##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 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, 2006
 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: 333-107569-03
 Arch Western Resources, LLC
  Delaware
    
    43-1811130(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number
 One CityPlace Drive, Suite 300, St. Louis, Missouri
    
    63141(Address of principal executive offices)
    
    (Zip code)
  þ o
  o o þ
 o þ




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##### 



Table of Contents
 PagePart I Financial Information
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II Other Information
    
    
    19Item 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19CertificationCertificationSection 1350 CertificationSection 1350 Certification
  i




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)RevenuesCoal sales
    
    $
    369,730
    
    
    $
    291,286
    
    
    $
    1,118,331
    
    
    $
    843,402Costs, expenses and otherCost of coal sales
    
    
    270,178
    
    
    
    212,183
    
    
    
    773,584
    
    
    
    626,984Depreciation, depletion and amortization
    
    
    27,860
    
    
    
    28,032
    
    
    
    78,289
    
    
    
    77,868Selling, general and administrative expenses allocated from
Arch Coal, Inc.
    
    
    5,087
    
    
    
    5,741
    
    
    
    17,105
    
    
    
    16,623Other operating income, net
    
    
    (1,437
    )
    
    
    (835
    )
    
    
    (3,303
    )
    
    
    (3,571
    )301,688
    
    
    
    245,121
    
    
    
    865,675
    
    
    
    717,904Income from operations
    
    
    68,042
    
    
    
    46,165
    
    
    
    252,656
    
    
    
    125,498Interest income (expense), netInterest expense
    
    
    (18,197
    )
    
    
    (16,297
    )
    
    
    (54,449
    )
    
    
    (49,609
    )Interest income primarily from Arch Coal, Inc.
    
    
    22,108
    
    
    
    11,909
    
    
    
    59,072
    
    
    
    31,2923,911
    
    
    
    (4,388
    )
    
    
    4,623
    
    
    
    (18,317
    )Other non-operating expenseExpenses resulting from early debt extinguishment and
termination of hedge accounting for interest rate swaps
    
    
    (1,635
    )
    
    
    (3,195
    )
    
    
    (6,658
    )
    
    
    (9,970
    )Income before minority interest
    
    
    70,318
    
    
    
    38,582
    
    
    
    250,621
    
    
    
    97,211Minority interest
    
    
    (2,410
    )
    
    
    (4,593
    )
    
    
    (23,165
    )
    
    
    (15,072
    )Net income
    
    $
    67,908
    
    
    $
    33,989
    
    
    $
    227,456
    
    
    $
    82,139Net income attributable to redeemable membership interests
    
    $
    340
    
    
    $
    170
    
    
    $
    1,138
    
    
    $
    410Net income attributable to non-redeemable membership interests
    
    $
    67,568
    
    
    $
    33,819
    
    
    $
    226,318
    
    
    $
    81,729
  1




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##### Table of Contents



Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    151
    
    
    $
    152Trade receivables
    
    
    576
    
    
    
    111,948Other receivables
    
    
    13,399
    
    
    
    5,469Inventories
    
    
    90,035
    
    
    
    98,478Prepaid royalties
    
    
    4,163
    
    
    
    Other
    
    
    16,982
    
    
    
    17,318Total current assets
    
    
    125,306
    
    
    
    233,365Property, plant and equipment, net
    
    
    1,151,153
    
    
    
    1,068,159Other assetsReceivable from Arch Coal, Inc.
    
    
    1,127,619
    
    
    
    869,056Other
    
    
    49,757
    
    
    
    44,796Total other assets
    
    
    1,177,376
    
    
    
    913,852Total assets
    
    $
    2,453,835
    
    
    $
    2,215,376Liabilities and Membership interestsCurrent liabilitiesAccounts payable
    
    $
    100,183
    
    
    $
    89,632Accrued expenses
    
    
    109,247
    
    
    
    111,821Total current liabilities
    
    
    209,430
    
    
    
    201,453Long-term debt
    
    
    959,222
    
    
    
    960,247Asset retirement obligations
    
    
    143,751
    
    
    
    136,092Accrued postretirement benefits other than pension
    
    
    29,219
    
    
    
    27,016Accrued workers compensation
    
    
    11,342
    
    
    
    11,446Other noncurrent liabilities
    
    
    51,593
    
    
    
    62,060Total liabilities
    
    
    1,404,557
    
    
    
