##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 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 NumberOne CityPlace Drive, Suite 300, St. Louis, Missouri
    
    63141(Address of principal executive offices)
    
    (Zip code)
  þ o
  o o þ
 o þ




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##### 



Table of Contents
 PagePart I Financial Information
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17Part II Other Information
    
    
    18Item 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18CertificationCertificationSection 1350 CertificationSection 1350 Certification




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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)RevenuesCoal sales
    
    $
    386,405
    
    
    $
    274,700
    
    
    $
    748,601
    
    
    $
    552,116Costs, expenses and otherCost of coal sales
    
    
    251,276
    
    
    
    205,697
    
    
    
    503,406
    
    
    
    414,801Depreciation, depletion and amortization
    
    
    26,853
    
    
    
    24,316
    
    
    
    50,429
    
    
    
    49,835Selling, general and administrative expenses allocated from
Arch Coal, Inc.
    
    
    6,529
    
    
    
    5,192
    
    
    
    12,018
    
    
    
    10,883Other operating income, net
    
    
    (1,391
    )
    
    
    (442
    )
    
    
    (1,866
    )
    
    
    (2,735
    )283,267
    
    
    
    234,763
    
    
    
    563,987
    
    
    
    472,784Income from operations
    
    
    103,138
    
    
    
    39,937
    
    
    
    184,614
    
    
    
    79,332Interest income (expense), netInterest expense
    
    
    (18,516
    )
    
    
    (17,323
    )
    
    
    (36,252
    )
    
    
    (33,312
    )Interest income primarily from Arch Coal, Inc.
    
    
    20,642
    
    
    
    10,603
    
    
    
    36,964
    
    
    
    19,3832,126
    
    
    
    (6,720
    )
    
    
    712
    
    
    
    (13,929
    )Other non-operating expenseExpenses resulting from early debt extinguishment and
termination of hedge accounting for interest rate swaps
    
    
    (2,305
    )
    
    
    (3,388
    )
    
    
    (5,023
    )
    
    
    (6,775
    )Income before minority interest
    
    
    102,959
    
    
    
    29,829
    
    
    
    180,303
    
    
    
    58,628Minority interest
    
    
    (7,388
    )
    
    
    (7,750
    )
    
    
    (20,755
    )
    
    
    (10,478
    )Net income
    
    $
    95,571
    
    
    $
    22,079
    
    
    $
    159,548
    
    
    $
    48,150Net income attributable to redeemable membership interests
    
    $
    478
    
    
    $
    110
    
    
    $
    798
    
    
    $
    240Net income attributable to non-redeemable membership interests
    
    $
    95,093
    
    
    $
    21,969
    
    
    $
    158,750
    
    
    $
    47,910
  1




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##### Table of Contents



Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    84
    
    
    $
    152Trade receivables
    
    
    379
    
    
    
    111,948Other receivables
    
    
    12,922
    
    
    
    5,469Inventories
    
    
    81,101
    
    
    
    98,478Prepaid royalties
    
    
    6,847
    
    
    
    Other
    
    
    13,223
    
    
    
    17,318Total current assets
    
    
    114,556
    
    
    
    233,365Property, plant and equipment, net
    
    
    1,143,550
    
    
    
    1,068,159Other assetsReceivable from Arch Coal, Inc.
    
    
    1,089,741
    
    
    
    869,056Other
    
    
    35,020
    
    
    
    44,796Total other assets
    
    
    1,124,761
    
    
    
    913,852Total assets
    
    $
    2,382,867
    
    
    $
    2,215,376Liabilities and Membership InterestsCurrent liabilitiesAccounts payable
    
    $
    93,464
    
    
    $
    89,632Accrued expenses
    
    
    125,072
    
    
    
    111,821Total current liabilities
    
    
    218,536
    
    
    
    201,453Long-term debt
    
    
    959,564
    
    
    
    960,247Asset retirement obligations
    
    
    141,354
    
    
    
    136,092Accrued postretirement benefits other than pension
    
    
    28,261
    
    
    
