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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One)  x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2004 OR  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  toCommission file number 333-107569-03 ARCH WESTERN RESOURCES, LLC (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    43-1811130(I.R.S. Employer Identification No.)
 One CityPlace Drive, Suite 300, St. Louis, Missouri 63141(Address of principal executive offices)(Zip Code) Registrants telephone number, including area code:(314) 994-2700 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes o No x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x At November 1, 2004, 99.5% of the registrants common equity was held by Arch
Western Acquisition Corporation and the remaining .5 percent was held by BP
p.l.c.




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INDEX PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2004 and
December 31, 2003
    
    
    1Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2004 and 2003 and the Nine Months
Ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 4. Controls and Procedures
    
    
    41PART II. OTHER INFORMATION
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 2. Changes in Securities Use of Proceeds and Issues Purchasers of Equity Securities
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 5. Other Information
    
    
    41Item 6. Exhibits
    
    
    41Certification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Principal Executive OfficerCertification of Principal Financial Officer




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS ARCH WESTERN RESOURCES, LLC 
 CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    60
    
    
    $
    35,171Trade accounts receivable
    
    
    84,820
    
    
    
    48,135Other receivables
    
    
    7,779
    
    
    
    4,438Inventories
    
    
    71,677
    
    
    
    35,830Other
    
    
    18,090
    
    
    
    6,695Total current assets
    
    
    182,426
    
    
    
    130,269Property, plant and equipment, net
    
    
    1,091,038
    
    
    
    759,872Other assetsInvestment in Canyon Fuel Company, LLC
    
    
    0
    
    
    
    146,180Coal supply agreements
    
    
    7,459
    
    
    
    4,862Receivable from Arch Coal, Inc.
    
    
    489,416
    
    
    
    351,866Other
    
    
    33,944
    
    
    
    18,466Total other assets
    
    
    530,819
    
    
    
    521,374Total assets
    
    $
    1,804,283
    
    
    $
    1,411,515LIABILITIES AND MEMBERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    60,294
    
    
    $
    24,436Accrued expenses
    
    
    123,941
    
    
    
    90,478Total current liabilities
    
    
    184,235
    
    
    
    114,914Long-term debt
    
    
    800,000
    
    
    
    700,000Accrued postretirement benefits other than pension
    
    
    25,176
    
    
    
    14,086Asset retirement obligations
    
    
    127,698
    
    
    
    91,474Accrued workers compensation
    
    
    11,841
    
    
    
    6,760Other noncurrent liabilities
    
    
    35,017
    
    
    
    7,645Total liabilities
    
    
    1,183,967
    
    
    
    934,879Minority interest
    
    
    110,395
    
    
    
    Redeemable equity interests
    
    
    4,913
    
    
    
    4,746Non-redeemable members equity
    
    
    505,008
    
    
    
    471,890$
    1,804,283
    
    
    $
    1,411,515
 See notes to condensed consolidated financial statements. 1




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ARCH WESTERN RESOURCES, LLC 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS)
 (UNAUDITED) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003RevenuesCoal sales
    
    $
    208,579
    
    
    $
    127,771
    
    
    $
    490,200
    
    
    $
    369,834Costs and expensesCost of coal sales
    
    
    191,207
    
    
    
    115,281
    
    
    
    445,457
    
    
    
    335,727Selling, general and administrative expenses
    
    
    3,816
    
    
    
    3,106
    
    
    
    11,581
    
    
    
    10,547Amortization of coal supply agreements, net
    
    
    (513
    )
    
    
    98
    
    
    
    (318
    )
    
    
    290194,510
    
    
    
    118,485
    
    
    
    456,720
    
    
    
    346,564Other Operating IncomeIncome from equity investment
    
    
    1,143
    
    
    
    1,392
    
    
    
    8,410
    
    
    
    17,596Other operating income
    
    
    1,106
    
    
    
    2,920
    
    
    
    8,416
    
    
    
    9,2152,249
    
    
    
    4,312
    
    
    
    16,826
    
    
    
    26,811Income from operations
    
    
    16,318
    
    
    
    13,598
    
    
    
    50,306
    
    
    
    50,081Interest expense, net:Interest expense
    
    
    (14,061
    )
    
    
    (11,851
    )
    
    
    (39,906
    )
    
    
    (32,408
    )Interest income primarily from Arch Coal, Inc.
    
    
    4,812
    
    
    
    3,426
    
    
    
    12,387
    
    
    
    10,927(9,249
    )
    
    
    (8,425
    )
    
    
    (27,519
    )
    
    
    (21,481
    )Other non-operating income (expense):Expenses from early debt extinguishment
and termination of hedge accounting for
interest rate swaps
    
    
    (3,388
    )
    
    
    (3,388
    )
    
    
    (10,162
    )
    
    
    (8,283
    )Income before cumulative effect of accounting
change
    
    
    3,681
    
    
    
    1,785
    
    
    
    12,625
    
    
    
    20,317Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,278
    )Minority interest
    
    
    (2,017
    )
    
    
    
    
    
    
    (2,017
    )
    
    
    Net income
    
    
    1,664
    
    
    
    1,785
    
    
    
    10,608
    
    
    
    2,039Net income attributable to redeemable equity
interests
    
    
    8
    
    
    
    9
    
    
    
    53
    
    
    
    10Net income attributable to non-redeemable equity
interests
    
    $
    1,656
    
    
    $
    1,776
    
    
    $
    10,555
    
    
    $
    2,029
 See notes to condensed consolidated financial statements. 2




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ARCH WESTERN RESOURCES, LLC 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED) Nine Months EndedSeptember 30,2004
    
    2003Operating activitiesNet income
    
    $
    10,608
    
    
    $
    2,039Adjustments to reconcile to cash provided by operating activities:Depreciation, depletion and amortization
    
    
    54,934
    
    
    
    46,862Prepaid royalties expensed
    
    
    10,002
    
    
    
    Other non-operating expense
    
    
    10,162
    
    
    
    8,283Accretion on asset retirement obligations
    
    
    6,590
    
    
    
    7,439Net gain on disposition of assets
    
    
    (93
    )
    
    
    (10
    )Income from equity investment
    
    
    (8,410
    )
    
    
    (17,596
    )Net distributions from equity investment
    
    
    16,049
    
    
    
    20,719Minority interest
    
    
    2,017
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    18,278Changes in:Receivables
    
    
    (4,341
    )
    
    
    16,089Inventories
    
    
    1,887
    
    
    
    (1,126
    )Accounts payable and accrued expenses
    
    
    (34,465
    )
    
    
    3,292Note receivable/payable to Arch Coal
    
    
    (132,706
    )
    
    
    (44,349
    )Accrued postretirement benefits other
than pension
    
    
    782
    
    
    
    (957
    )Asset retirement obligations
    
    
    (4,800
    )
    
    
    (12,643
    )Accrued workers compensation benefits
    
    
    (949
    )
    
    
    (177
    )Other
    
    
    2,028
    
    
    
    2,648Cash (used in) provided by operating activities
    
    
    (70,705
    )
    
    
    48,791Investing activitiesCapital expenditures
    
    
    (52,626
    )
    
    
    (22,397
    )Proceeds from dispositions of capital assets
    
    
    133
    
    
    
    10Additions to prepaid royalties
    
    
    (11,688
    )
    
    
    Cash used in investing activities
    
    
    (64,181
    )
    
    
    (22,387
    )Financing activitiesProceeds from issuance of debt
    
    
    100,000
    
    
    
    700,000Debt financing cost
    
    
    (225
    )
    
    
    (16,171
    )Payments on term debt
    
    
    
    
    
    
    (675,000
    )Cash provided by financing activities
    
    
    99,775
    
    
    
    8,829Increase (decrease) in cash and cash equivalents
    
    
    (35,111
    )
    
    
    35,233Cash and cash equivalents, beginning of period
    
    
    35,171
    
    
    
    249Cash and cash equivalents, end of period
    
    $
    60
    
    
    $
    35,482
 See notes to condensed consolidated financial statements. 3




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ARCH WESTERN RESOURCES, LLC 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2004
 (UNAUDITED)
 Note A  General The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission regulations,
but are subject to any year-end adjustments that may be necessary. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for the period ended September 30, 2004 are not
necessarily indicative of results to be expected for the year ending December
31, 2004. Arch Western Resources, LLC (the Company) was formed as a joint venture on
June 1, 1998 when Arch Coal, Inc. (Arch Coal) acquired the United States coal
operations of Atlantic Richfield Company and combined these operations with
Arch Coals western operations. Arch Westerns membership interests are owned
99% by Arch Coal and 1% by an affiliate of BP p.l.c. (BP), the successor to
Atlantic Richfield Company. Arch Coals ownership is comprised entirely of
common membership interests, while BPs ownership is comprised of a 0.5% common
membership interest and a 0.5% preferred membership interest. Under the terms of the Companys membership agreement, net profits and losses
are allocated only to the common membership interests on the basis of 99.5% to
Arch Coal and 0.5% to BP. No profit or loss is allocated to the preferred
membership interest of BP. Except for a Preferred Return, distributions to
members are allocated on the basis of 99.5% to Arch Coal and 0.5% to BP. The
Preferred Return entitles BP to receive an annual distribution from the common
membership interests equal to 4% of the preferred capital account balance at
the end of the year. The Preferred Return is payable at the Companys
discretion. The Company mines and markets steam coal from surface and deep mines for sale
to utility and industrial customers in the United States and certain export
markets. The Companys principal subsidiaries are Thunder Basin Coal Company,
L.L.C., which operates a surface coal mine and owns one idle mine in the Powder
River Basin in Wyoming; Mountain Coal Company, L.L.C., which operates one
underground coal mine in Colorado; and Arch of Wyoming, which operates two
surface coal mines in the Hanna Basin in Wyoming (which were both put into reclamation mode in 2004). In addition to these wholly
owned operating units, the Company has a 65% interest in Canyon Fuel Company,
LLC (Canyon Fuel). Canyon Fuel operates three underground mines in Utah.
Through July 31, 2004, the Companys interest in Canyon Fuel was accounted for
on the equity method as a result of certain super-majority voting rights in the
Canyon Fuel joint venture agreement. On July 31, 2004, Arch Coal purchased the
remaining 35% interest in Canyon Fuel not owned by the Company. Upon Arch
Coals acquisition of the 35% interest, Canyon Fuels joint venture agreement
was amended to eliminate the super-majority voting rights. As a result, for
periods subsequent to July 31, 2004, the Company will consolidate 100% of the
results of Canyon Fuel in its financial statements and deduct for Arch Coals
35% minority interest in Canyon Fuel. Amounts included in the accompanying
condensed consolidated financial statements for Canyon Fuel represent amounts
recorded by the Company under the equity method of accounting through July 31,
2004 and amounts consolidated by the Company subsequent to that date. Note B  Contribution of North Rochelle Mine On August 20, 2004, Arch Coal acquired (1) Vulcan Coal Holdings, L.L.C., which
owns all of the common equity of Triton Coal Company, LLC (Triton), and (2)
all of the preferred units of Triton for a purchase price of $376.0 million,
including transaction costs and subject to working capital adjustments. Upon
acquisition, Arch Coal contributed the assets and liabilities of Tritons North
Rochelle mine (excluding coal reserves) to the Company. The contribution
results in the integration of the North Rochelle mine with the Companys
existing Black Thunder mine in the Powder River Basin. The North Rochelle mine
produced an estimated 23.9 million tons of coal in 2003 and its reserve base
totaled an estimated 226.0 million tons of super-compliance coal at December
31, 2003. Concurrently with the contribution, the Company entered into a sublease
transaction with Arch Coal for the right to mine the former North Rochelle coal
reserves. Under the terms of the sublease agreement, the Company pays a
production royalty to Arch Coal for tons mined on the North Rochelle property.
For the quarter ended September 30, 2004, the Company paid royalties of $0.2
million to Arch Coal. 4