    1,398,314Membership interestsMinority interest
    
    
    156,785
    
    
    
    133,620Redeemable membership interests
    
    
    6,690
    
    
    
    5,647Non-redeemable membership interests
    
    
    885,803
    
    
    
    677,795Total liabilities and membership interests
    
    $
    2,453,835
    
    
    $
    2,215,376
  2




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##### Table of Contents



Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005RESTATED(unaudited)Operating activitiesNet income
    
    $
    227,456
    
    
    $
    82,139Adjustments to reconcile to cash provided by operating activitiesDepreciation, depletion and amortization
    
    
    78,289
    
    
    
    77,868Prepaid royalties expensed
    
    
    3,320
    
    
    
    12,776Net gain on disposition of assets
    
    
    (89
    )
    
    
    (1,853
    )Minority interest
    
    
    23,165
    
    
    
    15,072Other non-operating expense
    
    
    6,658
    
    
    
    9,970Changes in assets and liabilities:Receivables
    
    
    103,442
    
    
    
    (34,029
    )Inventories
    
    
    (29,111
    )
    
    
    (13,509
    )Accounts payable and accrued expense
    
    
    7,977
    
    
    
    (3,129
    )Other
    
    
    4,040
    
    
    
    9,744Cash provided by operating activities
    
    
    425,147
    
    
    
    155,049Investing activitiesCapital expenditures
    
    
    (170,678
    )
    
    
    (78,588
    )Increase in receivable from Arch Coal, Inc.
    
    
    (254,640
    )
    
    
    (67,388
    )Proceeds from dispositions of property, plant and equipment
    
    
    185
    
    
    
    2,150Additions to prepaid royalties
    
    
    
    
    
    
    (12,456
    )Cash used in investing activities
    
    
    (425,133
    )
    
    
    (156,282
    )Financing activitiesDebt financing costs
    
    
    (15
    )
    
    
    (67
    )Cash used in financing activities
    
    
    (15
    )
    
    
    (67
    )Decrease in cash and cash equivalents
    
    
    (1
    )
    
    
    (1,300
    )Cash and cash equivalents, beginning of period
    
    
    152
    
    
    
    1,351Cash and cash equivalents, end of period
    
    $
    151
    
    
    $
    51
  3




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Arch Western Resources, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
 1. Basis of Presentation
     2. Accounting Pronouncements
 Accounting for Stripping Costs in the Mining Industry .
 Fair
Value Measurements
 4




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3. Insurance Recovery
  4. Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Coal
    
    $
    27,558
    
    
    $
    49,144Repair parts and supplies
    
    
    62,477
    
    
    
    49,334$
    90,035
    
    
    $
    98,478
  5. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    67,908
    
    
    $
    33,989
    
    
    $
    227,456
    
    
    $
    82,139Other comprehensive income
    
    
    1,635
    
    
    
    6,031
    
    
    
    21,189
    
    
    
    15,664Total comprehensive income
    
    $
    69,543
    
    
    $
    40,020
    
    
    $
    248,645
    
    
    $
    97,803
  Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 6. Related Party Transactions
   5




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##### Table of Contents



7. Segment Information
   Three Months Ended September 30, 2006Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands)Coal sales
    
    $
    256,759
    
    
    $
    112,971
    
    
    $
    
    
    
    $
    369,730Income from operations
    
    
    46,830
    
    
    
    28,314
    
    
    
    (7,102
    )
    
    
    68,042Total assets
    
    
    1,522,347
    
    
    
    1,789,082
    
    
    
    (857,594
    )
    
    
    2,453,835Depreciation, depletion and amortization
    
    
    15,628
    
    
    
    12,232
    
    
    
    
    
    
    
    27,860Capital expenditures
    
    
    6,852
    
    
    
    30,640
    
    
    
    
    
    
    
    37,492
 Three Months Ended September 30, 2005Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands)Coal 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
    
    
    
    36,627
 6




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##### Table of Contents



Nine Months Ended September 30, 2006Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands)Coal sales
    
    $
    785,202
    
    
    $
    333,129
    
    
    $
    
    
    
    $
    1,118,331Income from operations
    
    
    179,542
    
    
    
    94,536
    
    
    
    (21,422
    )
    
    
    252,656Depreciation, depletion and amortization
    
    
    45,892
    
    
    
    32,397
    
    
    
    
    
    
    
    78,289Capital expenditures
    
    
    76,059
    
    
    
