,932
    )
    
    
    2,249Income from operations
    
    
    15,705
    
    
    
    
    
    
    
    14,710
    
    
    
    4,835
    
    
    
    (18,932
    )
    
    
    16,318Interest expense
    
    
    (13,448
    )
    
    
    (13,372
    )
    
    
    
    
    
    
    
    
    
    
    12,759
    
    
    
    (14,061
    )Interest income primarily from Arch
Coal, Inc.
    
    
    4,812
    
    
    
    12,759
    
    
    
    
    
    
    
    
    
    
    
    (12,759
    )
    
    
    4,812(8,636
    )
    
    
    (613
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,249
    )Other non-operating expense
    
    
    (3,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )Minority interest
    
    
    (2,017
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,017
    )Net income (loss)
    
    $
    1,664
    
    
    $
    (613
    )
    
    $
    14,710
    
    
    $
    4,835
    
    
    $
    (18,932
    )
    
    $
    1,664
 18




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##### Table of Contents



STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2004
(in thousands of dollars)
(Unaudited)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    452,948
    
    
    $
    37,252
    
    
    $
    
    
    
    $
    490,200Cost of coal sales
    
    
    2,921
    
    
    
    
    
    
    
    356,750
    
    
    
    30,534
    
    
    
    
    
    
    
    390,205Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    51,859
    
    
    
    3,075
    
    
    
    
    
    
    
    54,934Selling, general and administrative
    
    
    11,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,58114,502
    
    
    
    
    
    
    
    408,609
    
    
    
    33,609
    
    
    
    
    
    
    
    456,720Income from equity investment
    
    
    55,923
    
    
    
    
    
    
    
    
    
    
    
    8,410
    
    
    
    (55,923
    )
    
    
    8,410Other operating income
    
    
    6,975
    
    
    
    
    
    
    
    1,392
    
    
    
    49
    
    
    
    
    
    
    
    8,41662,898
    
    
    
    
    
    
    
    1,392
    
    
    
    8,459
    
    
    
    (55,923
    )
    
    
    16,826Income from operations
    
    
    48,396
    
    
    
    
    
    
    
    45,731
    
    
    
    12,102
    
    
    
    (55,923
    )
    
    
    50,306Interest expense
    
    
    (37,996
    )
    
    
    (38,781
    )
    
    
    
    
    
    
    
    
    
    
    36,871
    
    
    
    (39,906
    )Interest income primarily from Arch
Coal, Inc.
    
    
    12,387
    
    
    
    36,871
    
    
    
    
    
    
    
    
    
    
    
    (36,871
    )
    
    
    12,387(25,609
    )
    
    
    (1,910
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,519
    )Other non-operating expense
    
    
    (10,162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,162
    )Minority interest
    
    
    (2,017
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,017
    )Net income (loss)
    
    $
    10,608
    
    
    $
    (1,910
    )
    
    $
    45,731
    
    
    $
    12,102
    
    
    $
    (55,923
    )
    
    $
    10,608
 19




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##### Table of Contents



STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004
(in thousands of dollars)
(Unaudited)
 Guarantor
    
    
    Non-GuarantorParent Company
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating ActivitiesCash provided by (used in) operating activities
    
    $
    (95,407
    )
    
    $
    
    
    
    $
    27,125
    
    
    $
    (2,423
    )
    
    $
    (70,705
    )Investing ActivitiesCapital expenditures
    
    
    
    
    
    
    
    
    
    
    (50,695
    )
    
    
    (1,931
    )
    
    
    (52,626
    )Proceeds from dispositions of capital assets
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    11
    
    
    
    133Additions to prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (11,688
    )
    
    
    
    
    
    
    (11,688
    )Cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (62,261
    )
    
    
    (1,920
    )
    
    
    (64,181
    )Financing ActivitiesDebt financing costs
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (225
    )Proceeds from issuance of debt
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Transactions with affiliates
    
    
    (4,368
    )
    
    
    
    
    
    
    
    
    