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The effects of the contribution have been recorded in the accompanying
condensed consolidated financial statements as of, and for the periods
subsequent to, August 20, 2004. The contributed assets and liabilities have
been recorded at their estimated fair value. The final valuation of the assets
acquired and liabilities assumed is expected to be finalized once third-party
appraisals are completed. The Company expects the completion of these
appraisals prior to year-end. The following table summarizes the preliminary estimated fair values of the
assets acquired and the liabilities assumed at the date of contribution
(dollars in thousands): Cash
    
    $
    407Accounts receivable
    
    
    14,450Materials and supplies
    
    
    4,332Coal inventory
    
    
    4,874Other current assets
    
    
    1,283Property, plant, equipment and mine development
    
    
    75,886Coal supply agreements
    
    
    3,975Accounts payable and accrued expenses
    
    
    (74,131
    )Other noncurrent assets and liabilities, net
    
    
    (20,004
    )Total contribution
    
    $
    11,072
 Amounts preliminarily allocated to coal supply agreements noted in the table
above represent the value attributed to above-market coal supply agreements to
be amortized over the remaining terms of the contracts. The amortization
period on these acquired coal supply agreements ranges from one to seven years. Pro Forma Financial Information The following unaudited pro forma financial information presents the combined
results of operations of the Company and the contributed North Rochelle mine,
as well as the consolidation of Canyon Fuel (net of Arch Coals minority
interest), on a pro forma basis, as though the contribution and consolidation
had occurred as of the beginning of each period presented. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and the North Rochelle mine
constituted a single entity during those periods: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share data)Revenues:As reported
    
    $
    208,579
    
    
    $
    127,771
    
    
    $
    490,200
    
    
    $
    369,834Pro forma
    
    
    251,699
    
    
    
    236,540
    
    
    
    741,973
    
    
    
    699,185Income before accounting
changes:As reported
    
    
    3,681
    
    
    
    1,785
    
    
    
    12,625
    
    
    
    20,317Pro forma
    
    
    977
    
    
    
    2,003
    
    
    
    17,571
    
    
    
    37,623Net income (loss):As reported
    
    
    1,664
    
    
    
    1,785
    
    
    
    10,608
    
    
    
    2,039Pro forma
    
    
    (2,111
    )
    
    
    1,355
    
    
    
    11,219
    
    
    
    4,993
 Note C  Transactions or Events Affecting Comparability of Reported Results During the nine months ended September 30, 2004, the Office of Surface Mining
completed an audit of certain of the Companys federal reclamation fee filings
for the period from 1998 through 2003. The audit resulted in the Company being
assessed additional fees of $1.3 million and interest of $0.2 million. The
additional fees have been recorded as a component of cost of coal sales in the
accompanying Condensed Consolidated Statements of Operations, while the
interest portion has been reflected as interest expense. During the first nine months of 2004, Canyon Fuel, which was accounted for
under the equity method through July 31, 2004, began the process of idling its
Skyline Mine (the idling process was completed in May 2004), and incurred
severance costs of $3.2 million for the nine months ended September 30, 2004.
The Companys share of these costs 5




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totals $2.1 million and is reflected in income from equity investment in the
Condensed Consolidated Statements of Operations. On June 25, 2003, the Company repaid its term loans with the proceeds from the
offering of senior notes. The Company had designated certain interest rate
swaps as hedges of the variable rate interest payments due under the term
loans. Pursuant to the requirements of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133), historical mark-to-market adjustments related to these swaps
through June 25, 2003 were deferred as a component of Accumulated Other
Comprehensive Loss. Subsequent to the repayment of the term loans, these
deferred amounts will be amortized as additional expense over the contractual
terms of the swap agreements. For the three and nine months ending September
30, 2004, the Company recognized $3.4 million and $10.2 million, respectively,
of expense related to the amortization of previously deferred mark-to-market
adjustments. For the nine months ended September 30, 2003, the Company
recognized $3.6 million of expense related to the amortization of previously
deferred mark-to-market adjustments and $4.7 million of expense related to
early debt extinguishment costs. During the nine months ended September 30, 2003, the Company was notified by
the State of Wyoming of a favorable ruling as it relates to the Companys
calculation of coal severance taxes. The ruling resulted in a refund of
previously paid taxes and the reversal of previously accrued taxes payable. The
impact on the three and nine months ended September 30, 2003 was a loss of $0.8
million and a gain of $2.5 million, respectively, which is reflected in cost of
coal sales in the accompanying Condensed Consolidated Statements of Operations. Note D  Adoption of FAS 143 On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations(FAS 143). FAS
143 requires legal obligations associated with the retirement of long-lived
assets to be recognized at fair value at the time the obligations are incurred.
Upon initial recognition of a liability, that cost should be capitalized as
part of the related long-lived asset and allocated to expense over the useful
life of the asset. Previously, the Company accrued for the expected costs of
these obligations over the estimated useful mining life of the property. The following table describes the changes to the Companys asset retirement
obligation for the nine months ended September 30, 2004 and 2003: 2004
    
    2003(in thousands)Balance at January 1 (including current portion)
    
    $
    106,285
    
    
    $
    69,069Impact of adoption
    
    
    
    
    
    
    44,614Impact of contributed liabilities and consolidation of
Canyon Fuel
    
    
    39,540
    
    
    
    Accretion expense
    
    
    6,591
    
    
    
    7,439Liabilities settled
    
    
    (4,882
    )
    
    
    (12,676
    )Balance at September 30
    
    
    147,534
    
    
    
    108,446Current portion included in accrued expenses
    
    
    (19,836
    )
    
    
    (14,841
    )Long-term liability
    
    $
    127,698
    
    
    $
    93,605
 6




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Note E  Investment in Canyon Fuel Through July 31, 2004, the Company accounted for its investment in Canyon Fuel
under the equity method. The following table presents unaudited summarized
financial information for Canyon Fuel for those periods when the Company
accounted for its investment under the equity method: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Condensed Income Statement Information
    
    2004
    
    2003
    
    2004
    
    2003(in thousands)Revenues
    
    $
    20,186
    
    
    $
    57,751
    
    
    $
    142,893
    
    
    $
    179,234Total costs and expenses
    
    
    18,791
    
    
    
    57,879
    
    
    
    133,546
    
    
    
    161,015Net income before cumulative effect
of accounting change
    
    $
    1,395
    
    
    $
    (128
    )
    
    $
    9,347
    
    
    $
    18,21965% of Canyon Fuel net income before
cumulative effect of accounting
change
    
    $
    906
    
    
    $
    (83
    )
    
    $
    6,075
    
    
    $
    11,842Effect of purchase adjustments
    
    
    237
    
    
    
    1,475
    
    
    
    2,335
    
    
    
    5,754Arch Westerns income from its equity
investment in Canyon Fuel
    
    $
    1,143
    
    
    $
    1,392
    
    
    $
    8,410
    
    
    $
    17,596
 Through July 31, 2004, the Companys income from its equity investment in
Canyon Fuel represents 65% of Canyon Fuels net income after adjusting for the
effect of purchase adjustments related to its investment in Canyon Fuel. The
Companys investment in Canyon Fuel reflects purchase adjustments related to
the reduction in amounts assigned to sales contracts, mineral reserves and
other property, plant and equipment. The purchase adjustments are amortized
consistent with the underlying assets of the joint venture. Effective January 1, 2003, Canyon Fuel adopted FAS 143 and recorded a
cumulative effect loss of $2.4 million. The Companys 65% share of this amount
was offset by purchase adjustments of $0.5 million. These amounts are included
in the cumulative effect of accounting change reported in the Companys
Condensed Consolidated Statements of Operations. Note F  Other Comprehensive Income Other comprehensive income items under FAS 130, Reporting Comprehensive Income,
are transactions recorded in members equity during the year from non-owner
sources. The following table presents comprehensive income: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net income
    
    $
    1,664
    
    
    $
    1,785
    
    
    $
    10,608
    
    
    $
    2,039Other comprehensive income
(loss) (net of amounts
reclassified to earnings)
    
    
    3,390
    
    
    
    3,406
    
    
    
    11,677
    
    
    
    (5,920
    )Total comprehensive income (loss)
    
    $
    5,054
    
    
    $
    5,191
    
    
    $
    22,285
    
    
    $
    (3,881
    )
 Other comprehensive income for the three and nine months ended September 30,
2004 and three months ended September 30, 2003 consists primarily of the
reclassification of previously deferred mark-to-market losses from other
comprehensive income to net income. Other comprehensive loss for the nine
months ended September 30, 2003 represents mark-to-market adjustments related
to the Companys financial derivatives positions for the periods when those
positions were deemed to be effective hedges and the reclassification of
previously deferred mark-to-market losses from other comprehensive income to
net income. 7




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Note G  Employee Benefit Plans Defined Benefit Pension and Other Postretirement Benefit Plans The Company has non-contributory defined benefit pension plans covering certain
of its salaried and non-union hourly employees. Benefits are generally based on
the employees years of service and compensation. The Company funds the plans
in an amount not less than the minimum statutory funding requirements nor more
than the maximum amount that can be deducted for federal income tax purposes. The Company also currently provides certain postretirement medical/life
insurance coverage for eligible employees. Generally, covered employees who
terminate employment after meeting eligibility requirements are eligible for
postretirement coverage for themselves and their dependents. The salaried
employee postretirement medical/life plans are contributory, with retiree
contributions adjusted periodically, and contain other cost-sharing features
such as deductibles and coinsurance. The Companys current funding policy is to
fund the cost of all postretirement medical/life insurance benefits as they are
paid. Components of Net Periodic Benefit Cost The following table details the components of pension and other postretirement
benefit costs. Other postretirementPension benefits
    
    benefitsThree Months Ended September 30,
    
    2004
    
    2003
    
    2004
    
    2003(In thousands)Service cost
    
    $
    1,324
    
    
    $
    747
    
    
    $
    387
    
    
    $
    220Interest cost
    
    
    1,033
    
    
    
    1,202
    
    
    
    349
    
    
    
    254Expected return on plan
assets*
    
    
    (1,348
    )
    
    
    (1,169
    )
    
    
    
    
    
    
    Other amortization and
deferral
    
    
    519
    
    
    
    (156
    )
    
    
    (32
    )
    
    
    172$
    1,528
    
    
    $
    624
    
    
    $
    704
    
    
    $
    646Other postretirementPension benefits
    
    benefitsNine Months Ended September 30,
    
    2004
    
    2003
    
    2004
    
    2003(In thousands)Service cost
    
    $
    2,774
    
    
    $
    2,261
    
    
    $
    872
    
    
    $
    634Interest cost
    
    
    2,948
    
    
    
    2,531
    
    
    
    851
    
    
    
    740Expected return on plan
assets*
    
    
    (3,807
    )
    
    
    (3,507
    )
    