    94,619
    
    
    
    
    
    
    
    170,678
 Nine Months Ended September 30, 2005Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands)Coal sales
    
    $
    533,665
    
    
    $
    309,737
    
    
    $
    
    
    
    $
    843,402Income from operations
    
    
    74,647
    
    
    
    67,988
    
    
    
    (17,137
    )
    
    
    125,498Depreciation, depletion and amortization
    
    
    48,993
    
    
    
    28,875
    
    
    
    
    
    
    
    77,868Capital expenditures
    
    
    30,330
    
    
    
    48,258
    
    
    
    
    
    
    
    78,588
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Income from operations
    
    $
    68,042
    
    
    $
    46,165
    
    
    $
    252,656
    
    
    $
    125,498Interest expense
    
    
    (18,197
    )
    
    
    (16,297
    )
    
    
    (54,449
    )
    
    
    (49,609
    )Interest income
    
    
    22,108
    
    
    
    11,909
    
    
    
    59,072
    
    
    
    31,292Other non-operating expense
    
    
    (1,635
    )
    
    
    (3,195
    )
    
    
    (6,658
    )
    
    
    (9,970
    )Income before minority interest
    
    $
    70,318
    
    
    $
    38,582
    
    
    $
    250,621
    
    
    $
    97,211
 8. Supplemental Condensed Consolidating Financial Information
  7




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##### Table of Contents



Balance Sheets (unaudited)
September 30, 2006 
(in thousands)
 Guarantor
    
    
    Non-GuarantorParent Company
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    98
    
    
    $
    53
    
    
    $
    
    
    
    $
    151Trade accounts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    576
    
    
    
    
    
    
    
    576Other receivables
    
    
    886
    
    
    
    
    
    
    
    11,352
    
    
    
    1,161
    
    
    
    
    
    
    
    13,399Inventories
    
    
    
    
    
    
    
    
    
    
    57,651
    
    
    
    32,384
    
    
    
    
    
    
    
    90,035Prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (621
    )
    
    
    4,784
    
    
    
    
    
    
    
    4,163Other current assets
    
    
    2,612
    
    
    
    2,159
    
    
    
    5,060
    
    
    
    7,151
    
    
    
    
    
    
    
    16,982Total current assets
    
    
    3,498
    
    
    
    2,159
    
    
    
    73,540
    
    
    
    46,109
    
    
    
    
    
    
    
    125,306Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    810,936
    
    
    
    340,217
    
    
    
    
    
    
    
    1,151,153Investment in subsidiaries
    
    
    1,846,493
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,846,493
    )
    
    
    Receivable from Arch Coal, Inc.
    
    
    1,109,656
    
    
    
    
    
    
    
    469
    
    
    
    17,494
    
    
    
    
    
    
    
    1,127,619Intercompanies
    
    
    (1,871,201
    )
    
    
    960,006
    
    
    
    885,128
    
    
    
    26,067
    
    
    
    
    
    
    
    Other
    
    
    3,728
    
    
    
    12,298
    
    
    
    29,234
    
    
    
    4,497
    
    
    
    
    
    
    
    49,757Total other assets
    
    
    1,088,676
    
    
    
    972,304
    
    
    
    914,831
    
    
    
    48,058
    
    
    
    (1,846,493
    )
    
    
    1,177,376Total assets
    
    $
    1,092,174
    
    
    $
    974,463
    
    
    $
    1,799,307
    
    
    $
    434,384
    
    
    $
    (1,846,493
    )
    
    $
    2,453,835Accounts payable
    
    
    10,187
    
    
    
    
    
    
    
    75,337
    
    
    
    14,659
    
    
    
    
    
    
    
    100,183Accrued expenses
    
    
    8,040
    
    
    
    16,031
    
    
    
    75,027
    
    
    
    10,149
    
    
    
    
    
    
    
    109,247Total current liabilities
    
    
    18,227
    
    
    
    16,031
    
    
    
    150,364
    
    
    
    24,808
    
    
    
    
    
    
    
    209,430Long-term debt
    
    
    
    
    
    
    959,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959,222Accrued postretirement benefits other
than pension
    
    
    17,481
    
    
    
    
    
    
    
    2,485
    
    
    
    9,253
    
    
    
    
    
    
    
    29,219Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    133,214
    
    
    
    10,537
    
    
    
    
    
    
    