    27,016Accrued workers compensation
    
    
    11,161
    
    
    
    11,446Other noncurrent liabilities
    
    
    46,647
    
    
    
    62,060Total liabilities
    
    
    1,405,523
    
    
    
    1,398,314Membership InterestsMinority interest
    
    
    154,375
    
    
    
    133,620Redeemable membership interests
    
    
    6,343
    
    
    
    5,647Non-redeemable membership interests
    
    
    816,626
    
    
    
    677,795Total liabilities and membership interests
    
    $
    2,382,867
    
    
    $
    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)
 Six Months EndedJune 30,2006
    
    
    2005Restated(unaudited)Operating activitiesNet income
    
    $
    159,548
    
    
    $
    48,150Adjustments to reconcile to cash provided by operating activitiesDepreciation, depletion and amortization
    
    
    50,429
    
    
    
    49,835Prepaid royalties expensed
    
    
    607
    
    
    
    12,726Net gain on disposition of assets
    
    
    (89
    )
    
    
    (1,687
    )Minority interest
    
    
    20,755
    
    
    
    10,478Other non-operating expense
    
    
    5,023
    
    
    
    6,775Increase (decrease) resulting from changes in:Trade receivables
    
    
    108,090
    
    
    
    (30,885
    )Inventories
    
    
    (20,177
    )
    
    
    (4,458
    )Accounts payable and accrued expense
    
    
    17,083
    
    
    
    (604
    )Other
    
    
    8,500
    
    
    
    7,544Cash provided by operating activities
    
    
    349,769
    
    
    
    97,874Investing activitiesCapital expenditures
    
    
    (133,186
    )
    
    
    (41,961
    )Increase in receivable from Arch Coal, Inc.
    
    
    (216,744
    )
    
    
    (46,249
    )Proceeds from dispositions of property, plant and equipment
    
    
    93
    
    
    
    1,974Additions to prepaid royalties
    
    
    
    
    
    
    (12,456
    )Cash used in investing activities
    
    
    (349,837
    )
    
    
    (98,692
    )Financing activitiesDebt financing costs
    
    
    
    
    
    
    (51
    )Cash used in financing activities
    
    
    
    
    
    
    (51
    )Decrease in cash and cash equivalents
    
    
    (68
    )
    
    
    (869
    )Cash and cash equivalents, beginning of period
    
    
    152
    
    
    
    1,351Cash and cash equivalents, end of period
    
    $
    84
    
    
    $
    482
  3




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##### Table of Contents



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




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##### Table of Contents



4. Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Coal
    
    $
    26,095
    
    
    $
    49,144Repair parts and supplies
    
    
    55,006
    
    
    
    49,334$
    81,101
    
    
    $
    98,478
  5. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    95,571
    
    
    $
    22,079
    
    
    $
    159,548
    
    
    $
    48,150Other comprehensive income
    
    
    16,836
    
    
    
    4,907
    
    
    
    19,554
    
    
    
    9,633Total comprehensive income
    
    $
    112,407
    
    
    $
    26,986
    
    
    $
    179,102
    
    
    $
    57,783
  6. Related Party Transactions
      5




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##### Table of Contents



7. Segment Information
   Three Months Ended June 30, 2006Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands)Coal sales
    
    $
    276,054
    
    
    $
    110,351
    
    
    $
    
    
    
    $
    386,405Income from operations
    
    
    70,499
    
    
    
    40,509
    
    
    
    (7,870
    )
    
    
    103,138Total assets
    
    
    1,454,686
    
    
    
    1,784,718
    
    
    
    (856,537
    )
    
    
    2,382,867Depreciation, depletion and amortization
    
    
    15,666
    
    
    
    11,187
    
    
    
    
    
    
    
    26,853Capital expenditures
    
    
    30,052
    
    
    
    42,038
    
    
    
    
    
    
    
    72,090
 Three Months Ended June 30, 2005Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands)Coal sales
    
    $
    169,666
    
    
    $
    105,034
    
    
    $
    
    
    