    
    
    
    
    
    Other amortization and
deferral
    
    
    962
    
    
    
    420
    
    
    
    (35
    )
    
    
    (353
    )$
    2,877
    
    
    $
    1,705
    
    
    $
    1,688
    
    
    $
    1,021
 * The Company does not fund its other postretirement liabilities. Employer Contributions The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $6.5 million to its pension
plan in 2004. During the period ended September 30, 2004, Arch Coal contributed
210,000 shares of its common stock to the Companys pension plan (the pension
plan subsequently sold the shares on the open market). The market value of Arch
Coals common stock on the date of contribution was $30.88 per share. The
Company presently does not anticipate contributing additional amounts to the
pension plan in 2004. Impact of Medicare Prescription Drug, Improvement and Modernization Act of 2003 On December 8, the President signed into law the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act). The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In May
2004, the Financial Accounting Standards Board issued FASB Staff Position 8




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##### Table of Contents



FAS 106-2, Accounting and Disclosure Requirements related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003(FSP 106-2). The
Company has included the effects of the Act in its financial statements for the
nine months ending September 30, 2004 in accordance with FSP 106-2.
Implementation of FSP 106-2 did not result in a material change in the
Companys postretirement benefit obligation or its anticipated postretirement
medical expenses. Note H  Inventories Inventories consist of the following: September 30,
    
    December 31,2004
    
    2003(in thousands)Coal
    
    $
    39,236
    
    
    $
    15,098Repair parts and supplies
    
    
    32,441
    
    
    
    20,732$
    71,677
    
    
    $
    35,830
 Note I  Debt On August 20, 2004, the Company borrowed $100.0 million under its term loan
facility, which was established on September 19, 2003. The $100.0 million was
loaned to Arch Coal and used to help fund the acquisition of Triton. Under the
facility, the loan is due in quarterly installments from October 2004 through
April 2007. On June 25, 2003, Arch Western Finance, LLC, a subsidiary of the Company,
completed the offering of $700 million of senior notes and utilized the
proceeds of the offering to repay the Companys existing $675 million term
loans. The senior notes bear a fixed rate of interest of 6.75% and are due in
full on July 1, 2013. Interest on the senior notes is payable on January 1 and
July 1 each year commencing January 1, 2004. The senior notes are guaranteed by
the Company and certain of its subsidiaries and are secured by a security
interest in loans made by the Company to Arch Coal. The terms of the senior
notes contain restrictive covenants that limit the Companys ability to, among
other things, incur additional debt, sell or transfer assets, and make
investments. Note J  Related Party Transactions The Company pays selling, general and administrative services fees to Arch
Coal. Expenses are allocated based on Arch Coals best estimates of
proportional or incremental costs, whichever is more representative of costs
incurred by Arch Coal on behalf of the Company. Amounts allocated to the
Company by Arch Coal were $3.8 million and $3.1 million for the three months
ended September 30, 2004 and 2003, respectively and $11.6 million and $10.5
million for the nine months ended September 30, 2004 and 2003, respectively.
These amounts are reported as selling, general and administrative expenses in
the accompanying Condensed Consolidated Statements of Operations. 9




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##### Table of Contents



Note K  Segment Information The Company produces steam and metallurgical coal from surface and deep mines
for sale to utility, industrial and export markets. The Company operates only
in the United States, with mines in the major western low-sulfur coal basins.
The Company has two reportable segments, which are based on the coal basins in
which the Company operates. Coal quality, coal seam height, transportation
methods and regulatory issues are generally consistent within a basin.
Accordingly, market and contract pricing have developed by coal basin. The
Company manages its coal sales by coal basin, not by individual mine complex.
Mine operations are evaluated based on their per-ton operating costs (which
include all mining costs but exclude pass-through transportation expenses). The
Companys reportable segments are Powder River Basin and Western Bituminous.
The Companys operations in the Powder River Basin are located in Wyoming and
include one active surface mine (into which the North Rochelle mine was
integrated) and one idle surface mine. The Companys operations in the Western
Bituminous region are located in southern Wyoming, Colorado and Utah and
include four underground mines (one of which was idled in May 2004) and two
surface mines (which were both put into reclamation mode in 2004). Operating segment results for the three and nine months ending September 30,
2004 and 2003 are presented below. Results for the operating segments include
all direct costs of mining. Corporate, Other and Eliminations includes
overhead, other support functions, and the elimination of intercompany
transactions. Three months ending September 30, 2004 Corporate,Powder River
    
    Western
    
    Other and(Amounts in thousands, except per ton amounts)
    
    Basin
    
    Bituminous
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    144,431
    
    
    $
    64,148
    
    
    $
    
    
    
    $
    208,579Income from equity investments
    
    
    
    
    
    
    1,143
    
    
    
    
    
    
    
    1,143Income from operations
    
    
    14,092
    
    
    
    5,889
    
    
    
    (3,663
    )
    
    
    16,318Total assets
    
    
    1,129,833
    
    
    
    1,373,331
    
    
    
    (698,881
    )
    
    
    1,804,283Depreciation, depletion and
amortization
    
    
    14,688
    
    
    
    6,850
    
    
    
    
    
    
    
    21,538Capital expenditures
    
    
    13,692
    
    
    
    8,326
    
    
    
    
    
    
    
    22,018Operating cost per ton
    
    
    6.53
    
    
    
    15.30Three months ending September 30, 2003Corporate,Powder River
    
    
    
    
    
    Other and(Amounts in thousands, except per ton amounts)
    
    Basin
    
    Western Bituminous
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    100,176
    
    
    $
    27,595
    
    
    $
    
    
    
    $
    127,771Income from equity investments
    
    
    
    
    
    
    1,392
    
    
    
    
    
    
    
    1,392Income from operations
    
    
    11,973
    
    
    
    3,805
    
    
    
    (2,180
    )
    
    
    13,598Total assets
    
    
    966,234
    
    
    
    934,177
    
    
    
    (499,163
    )
    
    
    1,401,248Equity investments
    
    
    
    
    
    
    156,722
    
    
    
    
    
    
    
    156,722Depreciation, depletion and
amortization
    
    
    10,909
    
    
    
    4,973
    
    
    
    
    
    
    
    15,882Capital expenditures
    
    
    8,985
    
    
    
    3,209
    
    
    
    
    
    
    
    12,194Operating cost per ton
    
    
    5.56
    
    
    
    14.58
 10




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##### Table of Contents



Nine months ending September 30, 2004 Corporate,Powder River
    
    Western
    
    Other and(Amounts in thousands, except per ton amounts)
    
    Basin
    
    Bituminous
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    372,009
    
    
    $
    118,191
    
    
    $
    
    
    
    $
    490,200Income from equity investments
    
    
    
    
    
    
    8,410
    
    
    
    
    
    
    
    8,410Income from operations
    
    
    42,929
    
    
    
    17,346
    
    
    
    (9,969
    )
    
    
    50,306Depreciation, depletion and
amortization
    
    
    40,151
    
    
    
    14,783
    
    
    
    
    
    
    
    54,934Capital expenditures
    
    
    41,270
    
    
    
    11,356
    
    
    
    
    
    
    
    52,626Operating cost per ton
    
    
    6.21
    
    
    
    15.82Nine months ending September 30, 2003Corporate,Powder River
    
    Western
    
    Other and(Amounts in thousands, except per ton amounts)
    
    Basin
    
    Bituminous
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    291,838
    
    
    $
    77,996
    
    
    $
    
    
    
    $
    369,834Income from equity investments
    
    
    
    
    
    
    17,596
    
    
    
    
    
    
    
    17,596Income from operations
    
    
    37,103
    
    
    
    20,156
    
    
    
    (7,178
    )
    
    
    50,081Depreciation, depletion and
amortization
    
    
    32,201
    
    
    
    14,661
    
    
    
    
    
    
    
    46,862Capital expenditures
    
    
    16,530
    
    
    
    5,867
    
    
    
    
    
    
    
    22,397Operating cost per ton
    
    
    5.55
    
    
    
    15.34Reconciliation of segment income from operations to consolidated income before
income taxes and cumulative effect of accounting change:Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Total segment income from operations
    
    $
    16,318
    
    
    $
    13,598
    
    
    $
    50,306
    
    
    $
    50,081Interest expense
    
    
    (14,061
    )
    
    
    (11,851
    )
    
    
    (39,906
    )
    
    
    (32,408
    )Interest income
    
    
    4,812
    
    
    
    3,426
    
    
    
    12,387
    
    
    
    10,927Other non-operating expense
    
    
    (3,388
    )
    
    
    (3,388
    )
    
    
    (10,162
    )
    
    
    (8,283
    )Income before income taxes and
cumulative effect of accounting
change
    
    $
    3,681
    
    
    $
    1,785
    
    
    $
    12,625
    
    
    $
    20,317
 Note L  Reclassifications Certain amounts in the 2003 financial statements have been reclassified to
conform to the classifications in the 2004 financial statements with no effect
on previously reported net income or members equity. Note M  Subsequent Event On October 22, 2004, the Company issued $250.0 million of 6.75% Senior Notes
due 2013 at a price of 104.75% of par. Interest on the notes is payable on
January 1 and July 1 of each year, beginning on January 1, 2005. The debt
offering was issued under an indenture dated June 25, 2003, to which the
Company previously issued $700.0 million of 6.75% Senior Notes due 2013. The
proceeds from the issuance, net of the underwriters discount and related
expenses, were $256.8 million. The net proceeds will be used primarily to repay
the $100.0 million in borrowings under the Companys term loan facility. The
balance of the net proceeds will be loaned to Arch Coal. 11




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##### Table of Contents



Note N  Supplemental Condensed Consolidating Financial Information In accordance with the indenture governing the Arch Western Finance senior
notes, certain wholly-owned subsidiaries of the Company have fully and
unconditionally guaranteed the senior notes on a joint and several basis. The
following tables present condensed consolidating financial information for (i)
the Company, (ii) the issuer of the senior notes (Arch Western Finance, LLC, a
wholly-owned subsidiary of the Company), (iii) the Companys wholly-owned
subsidiaries (Thunder Basin Coal Company, L.L.C., Mountain Coal Company,
L.L.C., and Arch of Wyoming, LLC), on a combined basis, which are guarantors
under the Notes, and (iv) its majority owned subsidiary (Canyon Fuel Company,
LLC) which is not a guarantor under the Notes. Amounts included in the
following consolidating condensed financial statements for Canyon Fuel
represent amounts recorded by the Company under the equity method of accounting
through July 31, 2004 and amounts consolidated by the Company subsequent to
that date. 12




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##### Table of Contents



ARCH WESTERN RESOURCES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)  (Continued) STATEMENTS OF OPERATIONS Quarter Ended September 30, 2004 Non-Parent
    
    
    
    
    
    Guarantor
    
    GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    
    
    
    $
    
    
    
    $
    171,327
    
    
    $
    37,252
    
    
    $
    
    
    
    $
    208,579Cost of coal sales
    
    
    359
    
    
    
    
    
    
    
    155,641
    
    
    
    35,207
    
    
    
    
    
    
    
    191,207Selling, general and administrative
    
    
    3,816
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,816Amortization of coal supply agreements
    
    
    
    
    
    
    
    
    
    
    1,085
    
    
    
    (1,598
    )
    
    
    
    
    
    
    (513
    )4,175
    
    
    
    
    
    
    
    156,726
    
    
    
    33,609
    
    
    
    
    
    
    
    194,510Income from equity investment
    
    
    18,932
    
    
    
    
    
    
    
    
    
    
    
    1,143
    
    
    
    (18,932
    )
    
    
    1,143Other operating income
    
    
    948
    
    
    
    
    
    
    
    109
    
    
    
    49
    
    
    
    
    
    
    
    1,10619,880
    
    
    
    
    
    
    
    109
    
    
    
    1,192
    
    
    
    (18,932
    )
    
    
    2,249Income from operations
    
    
    15,705
    
    
    
    
    
    
    
    14,710
    
    
    
    4,835
    
    
    
    (18,932
    )
    
    
    16,318Interest expense
    
    
    (13,448
    )
    
    
    (13,372
    )
    
    
    
    
    
    
    
    
    
    
    12,759
    
    
    
    (14,061
    )Interest income primarily from Arch
Coal, Inc.
    