    143,751Accrued workers compensation
    
    
    6,212
    
    
    
    
    
    
    
    1,378
    
    
    
    3,752
    
    
    
    
    
    
    
    11,342Other noncurrent liabilities
    
    
    976
    
    
    
    
    
    
    
    41,284
    
    
    
    9,333
    
    
    
    
    
    
    
    51,593Total liabilities
    
    
    42,896
    
    
    
    975,253
    
    
    
    328,725
    
    
    
    57,683
    
    
    
    
    
    
    
    1,404,557Minority interest
    
    
    156,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,785Redeemable equity interests
    
    
    6,690
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,690Non-redeemable members equity
    
    
    885,803
    
    
    
    (790
    )
    
    
    1,470,582
    
    
    
    376,701
    
    
    
    (1,846,493
    )
    
    
    885,803Total liabilities, redeemable membership
interests and non-redeemable
membership interests
    
    $
    1,092,174
    
    
    $
    974,463
    
    
    $
    1,799,307
    
    
    $
    434,384
    
    
    $
    (1,846,493
    )
    
    $
    2,453,835
 Statements of Operations (unaudited)
Three Months Ended September 30, 2006
(in thousands)
 Guarantor
    
    
    Non-GuarantorParent Company
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    299,278
    
    
    $
    70,452
    
    
    $
    
    
    
    $
    369,730Cost of coal sales
    
    
    
    
    
    
    
    
    
    
    211,449
    
    
    
    58,729
    
    
    
    
    
    
    
    270,178Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    20,624
    
    
    
    7,236
    
    
    
    
    
    
    
    27,860Selling, general and administrative
expenses allocated from Arch Coal
    
    
    5,087
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,087Other operating income
    
    
    
    
    
    
    
    
    
    
    (1,165
    )
    
    
    (272
    )
    
    
    
    
    
    
    (1,437
    )5,087
    
    
    
    
    
    
    
    230,908
    
    
    
    65,693
    
    
    
    
    
    
    
    301,688Income from equity investment
    
    
    73,708
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73,708
    )
    
    
    Income from operations
    
    
    68,621
    
    
    
    
    
    
    
    68,370
    
    
    
    4,759
    
    
    
    (73,708
    )
    
    
    68,042Interest expense
    
    
    (18,395
    )
    
    
    (15,366
    )
    
    
    (57
    )
    
    
    (388
    )
    
    
    16,009
    
    
    
    (18,197
    )Interest income, primarily from Arch Coal
    
    
    21,727
    
    
    
    16,009
    
    
    
    147
    
    
    
    234
    
    
    
    (16,009
    )
    
    
    22,1083,332
    
    
    
    643
    
    
    
    90
    
    
    
    (154
    )
    
    
    
    
    
    
    3,911Other non-operating expense
    
    
    (1,635
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,635
    )Minority interest
    
    
    (2,410
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,410
    )Net income (loss)
    
    $
    67,908
    
    
    $
    643
    
    
    $
    68,460
    
    
    $
    4,605
    
    
    $
    (73,708
    )
    
    $
    67,908
 8




---



##### Table of Contents



Statements of Income (unaudited)
Nine Months Ended September 30, 2006 (in thousands)
 Non-Parent
    
    
    
    
    
    
    Guarantor
    
    
    GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCoal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    878,171
    
    
    $
    240,160
    
    
    $
    
    
    
    $
    1,118,331Cost of coal sales
    
    
    2,370
    
    
    
    
    
    
    
    606,252
    
    
    
    164,962
    
    
    
    
    
    
    
    773,584Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    59,150
    
    
    
    19,139
    
    
    
    
    
    
    
    78,289Selling, general and administrative
expenses allocated from Arch Coal
    
    
    17,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,105Other operating income
    
    
    (68
    )
    
    
    
    
    
    
    (2,175
    )
    
    
    (1,060
    )
    
    
    
    
    
    
    (3,303
    )19,407
    
    
    
    
    
    
    
    663,227
    
    
    
    183,041
    
    
    
    
    
    
    
    865,675Income from equity investment
    
    
    273,393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (273,393
    )
    
    
    Income from operations
    
    
    253,986
    
    
    
    
    
    
    
    214,944
    
    
    
    57,119
    
    
    
    (273,393
    )
    
    
    252,656Interest expense
    
    
    (54,544
    )
    
    
    (46,138
    )
    