    $
    274,700Income from operations
    
    
    17,924
    
    
    
    26,746
    
    
    
    (4,733
    )
    
    
    39,937Total assets
    
    
    1,182,995
    
    
    
    1,701,858
    
    
    
    (808,338
    )
    
    
    2,076,515Depreciation, depletion and amortization
    
    
    15,626
    
    
    
    8,690
    
    
    
    
    
    
    
    24,316Capital expenditures
    
    
    8,507
    
    
    
    11,541
    
    
    
    
    
    
    
    20,048
 Six Months Ended June 30, 2006Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands)Coal sales
    
    $
    528,443
    
    
    $
    220,158
    
    
    $
    
    
    
    $
    748,601Income from operations
    
    
    132,712
    
    
    
    66,222
    
    
    
    (14,320
    )
    
    
    184,614Depreciation, depletion and amortization
    
    
    30,264
    
    
    
    20,165
    
    
    
    
    
    
    
    50,429Capital expenditures
    
    
    69,207
    
    
    
    63,979
    
    
    
    
    
    
    
    133,186
 Six Months Ended June 30, 2005Corporate,Other andPRB
    
    WBIT
    
    Eliminations
    
    Consolidated(in thousands)Coal sales
    
    $
    349,373
    
    
    $
    202,743
    
    
    $
    
    
    
    $
    552,116Income from operations
    
    
    51,584
    
    
    
    39,106
    
    
    
    (11,358
    )
    
    
    79,332Depreciation, depletion and amortization
    
    
    32,815
    
    
    
    17,020
    
    
    
    
    
    
    
    49,835Capital expenditures
    
    
    16,998
    
    
    
    24,963
    
    
    
    
    
    
    
    41,961
 6




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Income from operations
    
    $
    103,138
    
    
    $
    39,937
    
    
    $
    184,614
    
    
    $
    79,332Interest expense
    
    
    (18,516
    )
    
    
    (17,323
    )
    
    
    (36,252
    )
    
    
    (33,312
    )Interest income
    
    
    20,642
    
    
    
    10,603
    
    
    
    36,964
    
    
    
    19,383Other non-operating expense
    
    
    (2,305
    )
    
    
    (3,388
    )
    
    
    (5,023
    )
    
    
    (6,775
    )Income before minority interest
    
    $
    102,959
    
    
    $
    29,829
    
    
    $
    180,303
    
    
    $
    58,628
 8. Supplemental Condensed Consolidating Financial Information
  7




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##### Table of Contents



Balance Sheets
June 30, 2006
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    77
    
    
    $
    7
    
    
    $
    
    
    
    $
    84Trade accounts receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379
    
    
    
    
    
    
    
    379Other receivables
    
    
    528
    
    
    
    
    
    
    
    10,912
    
    
    
    1,482
    
    
    
    
    
    
    
    12,922Inventories
    
    
    
    
    
    
    
    
    
    
    51,512
    
    
    
    29,589
    
    
    
    
    
    
    
    81,101Prepaid royalties
    
    
    
    
    
    
    
    
    
    
    2,032
    
    
    
    4,815
    
    
    
    
    
    
    
    6,847Other current assets
    
    
    2,496
    
    
    
    2,147
    
    
    
    3,654
    
    
    
    4,926
    
    
    
    
    
    
    
    13,223Total current assets
    
    
    3,024
    
    
    
    2,147
    
    
    
    68,187
    
    
    
    41,198
    
    
    
    
    
    
    
    114,556Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    814,455
    
    
    
    329,095
    
    
    
    
    
    
    
    1,143,550Investment in subsidiaries
    
    
    1,772,047
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,772,047
    )
    
    
    Receivable from Arch Coal
    
    
    1,071,875
    
    
    
    
    
    
    
    13
    
    
    
    17,853
    
    
    
    
    
    
    
    1,089,741Intercompanies
    
    
    (1,829,141
    )
    
    
    975,212
    
    
    
    801,384
    
    
    
    52,545
    
    
    
    
    