    
    4,812
    
    
    
    12,759
    
    
    
    
    
    
    
    
    
    
    
    (12,759
    )
    
    
    4,812(8,636
    )
    
    
    (613
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,249
    )Other non-operating expense
    
    
    (3,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )Minority interest
    
    
    (2,017
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,017
    )Net income (loss)
    
    $
    1,664
    
    
    $
    (613
    )
    
    $
    14,710
    
    
    $
    4,835
    
    
    $
    (18,932
    )
    
    $
    1,664
 13




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##### Table of Contents



ARCH WESTERN RESOURCES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)  (Continued) STATEMENTS OF OPERATIONS Quarter Ended September 30, 2004 Non-Parent
    
    
    
    
    
    Guarantor
    
    GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    
    
    
    $
    
    
    
    $
    452,948
    
    
    $
    37,252
    
    
    $
    
    
    
    $
    490,200Cost of coal sales
    
    
    2,921
    
    
    
    
    
    
    
    407,329
    
    
    
    35,207
    
    
    
    
    
    
    
    445,457Selling, general and administrative
    
    
    11,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,581Amortization of coal supply agreements
    
    
    
    
    
    
    
    
    
    
    1,280
    
    
    
    (1,598
    )
    
    
    
    
    
    
    (318
    )14,502
    
    
    
    
    
    
    
    408,609
    
    
    
    33,609
    
    
    
    
    
    
    
    456,720Income from equity investment
    
    
    55,923
    
    
    
    
    
    
    
    
    
    
    
    8,410
    
    
    
    (55,923
    )
    
    
    8,410Other operating income
    
    
    6,975
    
    
    
    
    
    
    
    1,392
    
    
    
    49
    
    
    
    
    
    
    
    8,41662,898
    
    
    
    
    
    
    
    1,392
    
    
    
    8,459
    
    
    
    (55,923
    )
    
    
    16,826Income from operations
    
    
    48,396
    
    
    
    
    
    
    
    45,731
    
    
    
    12,102
    
    
    
    (55,923
    )
    
    
    50,306Interest expense
    
    
    (37,996
    )
    
    
    (38,781
    )
    
    
    
    
    
    
    
    
    
    
    36,871
    
    
    
    (39,906
    )Interest income primarily from Arch
Coal, Inc.
    
    
    12,387
    
    
    
    36,871
    
    
    
    
    
    
    
    
    
    
    
    (36,871
    )
    
    
    12,387(25,609
    )
    
    
    (1,910
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,519
    )Other non-operating expense
    
    
    (10,162
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,162
    )Minority interest
    
    
    (2,017
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,017
    )Net income (loss)
    
    $
    10,608
    
    
    $
    (1,910
    )
    
    $
    45,731
    
    
    $
    12,102
    
    
    $
    (55,923
    )
    
    $
    10,608
 14




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##### Table of Contents



ARCH WESTERN RESOURCES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)  (Continued) BALANCE SHEET September 30, 2004 Non-Parent
    
    
    
    
    
    Guarantor
    
    GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    35
    
    
    $
    25
    
    
    $
    
    
    
    $
    60Trade accounts receivable
    
    
    73,407
    
    
    
    
    
    
    
    1,847
    
    
    
    9,566
    
    
    
    
    
    
    
    84,820Other receivables
    
    
    (2
    )
    
    
    
    
    
    
    1,779
    
    
    
    6,002
    
    
    
    
    
    
    
    7,779Inventories
    
    
    
    
    
    
    
    
    
    
    45,622
    
    
    
    26,055
    
    
    
    
    
    
    
    71,677Other current assets
    
    
    1,852
    
    
    
    
    
    
    
    6,066
    
    
    
    10,172
    
    
    
    
    
    
    
    18,090Total current assets
    
    
    75,257
    
    
    
    
    
    
    
    55,349
    
    
    
    51,820
    
    
    
    
    
    
    
    182,426Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    835,824
    
    
    
    255,214
    
    
    
    
    
    
    
    1,091,038Investment in subsidiaries
    
    
    1,346,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,346,421
    )
    
    
    Coal supply agreements
    
    
    
    
    
    
    
    
    
    
    7,459
    
    
    
    
    
    
    
    
    
    
    
    7,459Receivable from Arch Coal, Inc.
    
    
    489,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    489,416Intercompanies
    
    
    (1,160,305
    )
    
    
    695,755
    
    
    
    433,929
    
    
    
    30,621
    
    
    
    
    
    
    
    Other
    
    
    4,975
    
    
    
    13,648
    
    
    
    15,321
    
    
    
    
    
    
    
    
    
    
    
    33,944Total other assets
    
    
    680,507
    
    
    
    709,403
    
    
    
    456,709
    
    
    
    30,621
    
    
    
    (1,346,421
    )
    
    
    530,819Total assets
    
    $
    755,764
    
    
    $
    709,403
    
    
    $
    1,347,882
    
    
    $
    337,655
    
    
    $
    (1,346,421
    )
    
    $
    1,804,283Accounts payable
    
    $
    6,147
    
    
    $
    
    
    
    $
    44,135
    
    
    $
    10,012
    
    
    $
    
    
    
    $
    60,294Accrued expenses
    
    
    3,999
    
    
    
    12,974
    
    
    
    99,106
    
    
    
    7,862
    
    
    
    
    
    
    
    123,941Total current liabilities
    
    
    10,146
    
    
    
    12,974
    
    
    
    143,241
    
    
    
    17,874
    
    
    
    
    
    
    
    184,235Long-term debt
    
    
    100,000
    
    
    
    700,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    800,000Accrued postretirement benefits
other than pension
    
    
    14,921
    
    
    
    
    
    
    
    2,488
    
    
    
    7,767
    
    
    
    
    
    
    
    25,176Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    116,385
    
    
    
    11,313
    
    
    
    
    
    
    
    127,698Accrued workers compensation
    
    
    5,916
    
    
    
    
    
    
    
    1,246
    
    
    
    4,679
    
    
    
    
    
    
    
    11,841Other noncurrent liabilities
    
    
    4,465
    
    
    
    
    
    
    
    5,817
    
    
    
    24,735
    
    
    
    
    
    
    
    35,017Total liabilities
    
    
    135,448
    
    
    
    712,974
    
    
    
    269,177
    
    
    
    66,368
    
    
    
    
    
    
    
    1,183,967Minority interest
    
    
    110,395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,395Redeemable equity interests
    
    
    4,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,913Non-redeemable members equity
    
    
    505,008
    
    
    
    (3,571
    )
    
    
    1,078,705
    
    
    
    271,287
    
    
    
    (1,346,421
    )
    
    
    505,008Total liabilities, redeemable
equity interests and
non-redeemable members
equity
    
    $
    755,764
    
    
    $
    709,403
    
    
    $
    1,347,882
    
    
    $
    337,655
    
    
    $
    (1,346,421
    )
    
    $
    1,804,283
 15




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##### Table of Contents



ARCH WESTERN RESOURCES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)  (Continued) STATEMENT OF CASH FLOWS Nine Months Ended September 30, 2004 Non-Parent
    
    
    
    
    
    Guarantor
    
    GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    ConsolidatedOperating activitiesCash provided by (used in) operating
activities
    
    $
    (95,407
    )
    
    $
    
    
    
    $
    27,125
    
    
    $
    (2,423
    )
    
    $
    (70,705
    )Investing activitiesCapital expenditures
    
    
    
    
    
    
    
    
    
    
    (50,695
    )
    
    
    (1,931
    )
    
    
    (52,626
    )Proceeds from dispositions of capital
assets
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    11
    
    
    
    133Additions to prepaid royalties
    
    
    
    
    
    
    
    
    
    
    (11,688
    )
    
    
    
    
    
    
    (11,688
    )Cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (62,261
    )
    
    
    (1,920
    )
    
    
    (64,181
    )Financing activitiesDebt financing costs
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (225
    )Proceeds on debt
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Transactions with affiliates
    
    
    (4,368
    )
    
    
    
    
    
    
    
    
    
    
    4,368
    
    
    
    Cash provided by financing activities
    
    
    95,407
    
    
    
    
    
    
    
    
    
    
    
    4,368
    
    
    
    99,775Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (35,136
    )
    
    
    25
    
    
    
    (35,111
    )Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    
    
    
    
    35,171
    
    
    
    
    
    
    
    35,171Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    35
    
    
    $
    25
    
    
    $
    60
 16




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##### Table of Contents



ARCH WESTERN RESOURCES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)  (Continued) STATEMENTS OF OPERATIONS Quarter Ended September 30, 2003 Non-Parent
    
    
    
    
    
    Guarantor
    
    GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    
    
    
    $
    
    
    
    $
    127,771
    
    
    $
    
    
    
    $
    
    
    
    $
    127,771Cost of coal sales
    
    
    339
    
    
    
    
    
    
    
    114,942
    
    
    
    
    
    
    
    
    
    
    
    115,281Selling, general and administrative
    
    
    3,106
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,106Amortization of coal supply agreements
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    983,445
    
    
    
    
    
    
    
    115,040
    
    
    
    
    
    
    
    
    
    
    
    118,485Income from equity investment
    
    
    12,819
    
    
    
    
    
    
    
    
    
    
    
    1,392
    
    
    
    (12,819
    )
    
    
    1,392Other operating income
    
    
    2,751
    
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    2,92015,570
    
    
    
    
    
    
    
    169
    
    
    
    1,392
    
    
    
    (12,819
    )
    
    
    4,312Income from operations
    
    
    12,125
    
    
    
    
    
    
    
    12,900
    
    
    
    1,392
    
    
    
    (12,819
    )
    
    
    13,598Interest expense
    
    
    (9,731
    )
    
    
    (12,375
    )
    
    
    (3
    )
    
    
    
    
    
    
    10,258
    
    
    
    (11,851
    )Interest income primarily from Arch
Coal, Inc.
    