    
    (406
    )
    
    
    (1,399
    )
    
    
    48,038
    
    
    
    (54,449
    )Interest income, primarily from Arch Coal
    
    
    57,837
    
    
    
    48,038
    
    
    
    405
    
    
    
    830
    
    
    
    (48,038
    )
    
    
    59,0723,293
    
    
    
    1,900
    
    
    
    (1
    )
    
    
    (569
    )
    
    
    
    
    
    
    4,623Other non-operating expense
    
    
    (6,658
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,658
    )Minority interest
    
    
    (23,165
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,165
    )Net income (loss)
    
    $
    227,456
    
    
    $
    1,900
    
    
    $
    214,943
    
    
    $
    56,550
    
    
    $
    (273,393
    )
    
    $
    227,456
 Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2006
(in thousands)
 Non-Parent
    
    
    
    
    
    
    Guarantor
    
    
    GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating ActivitiesCash provided by (used in) operating
activities
    
    $
    67,658
    
    
    $
    (13,537
    )
    
    $
    290,047
    
    
    $
    80,979
    
    
    $
    425,147Investing ActivitiesCapital expenditures
    
    
    
    
    
    
    
    
    
    
    (92,555
    )
    
    
    (78,123
    )
    
    
    (170,678
    )Increase in receivable from Arch Coal
    
    
    (236,677
    )
    
    
    
    
    
    
    (469
    )
    
    
    (17,494
    )
    
    
    (254,640
    )Proceeds from dispositions of capital
assets
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    93
    
    
    
    185Cash used in investing activities
    
    
    (236,677
    )
    
    
    
    
    
    
    (92,932
    )
    
    
    (95,524
    )
    
    
    (425,133
    )Financing ActivitiesDebt financing costs
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )Transactions with affiliates, net
    
    
    169,019
    
    
    
    13,552
    
    
    
    (197,143
    )
    
    
    14,572
    
    
    
    Cash provided by (used in) financing
activities
    
    
    169,019
    
    
    
    13,537
    
    
    
    (197,143
    )
    
    
    14,572
    
    
    
    (15
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    27
    
    
    
    (1
    )Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    26
    
    
    
    152Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    98
    
    
    $
    53
    
    
    $
    151
 9




---



##### Table of Contents



Balance Sheets
December 31, 2005
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    126
    
    
    $
    26
    
    
    $
    
    
    
    $
    152Trade accounts receivable
    
    
    87,012
    
    
    
    
    
    
    
    31
    
    
    
    24,905
    
    
    
    
    
    
    
    111,948Other receivables
    
    
    1,072
    
    
    
    
    
    
    
    673
    
    
    
    3,724
    
    
    
    
    
    
    
    5,469Inventories
    
    
    
    
    
    
    
    
    
    
    78,993
    
    
    
    19,485
    
    
    
    
    
    
    
    98,478Other current assets
    
    
    6,947
    
    
    
    2,146
    
    
    
    3,212
    
    
    
    5,013
    
    
    
    
    
    
    
    17,318Total current assets
    
    
    95,031
    
    
    
    2,146
    
    
    
    83,035
    
    
    
    53,153
    
    
    
    
    
    
    
    233,365Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    778,945
    
    
    
    289,214
    
    
    
    
    
    
    
    1,068,159Investment in subsidiaries
    
    
    1,604,489
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,604,489
    )
    
    
    Receivable from Arch Coal
    
    
    869,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    869,056Intercompanies
    
    
    (1,702,182
    )
    
    
    973,558
    
    
    
    687,985
    
    
    
    40,639
    
    
    
    
    
    
    
    Other
    
    
    1,865
    
    
    
    13,916
    
    
    
    25,210
    
    
    
    3,805
    
    
    
    
    
    
    
    44,796Total other assets
    
    
    773,228
    
    
    
    987,474
    
    
    
    713,195
    
    
    
    44,444
    
    
    
    (1,604,489
    )
    
    
    913,852Total assets
    
    $
    868,259
    
    
    $
    989,620
    
    
    $
    1,575,175
    
    
    $
    386,811
    
    
    $
    (1,604,489
    )
    
    $
    2,215,376Accounts payable
    
    
    18,499
    
    
    
    
    
    
    
    51,980
    
    
    
    19,153
    
    
    
    
    
    
    
    89,632Accrued expenses
    
    
    3,862
    
    
    