    
    
    Other
    
    
    1,713
    
    
    
    12,835
    
    
    
    23,232
    
    
    
    (2,760
    )
    
    
    
    
    
    
    35,020Total other assets
    
    
    1,016,494
    
    
    
    988,047
    
    
    
    824,629
    
    
    
    67,638
    
    
    
    (1,772,047
    )
    
    
    1,124,761Total assets
    
    $
    1,019,518
    
    
    $
    990,194
    
    
    $
    1,707,271
    
    
    $
    437,931
    
    
    $
    (1,772,047
    )
    
    $
    2,382,867Accounts payable
    
    
    11,612
    
    
    
    
    
    
    
    60,411
    
    
    
    21,441
    
    
    
    
    
    
    
    93,464Accrued expenses
    
    
    6,629
    
    
    
    32,062
    
    
    
    76,735
    
    
    
    9,646
    
    
    
    
    
    
    
    125,072Total current liabilities
    
    
    18,241
    
    
    
    32,062
    
    
    
    137,146
    
    
    
    31,087
    
    
    
    
    
    
    
    218,536Long-term debt
    
    
    
    
    
    
    959,564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959,564Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    131,051
    
    
    
    10,303
    
    
    
    
    
    
    
    141,354Accrued postretirement benefits
other than pension
    
    
    16,662
    
    
    
    
    
    
    
    2,485
    
    
    
    9,114
    
    
    
    
    
    
    
    28,261Accrued workers compensation
    
    
    6,120
    
    
    
    
    
    
    
    1,345
    
    
    
    3,696
    
    
    
    
    
    
    
    11,161Other noncurrent liabilities
    
    
    1,151
    
    
    
    
    
    
    
    33,856
    
    
    
    11,640
    
    
    
    
    
    
    
    46,647Total liabilities
    
    
    42,174
    
    
    
    991,626
    
    
    
    305,883
    
    
    
    65,840
    
    
    
    
    
    
    
    1,405,523Minority interest
    
    
    154,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154,375Redeemable membership interests
    
    
    6,343
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,343Non-redeemable membership interests
    
    
    816,626
    
    
    
    (1,432
    )
    
    
    1,401,388
    
    
    
    372,091
    
    
    
    (1,772,047
    )
    
    
    816,626Total liabilities, redeemable
membership interests and
non-redeemable membership
interests
    
    $
    1,019,518
    
    
    $
    990,194
    
    
    $
    1,707,271
    
    
    $
    437,931
    
    
    $
    (1,772,047
    )
    
    $
    2,382,867
 Statements of Operations
Three Months Ended June 30, 2006
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Coal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    315,888
    
    
    $
    70,517
    
    
    $
    
    
    
    $
    386,405Cost of coal sales
    
    
    1,391
    
    
    
    
    
    
    
    202,677
    
    
    
    47,208
    
    
    
    
    
    
    
    251,276Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    20,820
    
    
    
    6,033
    
    
    
    
    
    
    
    26,853Selling, general and administrative
expenses allocated from Arch Coal
    
    
    6,529
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,529Other operating income
    
    
    (50
    )
    
    
    
    
    
    
    (722
    )
    
    
    (619
    )
    
    
    
    
    
    
    (1,391
    )7,870
    
    
    
    
    
    
    
    222,775
    
    
    
    52,622
    
    
    
    
    
    
    
    283,267Income from equity investment
    
    
    111,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111,681
    )
    
    
    Income from operations
    
    
    103,811
    
    
    
    
    
    
    
    93,113
    
    
    
    17,895
    
    
    
    (111,681
    )
    
    
    103,138Interest expense
    
    
    (18,717
    )
    
    
    (15,271
    )
    
    
    (78
    )
    
    
    (481
    )
    
    
    16,031
    
    
    
    (18,516
    )Interest income primarily from Arch Coal
    
    
    20,170
    
    
    
    16,031
    
    
    
    137
    
    
    
    335
    
    
    
    (16,031
    )
    
    
    20,6421,453
    
    
    