    
    2,779
    
    
    
    10,905
    
    
    
    
    
    
    
    
    
    
    
    (10,258
    )
    
    
    3,426(6,952
    )
    
    
    (1,470
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (8,425
    )Other non-operating expense
    
    
    (3,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )Net income (loss)
    
    $
    1,785
    
    
    $
    (1,470
    )
    
    $
    12,897
    
    
    $
    1,392
    
    
    $
    (12,819
    )
    
    $
    1,785
 17




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##### Table of Contents



ARCH WESTERN RESOURCES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)  (Continued) STATEMENTS OF OPERATIONS Nine months ended September 30, 2003 Non-Parent
    
    
    
    
    
    Guarantor
    
    GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCoal sales
    
    $
    
    
    
    $
    
    
    
    $
    369,834
    
    
    $
    
    
    
    $
    
    
    
    $
    369,834Cost of coal sales
    
    
    960
    
    
    
    
    
    
    
    334,767
    
    
    
    
    
    
    
    
    
    
    
    335,727Selling, general and administrative
    
    
    10,547
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,547Amortization of coal supply agreements
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    
    
    
    
    
    
    
    
    29011,507
    
    
    
    
    
    
    
    335,057
    
    
    
    
    
    
    
    
    
    
    
    346,564Income from equity investment
    
    
    51,382
    
    
    
    
    
    
    
    
    
    
    
    17,596
    
    
    
    (51,382
    )
    
    
    17,596Other operating income
    
    
    8,751
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    9,21560,133
    
    
    
    
    
    
    
    464
    
    
    
    17,596
    
    
    
    (51,382
    )
    
    
    26,811Income from operations
    
    
    48,626
    
    
    
    
    
    
    
    35,241
    
    
    
    17,596
    
    
    
    (51,382
    )
    
    
    50,081Interest expense
    
    
    (30,928
    )
    
    
    (13,022
    )
    
    
    (10
    )
    
    
    
    
    
    
    11,552
    
    
    
    (32,408
    )Interest income primarily from Arch
Coal, Inc.
    
    
    10,902
    
    
    
    11,552
    
    
    
    25
    
    
    
    
    
    
    
    (11,552
    )
    
    
    10,927(20,026
    )
    
    
    (1,470
    )
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    (21,481
    )Other non-operating expense
    
    
    (8,283
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,283
    )Income before cumulative effect
    
    
    20,317
    
    
    
    (1,470
    )
    
    
    35,256
    
    
    
    17,596
    
    
    
    (51,382
    )
    
    
    20,317Cumulative effect of accounting change
    
    
    (18,278
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,278
    )Net income (loss)
    
    $
    2,039
    
    
    $
    (1,470
    )
    
    $
    35,256
    
    
    $
    17,596
    
    
    $
    (51,382
    )
    
    $
    2,039
 18




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##### Table of Contents



ARCH WESTERN RESOURCES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)  (Continued) BALANCE SHEET December 31, 2003 Non-Parent
    
    
    
    
    
    Guarantor
    
    GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    35,171
    
    
    $
    
    
    
    $
    
    
    
    $
    35,171Trade accounts receivable
    
    
    48,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,135Other receivables
    
    
    3,061
    
    
    
    
    
    
    
    1,377
    
    
    
    
    
    
    
    
    
    
    
    4,438Inventories
    
    
    
    
    
    
    
    
    
    
    35,830
    
    
    
    
    
    
    
    
    
    
    
    35,830Other current assets
    
    
    2,902
    
    
    
    
    
    
    
    3,793
    
    
    
    
    
    
    
    
    
    
    
    6,695Total current assets
    
    
    54,098
    
    
    
    
    
    
    
    76,171
    
    
    
    
    
    
    
    
    
    
    
    130,269Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    759,872
    
    
    
    
    
    
    
    
    
    
    
    759,872Investment in subsidiaries
    
    
    1,166,270
    
    
    
    
    
    
    
    
    
    
    
    146,180
    
    
    
    (1,166,270
    )
    
    
    146,180Coal supply agreements
    
    
    
    
    
    
    
    
    
    
    4,862
    
    
    
    
    
    
    
    
    
    
    
    4,862Receivable from Arch Coal, Inc.
    
    
    351,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    351,866Intercompanies
    
    
    (1,058,804
    )
    
    
    708,038
    
    
    
    350,766
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    1,050
    
    
    
    14,712
    
    
    
    2,704
    
    
    
    
    
    
    
    
    
    
    
    18,466Total other assets
    
    
    460,382
    
    
    
    722,750
    
    
    
    358,332
    
    
    
    146,180
    
    
    
    (1,166,270
    )
    
    
    521,374Total assets
    
    $
    514,480
    
    
    $
    722,750
    
    
    $
    1,194,375
    
    
    $
    146,180
    
    
    $
    (1,166,270
    )
    
    $
    1,411,515Accounts payable
    
    $
    2,907
    
    
    $
    
    
    
    $
    21,529
    
    
    $
    
    
    
    $
    
    
    
    $
    24,436Accrued expenses
    
    
    8,939
    
    
    
    24,413
    
    
    
    57,126
    
    
    
    
    
    
    
    
    
    
    
    90,478Total current liabilities
    
    
    11,846
    
    
    
    24,413
    
    
    
    78,655
    
    
    
    
    
    
    
    
    
    
    
    114,914Long-term debt
    
    
    
    
    
    
    700,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    700,000Accrued postretirement benefits other than
pension
    
    
    14,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,086Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    91,474
    
    
    
    
    
    
    
    
    
    
    
    91,474Accrued workers compensation
    
    
    6,136
    
    
    
    
    
    
    
    624
    
    
    
    
    
    
    
    
    
    
    
    6,760Other noncurrent liabilities
    
    
    5,776
    
    
    
    
    
    
    
    1,869
    
    
    
    
    
    
    
    
    
    
    
    7,645Total liabilities
    
    
    37,844
    
    
    
    724,413
    
    
    
    172,622
    
    
    
    
    
    
    
    
    
    
    
    934,879Redeemable equity interests
    
    
    4,746
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,746Non-redeemable members equity
    
    
    471,890
    
    
    
    (1,663
    )
    
    
    1,021,753
    
    
    
    146,180
    
    
    
    (1,166,270
    )
    
    
    471,890Total liabilities, redeemable
equity interests and
non-redeemable members
equity
    
    $
    514,480
    
    
    $
    722,750
    
    
    $
    1,194,375
    
    
    $
    146,180
    
    
    $
    (1,166,270
    )
    
    $
    1,411,515
 19




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##### Table of Contents



ARCH WESTERN RESOURCES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)  (Continued) STATEMENT OF CASH FLOWS Nine Months Ended September 30, 2003 Non-Parent
    
    
    
    
    
    Guarantor
    
    GuarantorCompany
    
    Issuer
    
    Subsidiaries
    
    Subsidiaries
    
    ConsolidatedOperating activitiesCash (used
in) provided by operating activities
    
    $
    (29,302
    )
    
    $
    
    
    
    $
    57,374
    
    
    $
    20,719
    
    
    $
    48,791Investing activitiesCapital expenditures
    
    
    
    
    
    
    
    
    
    
    (22,397
    )
    
    
    
    
    
    
    (22,397
    )Proceeds from dispositions of capital
assets
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (22,387
    )
    
    
    
    
    
    
    (22,387
    )Financing activitiesProceeds from issuance of senior notes
    
    
    
    
    
    
    700,000
    
    
    
    
    
    
    
    
    
    
    
    700,000Debt financing costs
    
    
    (16,171
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,171
    )Payments on term debt
    
    
    (675,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (675,000
    )Transactions with affiliates
    
    
    720,719
    
    
    
    (700,000
    )
    
    
    
    
    
    
    (20,719
    )
    
    
    Cash provided by (used in) financing
activities
    
    
    29,548
    
    
    
    
    
    
    
    
    
    
    
    (20,719
    )
    
    
    8,829Increase in cash and cash equivalents
    
    
    246
    
    
    
    
    
    
    
    34,987
    
    
    
    
    
    
    
    35,233Cash and cash equivalents, beginning of
period
    
    
    194
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    249Cash and cash equivalents, end of period
    
    $
    440
    
    
    $
    
    
    
    $
    35,042
    
    
    $
    
    
    
    $
    35,482
 20




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In this quarterly report, statements that are not reported financial results or
other historical information are forward-looking statements. Forward-looking
statements give current expectations or forecasts of future events and are not
guarantees of future performance. They are based on our managements
expectations that involve a number of business risks and uncertainties, any of
which could cause actual results to differ materially from those expressed in
or implied by the forward-looking statements. Forward-looking statements can be identified by the fact that they do not
relate strictly to historic or current facts. They use words such as
anticipate, estimate, project, intend, plan, believe and other
words and terms of similar meaning in connection with any discussion of future
operating or financial performance. In particular, these include statements
relating to:  
    
    our expectation of continued growth in the demand for
our coal by the domestic electric generation industry;
    
    our belief that legislation and regulations relating to
the Clean Air Act and other proposed environmental initiatives
and the relatively higher costs of competing fuels will increase
demand for our compliance and low sulfur coal;
    
    our expectations regarding incentives to generators of
electricity to minimize their fuel costs as a result of electric
utility deregulation;
    
    our expectation that we will continue to have adequate
liquidity from cash flow from operations;
    
    a variety of market, operational, geologic, permitting, labor and weather related factors;
    
    our expectations regarding any synergies to be derived from the Triton acquisition; and
    
    the other risks and uncertainties which are described
below under Contingencies and Certain Trends and
Uncertainties, including, but not limited to, the following:  
    
    A reduction in consumption by the domestic
electric generation industry may cause our profitability to
decline.
    
    Extensive environmental laws and
regulations could cause the volume of our sales to decline.
    
    The coal industry is highly regulated,
which restricts our ability to conduct mining operations
and may cause our profitability to decline.
    
    We may not be able to obtain or renew our surety bonds on acceptable terms.
    
    Unanticipated mining conditions may cause profitability to fluctuate.
    
    Intense competition and excess industry
capacity in the coal producing regions has adversely
affected our revenues and may continue to do so in the
future.
    
    Deregulation of the electric utility
industry may cause customers to be more price-sensitive,
resulting in a potential decline in our profitability.
    
    Our profitability may be adversely affected
by the status of our long-term coal supply contracts.
    
    Decreases in purchases of coal by our
largest customers could adversely affect our revenues.
    
    An unavailability of coal reserves would
cause our profitability to decline.
    
    Disruption in, or increased costs of,
transportation services could adversely affect our
profitability.
    
    Numerous uncertainties exist in estimating
our economically recoverable coal reserves, and
inaccuracies in our estimates could result in lower
revenues, higher costs or decreased profitability.
    
    Title defects or loss of leasehold
interests in our properties could result in unanticipated
costs or an inability to mine these properties.
    
    All acquisitions involve a number of
inherent risks, any of which could cause us not to realize
the benefits anticipated to result.
    
    Some of our agreements limit our ability to
manage our operations exclusively.
    
    Our expenditures for postretirement medical
and pension benefits increased in 2003 and could further
increase in the future. 21




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##### Table of Contents




    
    Any inability to comply with restrictions
imposed by our credit facilities and other debt
arrangements could result in a default under these
agreements.
    