    32,063
    
    
    
    67,919
    
    
    
    7,977
    
    
    
    
    
    
    
    111,821Total current liabilities
    
    
    22,361
    
    
    
    32,063
    
    
    
    119,899
    
    
    
    27,130
    
    
    
    
    
    
    
    201,453Long-term debt
    
    
    
    
    
    
    960,247
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960,247Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    126,255
    
    
    
    9,837
    
    
    
    
    
    
    
    136,092Accrued postretirement benefits
other than pension
    
    
    15,826
    
    
    
    
    
    
    
    2,486
    
    
    
    8,704
    
    
    
    
    
    
    
    27,016Accrued workers compensation
    
    
    5,947
    
    
    
    
    
    
    
    1,325
    
    
    
    4,174
    
    
    
    
    
    
    
    11,446Other noncurrent liabilities
    
    
    7,063
    
    
    
    
    
    
    
    35,748
    
    
    
    19,249
    
    
    
    
    
    
    
    62,060Total liabilities
    
    
    51,197
    
    
    
    992,310
    
    
    
    285,713
    
    
    
    69,094
    
    
    
    
    
    
    
    1,398,314Minority interest
    
    
    133,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,620Redeemable membership interests
    
    
    5,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,647Non-redeemable membership interests
    
    
    677,795
    
    
    
    (2,690
    )
    
    
    1,289,462
    
    
    
    317,717
    
    
    
    (1,604,489
    )
    
    
    677,795Total liabilities, redeemable
membership interests and
non-redeemable membership
interests
    
    $
    868,259
    
    
    $
    989,620
    
    
    $
    1,575,175
    
    
    $
    386,811
    
    
    $
    (1,604,489
    )
    
    $
    2,215,376
 Statements of Operations (unaudited)
Three Months Ended September 30, 2005
(in thousands)
 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
expenses allocated from Arch Coal
    
    
    5,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,741Other operating income
    
    
    (72
    )
    
    
    
    
    
    
    (608
    )
    
    
    (155
    )
    
    
    
    
    
    
    (835
    )6,255
    
    
    
    
    
    
    
    187,822
    
    
    
    51,044
    
    
    
    
    
    
    
    245,121Income from equity investment
    
    
    52,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,143
    )
    
    
    Income from operations
    
    
    45,888
    
    
    
    
    
    
    
    40,607
    
    
    
    11,813
    
    
    
    (52,143
    )
    
    
    46,165Interest 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
 10




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##### Table of Contents



Statements of Operations (unaudited)
Nine Months Ended September 30, 2005
(in thousands)
 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
expenses allocated from Arch Coal
    
    
    16,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,623Other operating income
    
    
    (103
    )
    
    
    
    
    
    
    (2,916
    )
    
    
    (552
    )
    
    
    
    
    
    
    (3,571
    )18,087
    
    
    
    
    
    
    
    547,964
    
    
    
    151,853
    
    
    
    
    
    
    
    717,904Income from equity investment
    
    
    142,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142,008
    )
    
    
    Income 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
 Statements of Cash Flows (RESTATED)
(unaudited)
Nine Months Ended September 30, 2005
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedOperating ActivitiesCash provided by (used in) operating
activities
    
    $
    (58,052
    )
    
    $
    (16,341
    )
    
    $
    186,013
    
    
    $
    43,429
    
    
    $
    155,049Investing Activities
    
    
    
    
    
    
    Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (46,788
    )
    
    
    (31,800
    )
    
    
    (78,588
    )Increase in receivable from Arch Coal
    
    
    (67,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,388
    )Proceeds from dispositions of capital
assets
    
    
    
    
    
    
    
    
    
    
    2,147
    
    
    
    3
    
    
    
    2,150Additions to prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (12,456
    )
    
    
    
    
    
    
    (12,456
    )Cash used in investing activities
    
    
    (67,388
    )
    
    
    
    
    
    
    (57,097
    )
    
    
    (31,797
    )
    
    
    (156,282
    )Financing ActivitiesDebt financing costs
    
    
    (67
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )Transactions with affiliates, net
    
    
    125,507
    
    
    
    16,341
    
    
    
    (130,057
    )
    
    
    (11,791
    )
    
    
    Cash provided by (used in) financing
activities
    
    
    125,440
    
    
    
    16,341
    
    
    
    (130,057
    )
    
    
    (11,791
    )
    