    760
    
    
    
    59
    
    
    
    (146
    )
    
    
    
    
    
    
    2,126Other non-operating expense
    
    
    (2,305
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,305
    )Minority interest
    
    
    (7,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,388
    )Net income
    
    $
    95,571
    
    
    $
    760
    
    
    $
    93,172
    
    
    $
    17,749
    
    
    $
    (111,681
    )
    
    $
    95,571
 8




---



##### Table of Contents



Statements of Operations
Six Months Ended June 30, 2006
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Coal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    578,893
    
    
    $
    169,708
    
    
    $
    
    
    
    $
    748,601Cost of coal sales
    
    
    2,370
    
    
    
    
    
    
    
    394,803
    
    
    
    106,233
    
    
    
    
    
    
    
    503,406Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    38,526
    
    
    
    11,903
    
    
    
    
    
    
    
    50,429Selling, general and administrative
expenses allocated from Arch Coal
    
    
    12,018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,018Other operating income
    
    
    (68
    )
    
    
    
    
    
    
    (1,010
    )
    
    
    (788
    )
    
    
    
    
    
    
    (1,866
    )14,320
    
    
    
    
    
    
    
    432,319
    
    
    
    117,348
    
    
    
    
    
    
    
    563,987Income from equity investment
    
    
    199,685
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (199,685
    )
    
    
    Income from operations
    
    
    185,365
    
    
    
    
    
    
    
    146,574
    
    
    
    52,360
    
    
    
    (199,685
    )
    
    
    184,614Interest expense
    
    
    (36,149
    )
    
    
    (30,772
    )
    
    
    (349
    )
    
    
    (1,011
    )
    
    
    32,029
    
    
    
    (36,252
    )Interest income primarily from Arch Coal
    
    
    36,110
    
    
    
    32,029
    
    
    
    258
    
    
    
    596
    
    
    
    (32,029
    )
    
    
    36,964(39
    )
    
    
    1,257
    
    
    
    (91
    )
    
    
    (415
    )
    
    
    
    
    
    
    712Other non-operating expense
    
    
    (5,023
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,023
    )Minority interest
    
    
    (20,755
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,755
    )Net income
    
    $
    159,548
    
    
    $
    1,257
    
    
    $
    146,483
    
    
    $
    51,945
    
    
    $
    (199,685
    )
    
    $
    159,548
 Statements of Cash Flows
Six Months Ended June 30, 2006
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)Operating ActivitiesCash provided by operating activities
    
    $
    71,919
    
    
    $
    1,654
    
    
    $
    189,093
    
    
    $
    87,103
    
    
    $
    349,769Investing ActivitiesIncrease in receivable from Arch Coal
    
    
    (198,878
    )
    
    
    
    
    
    
    (13
    )
    
    
    (17,853
    )
    
    
    (216,744
    )Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (75,730
    )
    
    
    (57,456
    )
    
    
    (133,186
    )Proceeds from dispositions of capital
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    93Cash used in investing activities
    
    
    (198,878
    )
    
    
    
    
    
    
    (75,743
    )
    
    
    (75,216
    )
    
    
    (349,837
    )Financing ActivitiesTransactions with affiliates, net
    
    
    126,959
    
    
    
    (1,654
    )
    
    
    (113,399
    )
    
    
    (11,906
    )
    
    
    Cash provided by (used in) financing
activities
    
    
    126,959
    
    
    
    (1,654
    )
    
    
    (113,399
    )
    
    
    (11,906
    )
    
    
    Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (49
    )
    
    
    (19
    )
    
    
    (68
    )Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    26
    
    
    
    152Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    77
    
    
    $
    7
    
    
    $
    84
 9




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##### 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
Three Months Ended June 30, 2005
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Coal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    209,479
    
    
    $
    65,221
    
    
    $
    
    
    
    $
    274,700Cost of coal sales
    
    
    42
    
    
    
    
    
    
    
    163,729
    
    
    
    41,926
    
    
    
    
    
    
    
    205,697Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    19,774
    
    
    