    Our estimated financial results may prove
to be inaccurate. We cannot guarantee that any forward-looking statements will be realized,
although we believe that we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and
assumptions that may prove to be inaccurate. Should known or unknown risks or
uncertainties materialize, or should underlying assumptions prove to be
inaccurate, actual results could vary materially from those anticipated,
estimated or projected. We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise, except as
may be required by law. You are advised, however, to consider any additional
disclosures that we or Arch Coal may make on related subjects in future filings
with the SEC. You should understand that it is not possible to predict or
identify all factors that could cause our actual results to differ.
Consequently, you should not consider any such list to be a complete set of all
potential risks or uncertainties. RESULTS OF OPERATIONS Significant Developments On August 20, 2004, Arch Coal, Inc. (Arch Coal) acquired (1) Vulcan Coal
Holdings, L.L.C., which owns all of the common equity of Triton Coal Company,
LLC (Triton), and (2) all of the preferred units of Triton for a purchase
price of $376.0 million, including transaction costs and subject to working
capital adjustments. Upon acquisition, Arch Coal contributed the assets and
liabilities of Tritons North Rochelle mine (excluding coal reserves) to us.
The contribution results in the integration of the North Rochelle mine with our
existing Black Thunder mine in the Powder River Basin. On July 31, 2004, Arch Coal purchased the 35% interest in Canyon Fuel Company,
LLC (Canyon Fuel) not owned by us. Through July 31, 2004, our interest in
Canyon Fuel was accounted for on the equity method as a result of certain
super-majority voting rights in the Canyon Fuel joint venture agreement. Upon
Arch Coals acquisition of the 35% interest, Canyon Fuels joint venture
agreement was amended to eliminate the super-majority voting rights. As a
result, for periods subsequent to July 31, 2004, we will consolidate 100% of
the results of Canyon Fuel in our financial statements and deduct for Arch
Coals 35% minority interest in Canyon Fuel. Amounts included in the
accompanying condensed consolidated financial statements for Canyon Fuel
represent amounts recorded under the equity method of accounting through July
31, 2004 and amounts consolidated in our financial statements subsequent to
that date. Items Affecting Comparability of Reported Results The comparison of our operating results for the quarter-to-date and
year-to-date periods ending September 30, 2004 and 2003 are affected by the
following significant items: Reclamation fee assessment During the nine months ended September 30, 2004, the Office of Surface Mining
completed an audit of certain of our federal reclamation fee filings for the
period from 1998 through 2003. The audit resulted in an assessment of
additional fees of $1.3 million and interest of $0.2 million. The additional
fees have been recorded as a component of cost of coal sales in the
accompanying Condensed Consolidated Statements of Operations, while the
interest portion has been reflected as interest expense. Severance costs  Skyline Mine During the first quarter of 2004, Canyon Fuel, which was accounted for under
the equity method through July 31, 2004, began the process of idling its
Skyline Mine (the idling process was completed in May 2004), and incurred
severance costs of $3.2 million for the nine months ended September 30, 2004.
Our share of these costs totals $2.1 million and is reflected in income from
equity investments. Expenses resulting from early debt extinguishment and termination of hedge
accounting for interest rate swaps On June 25, 2003, we repaid our term loan with the proceeds from the offering
of senior notes. Prior to the repayment, we had designated certain interest
rate swaps as hedges of the variable rate interest payments due under 22




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##### Table of Contents



the term
loans. Pursuant to the requirements of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133), historical mark-to-market adjustments related to these swaps
through June 25, 2003 were deferred as a component of Accumulated Other
Comprehensive Loss. Subsequent to the repayment of the term loans, these
deferred amounts will be amortized as additional expense over the contractual
terms of the swap agreements. For the three and nine months ending September
30, 2004, we recognized $3.4 million and $10.2 million, respectively, of
expense related to the amortization of previously deferred mark-to-market
adjustments. For the nine months ended September 30, 2003, we recognized $3.6
million related to the amortization of previously deferred mark-to-market
adjustments and $4.7 million of expense related to early debt extinguishment
costs. Mark-To-Market Adjustments We are a party to several interest rate swap agreements that were entered into
in order to hedge the variable rate interest payments due under our term loans.
Subsequent to the repayment of those term loans, the swaps no longer qualify
for hedge accounting under FASB Statement No. 133. As such, changes in the
market value of the swap agreements are recorded as a component of income. For
the three and nine months ending September 30, 2004, we recognized $0.4 million
and $0.7 million, respectively, of income related to the mark-to-market
adjustments on these swap agreements. For the nine months ending September 30,
2003 we recognized $11.6 million of income related to the mark-to-market
adjustments on these swap agreements. Severance Tax Recoveries During the nine months ended September 30, 2003, we were notified by the State
of Wyoming of a favorable ruling as it relates to our calculation of coal
severance taxes. The ruling resulted in a refund of previously paid taxes and
the reversal of previously accrued taxes payable. The impact on the three and
nine months ended September 30, 2003 was a loss of $0.8 million and a gain of
$2.5 million, respectively, which is reflected in cost of coal sales in the
accompanying Condensed Consolidated Statements of Operations. Quarter Ended September 30, 2004, Compared      to
Quarter Ended September 30, 2003 Revenues (Amounts in thousands, except per ton amounts) Three Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Coal sales
    
    $
    208,579
    
    
    $
    127,771
    
    
    $
    80,808
    
    
    
    63.2
    %Tons sold
    
    
    23,556
    
    
    
    17,733
    
    
    
    5,823
    
    
    
    32.8
    %Coal sales realization per ton
    
    $
    8.85
    
    
    $
    7.21
    
    
    $
    1.64
    
    
    
    22.7
    %
 Coal sales.The increase in coal sales resulted from the combination of higher
pricing, increased sales volumes and the effects of the North Rochelle
contribution and the consolidation of Canyon Fuel. Prior to July 31, 2004, coal
sales and tons sold do not include the results of Canyon Fuel. Sales volumes increased in both of our operating regions. The Powder River
Basin volumes increased 25.7%, while Western Bituminous volumes increased 95.8%
for the third quarter of 2004 compared to the third quarter 2003. These
increases were primarily due to additional volumes from the Black Thunder mine
following the contribution of the North Rochelle assets and to the inclusion of
Canyon Fuel volumes. Per ton realizations increased primarily due to higher contract prices in both
regions (a 14.7% increase in the Powder River Basin and an 18.7% increase in
Western Bituminous). The per ton realizations were also partially affected in
the Powder River Basin by contracts that were contributed to us with the North
Rochelle assets and liabilities. These contracts have higher pricing on average
than our historical contracts. 23




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##### Table of Contents



Costs and Expenses (Amounts in thousands, except per ton amounts) Three Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Cost of coal sales
    
    $
    191,207
    
    
    $
    115,281
    
    
    $
    75,926
    
    
    
    65.9
    %Selling, general and administrative
expenses
    
    
    3,816
    
    
    
    3,106
    
    
    
    710
    
    
    
    22.9
    %Amortization of coal supply agreements
    
    
    (513
    )
    
    
    98
    
    
    
    (611
    )
    
    
    (623.5
    %)$
    194,510
    
    
    $
    118,485
    
    
    $
    76,025
    
    
    
    64.2
    %Cost of coal sales per ton sold
    
    $
    8.12
    
    
    $
    6.50
    
    
    $
    1.62
    
    
    
    24.9
    %
 Cost of coal sales.The increase in cost of coal sales is primarily due to the
increase in coal sales revenues discussed above. Specific factors contributing
to the increase are as follows:  
    
    Consolidation of Canyon Fuel added $27.9 million for the months of
August and September 2004.
    
    Excluding Canyon Fuel, production taxes and coal royalties (which
are incurred as a percentage of coal sales realization) increased $11.9
million.
    
    Excluding Canyon Fuel, repairs and maintenance costs increased $7.8
million, and depreciation, depletion and amortization charges increased
$1.6 million due partially to the property additions resulting from the
contribution of North Rochelle during the third quarter of 2004
    
    Poor rail performance continued during the third quarter of 2004,
resulting in missed shipments and disruptions in production.
    
    Higher supply costs, primarily related to explosives (an increase
of $1.5 million) and diesel fuel (an increase of $2.8 million). On a per-ton basis, operating costs (defined as including all mining costs but
excluding pass-through transportation costs) at our Powder River Basin
operations increased from $5.56 per ton in the third quarter of 2003 to $6.53
in the third quarter of 2004. The increase in per ton costs in the Powder River
Basin is due primarily to increased production taxes and coal royalties ($11.6
million, or $0.14 per ton) and repairs and maintenance charges ($7.3 million,
or $0.21 per ton) and to the higher explosives and diesel fuel costs discussed
above. Additionally, average costs were higher due to the integration of the
North Rochelle mine into our Black Thunder mine. Operating cost per ton at our Western Bituminous operations increased to $15.30
per ton in the third quarter 2004 from $14.58 per ton in the third quarter of
2003. The increase in per ton costs is due primarily to increased production
taxes and coal royalties, increased repairs and maintenance costs and
disruptions in production caused by poor rail performance. The consolidation of
Canyon Fuel resulted in lower per ton operating costs as the Canyon Fuel
operations have slightly lower costs as compared to the other Western
Bituminous operations. Other Operating Income (Amounts in thousands) Three Months EndedSeptember 30,

    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Income from equity investments
    
    $
    1,143
    
    
    $
    1,392
    
    
    $
    (249
    )
    
    
    (17.9
    %)Other operating income
    
    
    1,106
    
    
    
    2,920
    
    
    
    (1,814
    )
    
    
    (62.1
    %)$
    2,249
    
    
    $
    4,312
    
    
    $
    (2,063
    )
    
    
    (47.8
    %)
 Other operating income.The decrease in other operating income is due primarily
to a $1.3 million decrease in administrative charges and production payments
received from Canyon Fuel. Upon Arch Coals July 31, 2004 acquisition of the
35% Canyon Fuel interest and the amendment of Canyon Fuels joint venture
agreement, these administrative charges and production payments ceased. 24




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##### Table of Contents



Interest Expense, Net (Amounts in thousands) Three Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Interest expense
    
    $
    14,061
    
    
    $
    11,851
    
    
    $
    2,210
    
    
    
    18.6
    %Interest income,
primarily from Arch
Coal, Inc.
    
    
    (4,812
    )
    
    
    (3,426
    )
    
    
    (1,386
    )
    
    
    40.5
    %$
    9,249
    
    
    $
    8,425
    
    
    $
    824
    
    
    
    9.8
    %
 Interest expense.The increase in interest expense is primarily due to a higher
amount of average borrowings in the third quarter of 2004 as compared to the
third quarter of 2003 as a result of additional debt issued during the current
quarter. The increase in interest expense also results from a higher average
borrowing rate in the third quarter of 2004 as compared to the same period in
2003. Interest income.Our cash transactions are managed by Arch Coal. Cash paid to
or from us that is not considered a distribution or a contribution is recorded
as a receivable from Arch Coal. The receivable balance earns interest from Arch
Coal at the prime interest rate. The increase in interest income results
primarily from an increase in the receivable balance related to the $100.0
million term loan proceeds that were loaned to Arch Coal during the third
quarter 2004. Other non-operating income and expense (Amounts in thousands) Three Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Expenses resulting from early debt
extinguishment and termination of hedge
accounting for interest rate swaps
    
    $
    3,388
    
    
    $
    3,388
    
    
    $
    
    
    
    
    N/A
 Amounts reported as non-operating consist of income or expense resulting from
our financing activities other than interest. As described above, our results
of operations for the quarter ended September 30, 2004 and 2003 include
expenses of $3.4 million for both periods related to the termination of hedge
accounting and resulting amortization of amounts that had previously been
deferred. Net income before cumulative effect of accounting change (Amounts in thousands) Three Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Net income before
cumulative effect of
accounting change
    
    $
    3,681
    
    
    $
    1,785
    
    
    $
    1,896
    
    
    
    106.2
    %
 The increase in net income before cumulative effect of accounting change is due
primarily to increased operating income related to higher coal sales revenues
discussed above. 25