    
    (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
 11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 This document contains forward-looking statements that is, statements related to
future, not past, events. In this context, forward-looking statements often address our expected
future business and financial performance, and often contain words such as expects,
anticipates, intends, plans, believes, seeks, or will. Forward-looking statements by
their nature address matters that are, to different degrees, uncertain. For us, particular
uncertainties arise from changes in the demand for our coal by the domestic electric generation
industry; from legislation and regulations relating to the Clean Air Act and other environmental
initiatives; from operational, geological, permit, labor and weather-related factors; from
fluctuations in the amount of cash we generate from operations; from future integration of acquired
businesses; and from numerous other matters of national, regional and global scale, including those
of a political, economic, business, competitive or regulatory nature. These uncertainties may
cause our actual future results to be materially different than those expressed in our
forward-looking statements. We do not undertake to update our forward-looking statements, whether
as a result of new information, future events or otherwise, except as may be required by law. For
a description of some of the risks and uncertainties that may affect our future results, see Risk
Factors under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005 and
Part II, Item 1A of the Quarterly Reports on Form 10-Q that we have filed during the interim
period.
 Executive Overview
   Results of Operations
 Items Affecting Comparability of Reported Results
   12




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##### Table of Contents



Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
  Revenues
 Three months ended September 30,
    
    Increase2006
    
    2005
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    369,730
    
    
    $
    291,286
    
    
    $
    78,444
    
    
    
    26.9
    %Tons sold
    
    
    28,729
    
    
    
    26,702
    
    
    
    2,027
    
    
    
    7.6
    %Coal sales realization per ton sold
    
    $
    12.87
    
    
    $
    10.91
    
    
    $
    1.96
    
    
    
    18.0
    %
   Three months ended September 30,
    
    
    Increase (decrease)2006
    
    
    2005
    
    
    Tons
    
    
    %(Amounts in thousands)Powder River Basin
    
    
    24,533
    
    
    
    22,131
    
    
    
    2,402
    
    
    
    10.9
    %Western Bituminous Region
    
    
    4,196
    
    
    
    4,571
    
    
    
    (375
    )
    
    
    (8.2
    )%Total
    
    
    28,729
    
    
    
    26,702
    
    
    
    2,027
    
    
    
    7.6
    %
   Three months ended September 30,
    
    Increase2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    10.46
    
    
    $
    8.24
    
    
    $
    2.22
    
    
    
    26.9
    %Western Bituminous Region
    
    
    24.21
    
    
    
    21.04
    
    
    
    3.17
    
    
    
    15.1
    %
 13




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##### Table of Contents



Operating costs and expenses
 Increase (decrease)Three months ended September 30,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Cost of coal sales
    
    $
    270,178
    
    
    $
    212,183
    
    
    $
    (57,995
    )
    
    
    (27.3
    )%Depreciation, depletion and amortization
    
    
    27,860
    
    
    
    28,032
    
    
    
    172
    
    
    
    0.6
    %Selling, general and administrative expenses
    
    
    5,087
    
    
    
    5,741
    
    
    
    654
    
    
    
    11.4
    %Other operating income, net
    
    
    (1,437
    )
    
    
    (835
    )
    
    
    602
    
    
    
    72.1
    %$
    301,688
    
    
    $
    245,121
    
    
    $
    (56,567
    )
    
    
    (23.1
    )%
 Cost of coal sales.
 Operating margins.
 Three months ended September 30,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    1.86
    
    
    $
    1.02
    
    
    $
    0.84
    
    
    
    82.4
    %Western Bituminous Region
    
    
    6.21
    
    
    
    6.35
    
    
    
    (0.14
    )
    
    
    (2.2
    )%
   Net interest income (expense)
 Increase (decrease)Three months ended September 30,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Interest expense
    
    $
    (18,197
    )
    
    $
    (16,297
    )
    
    $
    (1,900
    )
    
    
    (11.7
    )%Interest income
    
    
    22,108
    
    
    
    11,909
    
    
    
    10,199
    
    
    
    85.6
    %$
    3,911
    
    
    $
    (4,388
    )
    
    $
    8,299
    
    
    
    189.1
    %
 Interest expense
 Interest income.
 14




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##### Table of Contents



Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
  Revenues
 Nine months ended September 30,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    1,118,331
    
    
    $
    843,402
    
    
    $
    274,929
    
    
    