    
    4,368
    
    
    
    Cash provided by financing activities
    
    
    95,407
    
    
    
    
    
    
    
    
    
    
    
    4,368
    
    
    
    99,775Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (35,136
    )
    
    
    25
    
    
    
    (35,111
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    
    
    
    
    35,171
    
    
    
    
    
    
    
    35,171Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    35
    
    
    $
    25
    
    
    $
    60
 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.°
    
    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.°
    
    Disruption in, or increased costs of, transportation services could adversely affect our profitability.
 21




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##### Table of Contents



°
    
    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.°
    
    Some of our agreements impose significant potential indemnification obligations on us.°
    
    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
    
    
    Nine MonthsSeptember 30,
    
    
    Ended September 30,(Amounts in millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Operating IncomeGain from equipment sale
    
    $
    0.2
    
    
    $
    
    
    
    $
    1.9
    
    
    $
    Reclamation fee
assessment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )Severance costs  Skyline Mine
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.1
    )Wyoming severance tax assessment
    
    
    
    
    
    
    
    
    
    
    (2.6
    )
    
    
    Net increase (decrease) in operating income
    
    $
    0.2
    
    
    $
    
    
    
    $
    (0.7
    )
    
    $
    (3.4
    )OtherWyoming severance tax assessment  interest
portion
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    Reclamation fee assessment  interest portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Net decrease in pretax income
    
    $
    0.2
    
    
    $
    
    
    
    $
    (2.1
    )
    
    $
    (3.6
    )
 Gain from equipment sale
  Reclamation fee assessment
  Wyoming severance tax assessment
  Severance costs  Skyline Mine
  23




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##### Table of Contents



Quarter Ended September 30, 2005 Compared to Quarter Ended September 30, 2004
 Revenues
 Three Months EndedSeptember 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    291,286
    
    
    $
    208,579
    
    
    $
    82,707
    
    
    
    39.7
    %Tons sold
    
    
    26,829
    
    
    
    23,556
    
    
    
    3,273
    
    
    
    13.9
    %Coal sales realization per ton sold
    
    $
    10.86
    
    
    $
    8.85
    
    
    $
    2.01
    
    
    
    22.7
    %
 Tons sold by operating segment
 Three Months Ended
    
    Three Months EndedSeptember 30, 2005
    
    September 30, 2004tons
    
    % of total
    
    Tons
    
    % of total(Amounts in thousands)Powder River Basin
    
    
    22,130
    
    
    
    82.5
    %
    
    
    20,010
    
    
    
    84.9
    %Western Bituminous Region
    
    
    4,699
    
    
    
    17.5
    %
    
    
    3,546
    
    
    
    15.1
    %Total operating regions
    
    
    26,829
    
    
    
    100.0
    %
    
    
    23,556
    
    
    
    100.0
    %
 Coal sales.
   Costs and Expenses
 Three Months EndedSeptember 30,
    
    
    Increase (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %Cost of coal sales
    
    $
    212,183
    
    
    $
    169,155
    
    
    $
    43,028
    
    
    
    25.4
    %Depreciation, depletion and amortization
    
    
    28,032
    
    
    
    21,539
    
    
    
    6,493
    
    
    
    30.1
    %Selling, general and administrative
expenses
    
    
    5,741
    
    
    
    3,816
    
    
    
    1,925
    
    
    
    50.4
    %$
    245,956
    
    
    $
    194,510
    
    
    $
    51,446
    
    
    
    26.4
    %
 Cost of coal sales.
 
    
    Production taxes and coal royalties (which are incurred as a percentage of coal sales
realization) increased $21.4 million during the third quarter of 2005 compared to the same
period in the prior year.
    
    Repairs and maintenance costs increased $1.5 million compared to the same period in the
prior year.
 24




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##### Table of Contents




    
    Costs for diesel fuel, explosives and utilities increased $4.5 million, $1.2 million and
$1.2 million, respectively, compared to the same period in the prior year.
    