    4,542
    
    
    
    
    
    
    
    24,316Selling, general and administrative
expenses allocated from Arch Coal
    
    
    5,192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,192Other operating income
    
    
    (25
    )
    
    
    
    
    
    
    (357
    )
    
    
    (60
    )
    
    
    
    
    
    
    (442
    )5,209
    
    
    
    
    
    
    
    183,146
    
    
    
    46,408
    
    
    
    
    
    
    
    234,763Income from equity investment
    
    
    43,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,859
    )
    
    
    Income from operations
    
    
    38,650
    
    
    
    
    
    
    
    26,333
    
    
    
    18,813
    
    
    
    (43,859
    )
    
    
    39,937Interest expense
    
    
    (16,036
    )
    
    
    (15,873
    )
    
    
    (1,446
    )
    
    
    
    
    
    
    16,032
    
    
    
    (17,323
    )Interest income primarily from Arch Coal
    
    
    10,603
    
    
    
    16,032
    
    
    
    
    
    
    
    
    
    
    
    (16,032
    )
    
    
    10,603(5,433
    )
    
    
    159
    
    
    
    (1,446
    )
    
    
    
    
    
    
    
    
    
    
    (6,720
    )Other non-operating expense
    
    
    (3,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )Minority interest
    
    
    (7,750
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,750
    )Net income
    
    $
    22,079
    
    
    $
    159
    
    
    $
    24,887
    
    
    $
    18,813
    
    
    $
    (43,859
    )
    
    $
    22,079
 10




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##### Table of Contents



Statements of Operations
Six Months Ended June 30, 2005
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(unaudited)Coal sales revenues
    
    $
    
    
    
    $
    
    
    
    $
    428,253
    
    
    $
    123,863
    
    
    $
    
    
    
    $
    552,116Cost of coal sales
    
    
    980
    
    
    
    
    
    
    
    321,385
    
    
    
    92,436
    
    
    
    
    
    
    
    414,801Depreciation, depletion and amortization
    
    
    
    
    
    
    
    
    
    
    41,064
    
    
    
    8,771
    
    
    
    
    
    
    
    49,835Selling, general and administrative
expenses allocated from Arch Coal
    
    
    10,883
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,883Other operating income
    
    
    (30
    )
    
    
    
    
    
    
    (2,308
    )
    
    
    (397
    )
    
    
    
    
    
    
    (2,735
    )11,833
    
    
    
    
    
    
    
    360,141
    
    
    
    100,810
    
    
    
    
    
    
    
    472,784Income from equity investment
    
    
    89,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (89,865
    )
    
    
    Income from operations
    
    
    78,032
    
    
    
    
    
    
    
    68,112
    
    
    
    23,053
    
    
    
    (89,865
    )
    
    
    79,332Interest expense
    
    
    (32,012
    )
    
    
    (31,866
    )
    
    
    (1,446
    )
    
    
    
    
    
    
    32,012
    
    
    
    (33,312
    )Interest income primarily from Arch Coal
    
    
    19,383
    
    
    
    32,012
    
    
    
    
    
    
    
    
    
    
    
    (32,012
    )
    
    
    19,383(12,629
    )
    
    
    146
    
    
    
    (1,446
    )
    
    
    
    
    
    
    
    
    
    
    (13,929
    )Other non-operating expense
    
    
    (6,775
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,775
    )Minority interest
    
    
    (10,478
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,478
    )Net income
    
    $
    48,150
    
    
    $
    146
    
    
    $
    66,666
    
    
    $
    23,053
    
    
    $
    (89,865
    )
    
    $
    48,150
 Statements of Cash Flows (Restated)
Six Months Ended June 30, 2005
(in thousands)
 Parent
    
    
    
    
    
    
    Guarantor
    
    
    Non-GuarantorCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated(unaudited)Operating ActivitiesCash provided by (used in) operating
activities
    
    $
    (47,015
    )
    
    $
    (721
    )
    
    $
    121,110
    
    
    $
    24,500
    
    
    $
    97,874Investing Activities
    
    
    