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##### Table of Contents



Nine Months Ended September 30, 2004, Compared      to
Nine Months Ended September 30, 2003 Revenues (Amounts in thousands, except per ton amounts) Nine Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Coal sales
    
    $
    490,200
    
    
    $
    369,834
    
    
    $
    120,366
    
    
    
    32.5
    %Tons sold
    
    
    60,030
    
    
    
    51,037
    
    
    
    8,993
    
    
    
    17.6
    %Coal sales realization per ton
    
    $
    8.17
    
    
    $
    7.25
    
    
    $
    0.92
    
    
    
    12.7
    %
 Coal sales.The increase in coal sales resulted from the combination of higher
pricing, increased sales volumes and the effects of the North Rochelle
contribution and the consolidation of Canyon Fuel. Sales volumes increased in both of our operating regions. The Powder River
Basin volumes increased 16.0%, while Western Bituminous volumes increased 32.5%
for the first nine months of 2004 compared to the first nine months of 2003.
These increases were primarily due to additional volumes from the Black Thunder
mine following the contribution of the North Rochelle assets and to the
inclusion of Canyon Fuel volumes. Per ton realizations increased primarily due to higher contract prices in both
regions (a 9.9% increase in the Powder River Basin and a 14.4% increase in
Western Bituminous). The per ton realizations were also partially affected in
the Powder River Basin by contracts that were contributed to us along with the
North Rochelle assets and liabilities. These contracts have higher pricing on
average than our historical contracts. Costs and Expenses (Amounts in thousands, except per ton amounts) Nine Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Cost of coal sales
    
    $
    445,457
    
    
    $
    335,727
    
    
    $
    109,730
    
    
    
    32.7
    %Selling, general and administrative
expenses
    
    
    11,581
    
    
    
    10,547
    
    
    
    1,034
    
    
    
    9.8
    %Amortization of coal supply agreements
    
    
    (318
    )
    
    
    290
    
    
    
    (608
    )
    
    
    (209.7
    %)$
    456,720
    
    
    $
    346,564
    
    
    $
    110,156
    
    
    
    31.8
    %Cost of coal sales per ton sold
    
    $
    7.42
    
    
    $
    6.58
    
    
    $
    0.84
    
    
    
    12.8
    %
 Cost of coal sales.The increase in cost of coal sales is primarily due to the
increase in coal sales revenues discussed above. Specific factors contributing
to the increase are as follows:  
    
    Consolidation of Canyon Fuel added $27.9 million for the months of
August and September 2004.
    
    Excluding Canyon Fuel, production taxes and coal royalties (which
are incurred as a percentage of coal sales realization) increased $29.4
million.
    
    Excluding Canyon Fuel, repairs and maintenance costs increased $9.8
million, and depreciation, depletion and amortization charges increased
$4.0 million due partially to the property additions resulting from the
contribution of North Rochelle during the third quarter of 2004.
    
    Poor rail performance during the second and third quarters of 2004
resulted in missed shipments and disruptions in production.
    
    Incentive compensation costs increased $2.3 million for amounts
expected to be earned under Arch Coals annual and long-term incentive
plans based on operating results for the nine months ending September
30, 2004.
    
    We experienced higher supply costs, primarily related to explosives
(an increase of $4.1 million) and diesel fuel (an increase of $5.5
million). 26




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##### Table of Contents



On a per-ton basis, operating costs (defined as including all mining costs but
excluding pass-through transportation costs) at our Powder River Basin
increased from $5.55 per ton in the first nine months of 2003 to $6.21 per ton
in the first nine months of 2004. The increase in per ton costs in the Powder
River Basin is due primarily to increased production taxes and coal royalties
($27.7 million, or $0.24 per ton) and repairs and maintenance charges ($10.3
million, or $0.10 per ton) and to the higher explosives and diesel fuel costs
discussed above. Additionally, average costs were higher due to the integration
of the North Rochelle mine into our Black Thunder mine. Operating cost per ton at our Western Bituminous operations increased to $15.82
per ton in the first nine months of 2004 from $15.34 per ton in the first nine
months of 2003. The increase in per ton costs is due primarily to increased
production taxes and coal royalties, increased repairs and maintenance costs
and disruptions in production caused by poor rail performance. The
consolidation of the Canyon Fuel mines in July 2004 resulted in lower per ton
operating costs as the Canyon Fuel operations have slightly lower costs as
compared to our other Western Bituminous operations. Other Operating Income (Amounts in thousands) Nine Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Income from equity investments
    
    $
    8,410
    
    
    $
    17,596
    
    
    ($
    9,186
    )
    
    
    (52.2
    %)Other operating income
    
    
    8,416
    
    
    
    9,215
    
    
    
    (799
    )
    
    
    (8.7
    %)$
    16,826
    
    
    $
    26,811
    
    
    ($
    9,985
    )
    
    
    (37.2
    %)
 Income from equity investment.The decline in income from our equity investment
results from the consolidation of Canyon Fuel in our financial statements
subsequent to July 31, 2004, lower production and sales levels at Canyon Fuel
during the period when we accounted for our investment under the equity method,
and the costs related to idling the Skyline Mine, including the severance costs
noted above. Interest Expense, Net (Amounts in thousands) Nine Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Interest expense
    
    $
    39,906
    
    
    $
    32,408
    
    
    $
    7,498
    
    
    
    23.1
    %Interest income,
primarily from Arch
Coal, Inc.
    
    
    (12,387
    )
    
    
    (10,927
    )
    
    
    (1,460
    )
    
    
    13.4
    %$
    27,519
    
    
    $
    21,481
    
    
    $
    6,038
    
    
    
    28.1
    %
 Interest expense.The increase in interest expense results primarily from a
higher average interest rate in the first nine months of 2004 as compared to
the same period in 2003. In 2004, the Companys outstanding borrowings consist
primarily of fixed rate borrowings, while borrowings in the first half of 2003
were primarily variable rate borrowings. Short-term interest rates in 2003 were
lower than the fixed rate of borrowing that makes up the majority of average
debt balances in 2004. The increase in interest expense also results partly
from a higher amount of average borrowings in the first nine months of 2004 as
compared to the same period in 2003 as a result of additional debt issued late
in the current year-to-date period to help finance the Triton acquisition
discussed above. Interest income.Our cash transactions are managed by Arch Coal. Cash paid to
or from us that is not considered a distribution or a contribution is recorded
as a receivable from Arch Coal. The receivable balance earns interest from Arch
Coal at the prime interest rate. The increase in interest income results
primarily from a higher average receivable balance in the first nine months of
2004 as compared to the same period in 2003. 27




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##### Table of Contents



Other non-operating income and expense (Amounts in thousands) Nine Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Expenses resulting from early debt
extinguishment and termination of hedge
accounting for interest rate swaps
    
    $
    10,162
    
    
    $
    8,283
    
    
    $
    1,879
    
    
    
    22.7
    %
 Amounts reported as non-operating consist of income or expense resulting from
our financing activities other than interest. As described above, our results
of operations for the nine months ended September 30, 2004 include expenses of
$10.2 million related to the termination of hedge accounting and resulting
amortization of amounts that had previously been deferred. The amounts recorded
for the nine months ended September 30, 2003 relate $3.6 million to the
amortization of previously deferred mark-to-market adjustments and $4.7 million
to early debt extinguishment costs. Net income before cumulative effect of accounting change (Amounts in thousands) Nine Months EndedSeptember 30,
    
    Increase (Decrease)2004
    
    2003
    
    $
    
    %Net income before
cumulative effect of
accounting change
    
    $
    12,625
    
    
    $
    20,317
    
    
    $
    (7,692
    )
    
    
    (37.9
    %)
 The decrease in net income before cumulative effect of accounting change is due
primarily to the increase in interest expense, lower income from our equity
investment in Canyon Fuel through July 31, 2004 and to the expenses related to
the termination of hedge accounting described above. Cumulative effect of accounting change Effective January 1, 2003, we adopted FAS 143, which requires legal obligations
associated with the retirement of long-lived assets to be recognized at fair
value at the time the obligations are incurred. Upon initial recognition of a
liability, that cost should be capitalized as part of the related long-lived
asset and allocated to expense over the useful life of the asset. Application
of FAS 143 resulted in a cumulative effect loss as of January 1, 2003 of $18.3
million. DISCLOSURE CONTROLS An evaluation was performed under the supervision and with the participation of
our management, including the CEO and CFO, of the effectiveness of the design
and operation of our disclosure controls and procedures as of June 30, 2004.
Based on that evaluation, our management, including the CEO and CFO, concluded
that the disclosure controls and procedures were effective as of such date.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to
September 30, 2004. RECENT DEVELOPMENTS On October 22, 2004, two of our subsidiaries, Arch Western Finance, LLC and
Arch of Wyoming, LLC, as co-obligors, issued $250 million of 6-3/4% senior
notes due 2013 at a price of 104.75% of par, pursuant to Rule 144A under the
Securities Act of 1933, as amended. The notes form a single series with Arch
Western Finances existing 6-3/4% senior notes due in 2013, except that the new
notes are subject to certain transfer restrictions and are not fully fungible
with the existing notes. The net proceeds of the offering of $256.8 million
were used to repay and retire the outstanding indebtedness under our $100.0
million term loan maturing in 2007 with the remainder loaned to Arch Coal to
repay indebtedness under its revolving credit facility and for general
corporate purposes. OUTLOOK Railroad Transportation Disruptions.During the second and third quarters of
2004, rail service disruptions resulted in missed shipments. In addition, we
were forced to curtail production at the West Elk mine in Colorado and the
Black Thunder mine in Wyoming due to high inventory levels stemming from
insufficient rail service. Inventory 28




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##### Table of Contents



levels increased more than 21% to 9.1
million tons year-to-date. The railroad disruptions, which initially resulted from inadequate staffing at
the railroads, a shortage of equipment and an unexpected increase in overall
rail shipments, improved somewhat during the third quarter. Further improvement
to rail service is expected as the year progresses, although we anticipate
continued challenges in the
fourth quarter. We are working with our customers and the railroads in an
effort to address these issues in a timely manner. LIQUIDITY AND CAPITAL RESOURCES The following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 2004 and 2003: 2004
    
    2003(in thousands)Cash provided by (used in):Operating activities
    
    $
    (70,705
    )
    
    $
    48,791Investing activities
    
    
    (64,181
    )
    
    
    (22,387
    )Financing activities
    
    
    99,775
    
    
    