    32.6
    %Tons sold
    
    
    83,571
    
    
    
    80,336
    
    
    
    3,235
    
    
    
    4.0
    %Coal sales realization per ton sold
    
    $
    13.38
    
    
    $
    10.50
    
    
    $
    2.88
    
    
    
    27.4
    %
   Nine months ended September 30,
    
    
    Increase (decrease)2006
    
    
    2005
    
    
    Tons
    
    
    %(Amounts in thousands)Powder River Basin
    
    
    70,814
    
    
    
    66,288
    
    
    
    4,526
    
    
    
    6.8
    %Western Bituminous Region
    
    
    12,757
    
    
    
    14,048
    
    
    
    (1,291
    )
    
    
    (9.2
    )%Total
    
    
    83,571
    
    
    
    80,336
    
    
    
    3,235
    
    
    
    4.0
    %
   Nine months ended September 30,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    11.07
    
    
    $
    8.00
    
    
    $
    3.07
    
    
    
    38.4
    %Western Bituminous Region
    
    
    23.17
    
    
    
    19.13
    
    
    
    4.04
    
    
    
    21.1
    %
 15




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##### Table of Contents



Operating costs and expenses
 Increase (decrease)Nine months ended September 30,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Cost of coal sales
    
    $
    773,584
    
    
    $
    626,984
    
    
    $
    (146,600
    )
    
    
    (23.4
    )%Depreciation, depletion and amortization
    
    
    78,289
    
    
    
    77,868
    
    
    
    (421
    )
    
    
    (0.5
    )%Selling, general and administrative expenses
    
    
    17,105
    
    
    
    16,623
    
    
    
    (482
    )
    
    
    (2.9
    )%Other operating income, net
    
    
    (3,303
    )
    
    
    (3,571
    )
    
    
    (268
    )
    
    
    (7.5
    )%$
    865,675
    
    
    $
    717,904
    
    
    $
    (147,771
    )
    
    
    (20.6
    )%
 Cost of coal sales.
 Operating margins.
 Nine months ended September 30,
    
    Increase2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    2.51
    
    
    $
    1.09
    
    
    $
    1.42
    
    
    
    130.3
    %Western Bituminous Region
    
    
    7.17
    
    
    
    4.85
    
    
    
    2.32
    
    
    
    47.8
    %
   Net interest income (expense)
 Increase (decrease)Nine months ended September 30,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Interest expense
    
    $
    (54,449
    )
    
    $
    (49,609
    )
    
    $
    (4,840
    )
    
    
    (9.8
    )%Interest income
    
    
    59,072
    
    
    
    31,292
    
    
    
    27,780
    
    
    
    88.8
    %$
    4,623
    
    
    $
    (18,317
    )
    
    $
    22,940
    
    
    
    125.2
    %
 Interest expense
 Interest income.
 16




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##### Table of Contents



Liquidity and Capital Resources
    Nine months ended September 30,2006
    
    2005RESTATED(in thousands)Cash provided by (used in):Operating activities
    
    $
    425,147
    
    
    $
    155,049Investing activities
    
    
    (425,133
    )
    
    
    (156,282
    )Financing activities
    
    
    (15
    )
    
    
    (67
    )
     Contingencies
   17




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
  18




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
  Exhibit
    
    Description3.1
    
    Certificate of Formation (incorporated herein by reference to
Exhibit 3.3 to the Form S-4 (File No. 333-107569) filed on August
1, 2003 by Arch Western Finance, LLC, Arch Western Resources, LLC,
Arch of Wyoming, LLC, Mountain Coal Company, L.L.C., and Thunder
Basin Coal Company, L.L.C.).3.2
    
    Limited Liability Company Agreement (incorporated herein by
reference to Exhibit 3.4 to the Form S-4 (File No. 333-107569)
filed on August 1, 2003 by Arch Western Finance, LLC, Arch Western
Resources, LLC, Arch of Wyoming, LLC, Mountain Coal Company,
L.L.C., and Thunder BasinCoal Company, L.L.C.).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Paul A. Lang.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Robert J. Messey.32.1
    
    Section 1350 Certification of Paul A. Lang.32.2
    
    Section 1350 Certification of Robert J. Messey.
 19




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##### Table of Contents



Signatures
  Arch Coal, Inc.By:
    
    /s/ Robert J. MesseyRobert J. MesseyVice PresidentNovember
    
    14, 2006
 20