    Costs for operating supplies increased $6.9 million due partially to increased steel
prices during the current quarter compared to the prior years comparable quarter.
 Depreciation, depletion and amortization.
   Three Months EndedSeptember 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %Powder River Basin
    
    $
    7.20
    
    
    $
    6.53
    
    
    $
    0.67
    
    
    
    10.3
    %Western Bituminous Region
    
    $
    14.62
    
    
    $
    15.30
    
    
    $
    (0.68
    )
    
    
    (4.4
    )%
   Selling, general and administrative expenses.
 Other Operating Income
 Three Months EndedSeptember 30,
    
    
    Increase (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %(Amounts in thousands)Income from equity investment
    
    $
    
    
    
    $
    1,143
    
    
    $
    (1,143
    )
    
    
    (100.0
    )%Other operating income
    
    
    835
    
    
    
    1,106
    
    
    
    (271
    )
    
    
    (24.5
    )%$
    835
    
    
    $
    2,249
    
    
    $
    (1,414
    )
    
    
    (62.9
    )%
 Other operating income.
 25




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##### Table of Contents



Interest Expense, Net
 Three Months EndedSeptember 30,
    
    
    Increase (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %(Amounts in thousands)Interest expense
    
    $
    (16,297
    )
    
    $
    (14,061
    )
    
    $
    (2,236
    )
    
    
    (15.9
    )%Interest income
    
    
    11,909
    
    
    
    4,812
    
    
    
    7,097
    
    
    
    147.5
    %$
    (4,388
    )
    
    $
    (9,249
    )
    
    $
    4,861
    
    
    
    52.6
    %
 Interest expense.
 Interest Income
 Other Non-operating Income and Expense
 Three Months EndedSeptember 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Expenses resulting from early debt extinguishment
and termination of hedge accounting for interest
rate swaps
    
    $
    (3,195
    )
    
    $
    (3,388
    )
    
    $
    193
    
    
    
    5.7
    %
  Nine months Ended September 30, 2005 Compared to Nine months Ended September 30, 2004
 Revenues
 Nine Months EndedSeptember 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    843,402
    
    
    $
    490,200
    
    
    $
    353,202
    
    
    
    72.1
    %Tons sold
    
    
    80,463
    
    
    
    60,030
    
    
    
    20,433
    
    
    
    34.0
    %Coal sales realization per ton sold
    
    $
    10.48
    
    
    $
    8.17
    
    
    $
    2.31
    
    
    
    28.3
    %
 Tons sold by operating segment
 Nine Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2004tons
    
    % of total
    
    tons
    
    % of total(Amounts in thousands)Powder River Basin
    
    
    66,287
    
    
    
    82.4
    %
    
    
    53,294
    
    
    
    88.8
    %Western Bituminous Region
    
    
    14,176
    
    
    
    17.6
    %
    
    
    6,736
    
    
    
    11.2
    %Total operating regions
    
    
    80,463
    
    
    
    100.0
    %
    
    
    60,030
    
    
    
    100.0
    %
 26




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##### Table of Contents



Coal sales.
   Costs and Expenses
 Nine Months EndedSeptember 30,
    
    
    Increase (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %(Amounts in thousands)Cost of coal sales
    
    $
    626,984
    
    
    $
    390,205
    
    
    $
    236,779
    
    
    
    60.7
    %Depreciation, depletion and amortization
    
    
    77,868
    
    
    
    54,934
    
    
    
    22,934
    
    
    
    41.7
    %Selling, general and administrative
expenses
    
    
    16,623
    
    
    
    11,581
    
    
    
    5,042
    
    
    
    43.5
    %$
    721,475
    
    
    $
    456,720
    
    
    $
    264,755
    
    
    
    58.0
    %
 Cost of coal sales.
 
    
    Production taxes and coal royalties (which are incurred as a percentage of coal sales
realization) increased $75.6 million during the nine months ended September 30, 2005
compared to the same period in the prior year.
    
    Repairs and maintenance costs increased $29.3 million compared to the same period in the
prior year.
    