    
    
    
    Increase in receivable from Arch Coal
    
    
    (46,249
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,249
    )Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (26,514
    )
    
    
    (15,447
    )
    
    
    (41,961
    )Proceeds from dispositions of capital
assets
    
    
    
    
    
    
    
    
    
    
    1,971
    
    
    
    3
    
    
    
    1,974Additions to prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (12,456
    )
    
    
    
    
    
    
    (12,456
    )Cash used in investing activities
    
    
    (46,249
    )
    
    
    
    
    
    
    (36,999
    )
    
    
    (15,444
    )
    
    
    (98,692
    )Financing ActivitiesDebt financing costs
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )Transactions with affiliates, net
    
    
    93,315
    
    
    
    721
    
    
    
    (84,835
    )
    
    
    (9,201
    )
    
    
    Cash provided by (used in) financing
activities
    
    
    93,264
    
    
    
    721
    
    
    
    (84,835
    )
    
    
    (9,201
    )
    
    
    (51
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (724
    )
    
    
    (145
    )
    
    
    (869
    )Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    166
    
    
    
    1,351Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    461
    
    
    $
    21
    
    
    $
    482
 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 June 30, 2006 Compared to Three Months Ended June 30, 2005
  Revenues
 Three months ended June 30,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    386,405
    
    
    $
    274,700
    
    
    $
    111,705
    
    
    
    40.7
    %Tons sold
    
    
    28,608
    
    
    
    25,718
    
    
    
    2,890
    
    
    
    11.2
    %Coal sales realization per ton sold
    
    $
    13.51
    
    
    $
    10.68
    
    
    $
    2.83
    
    
    
    26.5
    %
   Three months ended June 30,
    
    Increase (decrease)2006
    
    2005
    
    Tons
    
    %(Amounts in thousands)Powder River Basin
    
    
    24,107
    
    
    
    21,040
    
    
    
    3,067
    
    
    
    14.6
    %Western Bituminous Region
    
    
    4,501
    
    
    
    4,678
    
    
    
    (177
    )
    
    
    (3.8
    )%Total
    
    
    28,608
    
    
    
    25,718
    
    
    
    2,890
    
    
    
    11.2
    %
   Three months ended June 30,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    11.44
    
    
    $
    8.04
    
    
    $
    3.40
    
    
    
    42.3
    %Western Bituminous Region
    
    
    22.08
    
    
    
    19.36
    
    
    
    2.72
    
    
    
    14.1
    %
  13




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##### Table of Contents



Operating costs and expenses
 Increase (decrease)Three months ended June 30,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Cost of coal sales
    
    $
    251,276
    
    
    $
    205,697
    
    
    $
    (45,579
    )
    
    
    (22.2
    )%Depreciation, depletion and amortization
    
    
    26,853
    
    
    
    24,316
    
    
    
    (2,537
    )
    
    
    (10.4
    )%Selling, general and administrative expenses
    
    
    6,529
    
    
    
    5,192
    
    
    
    (1,337
    )
    
    
    (25.8
    )%Other operating income, net
    
    
    (1,391
    )
    
    
    (442
    )
    
    
    949
    
    
    
    214.7
    %$
    283,267
    
    
    $
    234,763
    
    
    $
    (48,504
    )
    
    
    (20.7
    )%
 Operating margins.
 Three months ended June 30,
    

Increase
(decrease)2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    2.90
    
    
    $
    0.84
    
    
    $
    2.06
    
    
    
    245.2
    %Western Bituminous Region
    
    
    8.85
    
    
    
    5.78
    
    
    
    3.07
    
    
    
    53.1
    %
   Net interest income (expense)
 Increase (decrease)Three months ended June 30,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    %(Amounts in thousands)Interest expense
    
    $
    (18,516
    )
    
    $
    (17,323
    )
    
    $
    (1,193
    )
    
    
    (6.9
    )%Interest income
    
    
    20,642
    
    
    
    10,603
    
    
    