    Costs for diesel fuel, explosives and utilities increased $14.2 million, $4.9 million and
$5.6 million, respectively, compared to the same period in the prior year.
    
    Costs for operating supplies increased $25.0 million due partially to increased steel
prices during the first nine months of 2005 compared to the same period in the prior year.
 Depreciation, depletion and amortization.
 27




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Nine Months EndedSeptember 30,
    
    
    Increase (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %Powder River Basin
    
    $
    6.90
    
    
    $
    6.21
    
    
    $
    0.69
    
    
    
    11.1
    %Western Bituminous Region
    
    $
    14.68
    
    
    $
    15.82
    
    
    $
    (1.14
    )
    
    
    (7.2
    )%
   Selling, general and administrative expenses.
 Other Operating Income
 Nine Months EndedSeptember 30,
    
    
    Increase (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %(Amounts in thousands)Income from equity investment
    
    $
    
    
    
    $
    8,410
    
    
    $
    (8,410
    )
    
    
    (100.0
    )%Other operating income
    
    
    3,571
    
    
    
    8,416
    
    
    
    (4,845
    )
    
    
    (57.6
    )%$
    3,571
    
    
    $
    16,826
    
    
    $
    (13,255
    )
    
    
    (78.8
    )%
 Other operating income.
 Interest Expense, Net
 Nine Months EndedSeptember 30,
    
    
    Increase (Decrease)2005
    
    
    2004
    
    
    $
    
    
    %(Amounts in thousands)Interest expense
    
    $
    (49,609
    )
    
    $
    (39,906
    )
    
    $
    (9,703
    )
    
    
    24.3
    %Interest income
    
    
    31,292
    
    
    
    12,387
    
    
    
    18,905
    
    
    
    152.6
    %$
    (18,317
    )
    
    $
    (27,519
    )
    
    $
    9,202
    
    
    
    33.4
    %
 Interest expense.
 Interest Income
 28




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29




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##### Table of Contents



Other Non-operating Income and Expense
 Nine Months EndedSeptember 30,
    
    Increase (Decrease)2005
    
    2004
    
    $
    
    %(Amounts in thousands)Expenses
resulting from
early debt
extinguishment and
termination of
hedge accounting
for interest rate
swaps
    
    $
    (9,970
    )
    
    $
    (10,162
    )
    
    $
    (192
    )
    
    

    1.9
    %
  DISCLOSURE AND INTERNAL CONTROLS
  OUTLOOK
 Railroad Transportation Disruptions.
  West
Elk mine evacuation.
  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
    
    $
    87,661
    
    
    $
    (70,705
    )Investing activities
    
    
    (88,894
    )
    
    
    (64,181
    )Financing activities
    
    
    (67
    )
    
    
    99,775
          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;
    
    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.
 32




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##### Table of Contents




    
    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;
    
    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
    
    changes in coal market and general economic conditions.
 Environmental and Regulatory Factors
  33




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##### Table of Contents




    
    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




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##### Table of Contents



2.5 2.5
      35




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##### 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.
 Comprehensive Environmental Response, Compensation and Liability Act.
 36




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##### Table of Contents



Mining Permits and Approvals.
     Surety Bonds.
 Endangered Species.
 37




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##### Table of Contents



Other Environmental Laws Affecting Us.
 Competition
  Electric Industry Factors
    Terms of Long-Term Coal Supply Contracts
  Reserve Depletion
  Potential Fluctuations in Operating Results  Factors Routinely Affecting Results of Operations
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Transportation
  Reserves  Title; Leasehold Interests
    Acquisitions
  
    
    uncertainties in assessing the value, strengths, weaknesses, contingent and other
liabilities and potential profitability of acquisition or other transaction candidates;
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
    
    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
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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 September 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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SIGNATURES
  ARCH WESTERN RESOURCES, LLC
(Registrant)Date: November 14, 2005
    /s/ Robert J. MesseyRobert J. MesseyVice President
(Chief Accounting Officer) 42