    10,039
    
    
    
    94.7
    %$
    2,126
    
    
    $
    (6,720
    )
    
    $
    8,846
    
    
    
    131.6
    %
 Interest expense
 Interest income.
 Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
  Revenues
 14




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##### Table of Contents



Six months ended June 30,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %(Amounts in thousands, except per ton data)Coal sales
    
    $
    748,601
    
    
    $
    552,116
    
    
    $
    196,485
    
    
    
    35.6
    %Tons sold
    
    
    54,842
    
    
    
    53,634
    
    
    
    1,208
    
    
    
    2.3
    %Coal sales realization per ton sold
    
    $
    13.65
    
    
    $
    10.29
    
    
    $
    3.36
    
    
    
    32.7
    %
   Six months ended June 30,
    
    Increase (decrease)2006
    
    2005
    
    Tons
    
    %(Amounts in thousands)Powder River Basin
    
    
    46,281
    
    
    
    44,157
    
    
    
    2,124
    
    
    
    4.81
    %Western Bituminous Region
    
    
    8,561
    
    
    
    9,477
    
    
    
    (916
    )
    
    
    (9.7
    )%Total
    
    
    54,842
    
    
    
    53,634
    
    
    
    1,208
    
    
    
    2.3
    %
   Six months ended June 30,
    
    Increase (decrease)2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    11.39
    
    
    $
    7.88
    
    
    $
    3.51
    
    
    
    44.5
    %Western Bituminous Region
    
    
    22.66
    
    
    
    18.21
    
    
    
    4.45
    
    
    
    24.4
    %
  Operating costs and expenses
 Increase (decrease)Six months ended June 30,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Cost of coal sales
    
    $
    503,406
    
    
    $
    414,801
    
    
    $
    (88,605
    )
    
    
    (21.4
    )%Depreciation, depletion and amortization
    
    
    50,429
    
    
    
    49,835
    
    
    
    (594
    )
    
    
    (1.2
    )%Selling, general and administrative expenses
    
    
    12,018
    
    
    
    10,883
    
    
    
    (1,135
    )
    
    
    (10.4
    )%Other operating income, net
    
    
    (1,866
    )
    
    
    (2,735
    )
    
    
    (869
    )
    
    
    (31.8
    )%$
    563,987
    
    
    $
    472,784
    
    
    $
    (91,203
    )
    
    
    (19.3
    )%
 Operating margins.
 15




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##### Table of Contents



Six months ended June 30,
    

Increase
(decrease)2006
    
    2005
    
    $
    
    %Powder River Basin
    
    $
    2.85
    
    
    $
    1.12
    
    
    $
    1.73
    
    
    
    154.5
    %Western Bituminous Region
    
    
    7.64
    
    
    
    4.12
    
    
    
    3.52
    
    
    
    85.4
    %
   Net interest income (expense)
 Increase (decrease)Six months ended June 30,
    
    
    in Net Income2006
    
    
    2005
    
    
    $
    
    
    %(Amounts in thousands)Interest expense
    
    $
    (36,252
    )
    
    $
    (33,312
    )
    
    $
    (2,940
    )
    
    
    (8.8
    )%Interest income
    
    
    36,964
    
    
    
    19,383
    
    
    
    17,581
    
    
    
    90.7
    %$
    712
    
    
    $
    (13,929
    )
    
    $
    14,641
    
    
    
    105.1
    %
 Interest expense
 Interest income.
 Liquidity and Capital Resources
    Six months ended June 30,2006
    
    2005Restated(in thousands)Cash provided by (used in):Operating activities
    
    $
    349,769
    
    
    $
    97,874Investing activities
    
    
    (349,837
    )
    
    
    (98,692
    )Financing activities
    
    
    
    
    
    
    (51
    )
  16




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##### Table of Contents



Contingencies
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
  17




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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.
 18




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##### Table of Contents



Signatures
  Arch Coal, Inc.By:
    
    /s/ Robert J. Messey

Robert J. MesseyVice PresidentAugust 11, 2006
 19