    8,829
 Cash used in operating activities for the nine months ended September 30, 2004
was $70.7 million, compared to cash provided by operating activities of $48.8
million in the nine months ended September 30, 2003. The decrease is primarily
due to an increase in our receivable from Arch Coal. This receivable balance
increased primarily due to the $100.0 million term loan proceeds that were
loaned to Arch Coal during the third quarter 2004 in order to help finance the
Triton acquisition. This decrease is also a result of increased cash used for
working capital purposes. Trade accounts receivable increased $6.8 million (net
of amounts contributed with the North Rochelle assets) in the first nine months
of 2004 due primarily to higher sales levels during the period, as revenues
have increased approximately 33% in the first nine months of 2004 as compared
to the same period in 2003. Cash used in investing activities for the nine months ended September 30, 2004
consists of capital expenditures of $52.6 million and additions to prepaid
royalties of $11.7 million. Cash used in investing activities for the nine
months ended September 30, 2003 consisted of capital expenditures of $22.4
million. The increase in capital expenditures was primarily at our Black
Thunder Mine, where certain assets were bought out of lease arrangements. Cash provided by financing activities for the nine months ended September 30,
2004 consists almost entirely of the $100.0 million proceeds from our term loan
facility. On August 20, 2004, we borrowed $100.0 million under our term loan
facility in order to help finance Arch Coals acquisition of the North Rochelle
operations from Triton. Cash provided by financing activities for the nine
months ended September 30, 2003 reflects the proceeds from the issuance of
senior notes (which were used to retire existing debt). On June 25, 2003, Arch
Western Finance LLC, a subsidiary of the Company, completed the offering of
$700 million of 6.75% senior notes. The proceeds of the offering were primarily
used to repay Arch Westerns existing term loans. Expenditures for property, plant and equipment were $52.6 million and $22.4
million for the nine months ended September 30, 2004 and 2003, respectively.
Capital expenditures are made to improve and replace existing mining equipment,
expand existing mines, develop new mines and improve the overall efficiency of
mining operations. We estimate that our capital expenditures will be
approximately $81.1 million in total for 2004. This estimate assumes no other
significant expansions of our existing mining operations or additions to our
reserve base. We anticipate that we will fund these capital expenditures with
available cash. We generally satisfy our working capital requirements and fund capital
expenditures and debt-service obligations with cash generated from operations.
We believe that cash generated from operations will be sufficient to meet
working capital requirements, anticipated capital expenditures and scheduled
debt payments for at least the next several years. Our ability to satisfy debt
service obligations and fund planned capital expenditures will depend upon our
future operating performance, which will be affected by prevailing economic
conditions in the coal industry and financial, business and other factors, some
of which are beyond our control. 29




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On August 20, 2004, we borrowed $100.0 million under our term loan facility,
which was established on September 19, 2003. The $100.0 million was loaned to
Arch Coal to help fund the Triton acquisition that occurred on August 20, 2004.
Under the facility, the loan is due in quarterly installments from October 2004
through April 2007. On June 25, 2003, Arch Western Finance completed the offering of $700 million
of senior notes and utilized the proceeds of the offering to repay our existing
term loans. The senior notes bear a fixed rate of interest of 6.75% and are due
in full on July 1, 2013. Interest on the senior notes is payable on January 1
and July 1 each year commencing January 1, 2004. The senior notes are
guaranteed by us and certain of our subsidiaries and are secured by a security
interest in our receivable from Arch Coal. The terms of the senior notes
contain restrictive covenants that limit our ability to, among other things,
incur additional debt, sell or transfer assets, and make investments. The terms of our LLC Agreement provide for a preferred return distribution in
an amount equal to 4% of the preferred capital balance, which was $2.4 million
as of December 31, 2003. Except for the preferred return
distribution, distributions may generally be made at such times and in such
amounts as Arch Coal, as the managing member, determines. We have historically
made no distributions other than the preferred return. We are exposed to market risk associated with interest rates. At September 30,
2004, our outstanding debt was comprised of debt that bore interest at both
fixed and variable rates. We are also exposed to commodity price risk related to our purchase of diesel
fuel. We enter into forward purchase contracts to reduce volatility in the
price of diesel fuel purchased for our operations. The discussion below presents the sensitivity of the market value of the
Companys financial instruments to selected changes in market rates and prices.
The range of changes reflects the Companys view of changes that are reasonably
possible over a one-year period. Market values are the present value of
projected future cash flows based on the market rates and prices chosen. The
major accounting policies for these instruments are described in Note 1 to the
consolidated financial statements of the Company as of and for the year ended
December 31, 2003 as filed on its registration statement on Form S-4 with the
Securities and Exchange Commission. At September 30, 2004, our debt portfolio consisted of both fixed rate and
variable rate debt. Changes in interest rates have different impacts on the
fixed-rate and variable-rate portions of the Companys debt portfolio. A change
in interest rates on the fixed rate debt impacts the net financial instrument
position but has no impact on interest incurred or cash flows. A change in
interest rates on the variable portion of the debt portfolio impacts the
interest incurred and cash flows but does not impact the net financial
instrument position. The sensitivity analysis related to our fixed rate debt
assumes an instantaneous 100-basis point move in interest rates from their
levels at September 30, 2004, with all other variables held constant. A
100-basis point increase in market interest rates would result in a $43.9
million decrease in the fair value of the Companys fixed rate debt at
September 30, 2004. Based on the variable-rate debt included in the Companys
debt portfolio as of September 30, 2004, a 100-basis point increase in interest
rates would result in an annualized additional $1.0 million of interest expense
incurred. CONTRACTUAL OBLIGATIONS We have previously disclosed our contractual obligations as of December 31,
2003. Subsequent to that date, we have incurred additional indebtedness. As of
September 30, 2004, we had outstanding borrowings of $100 million under a term
loan payable from October 2004 through April 2007. Subsequent to September 30,
2004, we issued $250 million of 6.75% Senior Notes. These Senior Notes mature
on July 1, 2013. The proceeds from the Senior Notes were used to retire the
$100 million term loan. 30




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CONTINGENCIES Reclamation The federal Surface Mining Control and Reclamation Act of 1977 (SMCRA) and
similar state statutes require that mine property be restored in accordance
with specified standards and an approved reclamation plan. We accrue for the
costs of reclamation in accordance with the provisions of FAS 143, which was
adopted as of January 1, 2003. These costs relate to reclaiming the pit and
support acreage at surface mines and sealing portals at deep mines. Other costs
of reclamation common to surface and underground mining are related to
reclaiming refuse and slurry ponds, eliminating sedimentation and drainage
control structures, and dismantling or demolishing equipment or buildings used
in mining operations. The establishment of the asset retirement obligation
liability is based upon permit requirements and requires various estimates and
assumptions, principally associated with costs and productivities. We review our entire environmental liability periodically and make necessary
adjustments, including permit changes and revisions to costs and productivities
to reflect current experience. Our management believes it is making adequate
provisions for all expected reclamation and other associated costs. Legal Contingencies We are a party to claims and lawsuits with respect to various matters. We
provide for costs related to contingencies, including environmental matters,
when a loss is probable and the amount is reasonably determinable. After
conferring with counsel, it is the opinion of management that the ultimate
resolution of these claims, to the extent not previously provided for, will not
have a material adverse effect on our consolidated financial condition, results
of operations or liquidity. Certain Trends and Uncertainties Substantial Leverage  Covenants As of September 30, 2004, we had outstanding consolidated indebtedness of $800
million, representing approximately 61% of our capital employed. We also have
significant lease and royalty obligations. Our ability to satisfy our debt,
lease and royalty obligations, and our ability to refinance our indebtedness,
will depend upon our future operating performance, which will be affected by
prevailing economic conditions in the markets that we serve and financial,
business and other factors, many of which are beyond our control. We may be
unable to generate sufficient cash flow from operations and future borrowings
or other financing may be unavailable in an amount sufficient to enable us to
fund our future financial obligations or our other liquidity needs. The amount
and terms of our debt could have material consequences to our business,
including, but not limited to:  
    
    making it more difficult for us to satisfy our debt covenants and
debt service, lease payment and other obligations;
    
    increasing our vulnerability to general adverse economic and
industry conditions;
    
    limiting our ability to obtain additional financing to fund future
acquisitions, working capital, capital expenditures or other general
operating requirements;
    
    reducing the availability of cash flow from operations to fund
acquisitions, working capital, capital expenditures or other general
operating purposes;
    
    limiting our flexibility in planning for, or reacting to, changes
in our business and the industry in which we compete; and
    
    placing us at a competitive disadvantage when compared to
competitors with less relative amounts of debt. The indenture governing our Senior Notes contains covenants that, among other
things, limit our ability and the ability of our subsidiaries to:  
    
    incur more debt;
    
    make distributions;
    
    make investments;
    
    create liens;
    
    issue and sell capital stock of subsidiaries;
    
    sell assets; 31




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
    
    enter into restrictions affecting the ability of restricted
subsidiaries to make distributions, loans or advances to us;
    
    engage in transactions with affiliates;
    
    enter into sale and leasebacks; and
    
    merge or consolidate or transfer and sell assets. These restrictions on operations and financings, as well as those that may be
contained in future debt agreements, may limit our ability to execute preferred
business strategies. Moreover, if operating results fall below current levels,
we may be unable to comply with these covenants. If that occurs, our lenders
could accelerate their debt. Profitability Our mining operations are inherently subject to changing conditions that can
affect levels of production and production costs at particular mines for
varying lengths of time and can result in decreases in our profitability. We

are exposed to commodity price risk related to our purchase of diesel fuel,
explosives and steel. In addition, weather conditions, equipment replacement or
repair, fires, variations in thickness of the layer, or seam, of coal, amounts
of overburden, rock and other natural materials and other geological conditions
have had, and can be expected in the future to have, a significant impact on
our operating results. Prolonged disruption of production at any of our
principal mines, particularly our Black Thunder mine, would result in a
decrease in our revenues and profitability, which could be material. Other
factors affecting the production and sale of our coal that could result in
decreases in our profitability include:  
    
    continued high pricing environment for our raw materials,
including, among other things, diesel fuel, explosives and steel;
    
    expiration or termination of, or sales price redeterminations or
suspension of deliveries under, coal supply agreements;
    
    disruption or increases in the cost of transportation services;
    
    changes in laws or regulations, including permitting requirements;
    
    litigation;
    
    work stoppages or other labor difficulties;
    
    labor shortages;
    
    mine worker vacation schedules and related maintenance activities; and
    
    changes in coal market and general economic conditions. Decreases in our profitability as a result of the factors described above could
adversely impact our financial results. Environmental and Regulatory Factors The coal mining industry is subject to regulation by federal, state and local
authorities on matters such as:  
    
    the discharge of materials into the environment;
    
    employee health and safety;
    
    mine permits and other licensing requirements;
    
    reclamation and restoration of mining properties after mining is completed;
    
    management of materials generated by mining operations;
    
    surface subsidence from underground mining;
    
    water pollution;
    
    legislatively mandated benefits for current and retired coal miners; 32




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
    
    air quality standards;
    
    protection of wetlands;
    
    endangered plant and wildlife protection;
    
    limitations on land use;
    
    storage of petroleum products and substances that are regarded as hazardous under applicable laws; and
    
    management of electrical equipment containing polychlorinated biphenyls, or PCBs. In addition, the electric generating industry, which is the most significant
end-user of coal, is subject to extensive regulation regarding the
environmental impact of its power generation activities, which could affect
demand for our coal. The possibility exists that new legislation or regulations
may be adopted or that the enforcement of existing laws could become more
stringent, either of which may have a significant impact on our mining
operations or our customers ability to use coal and may require us or our
customers to significantly change operations or to incur substantial costs. While it is not possible to quantify the expenditures we incur to maintain
compliance with all applicable federal and state laws, those costs have been
and are expected to continue to be significant. We post performance bonds
pursuant to federal and state mining laws and regulations for the estimated
costs of reclamation and mine closing, including the cost of treating mine
water discharge when necessary. Compliance with these laws has substantially
increased the cost of coal mining for all domestic coal producers. Clean Air Act.The federal Clean Air Act and similar state and local laws,
which regulate emissions into the air, affect coal mining and processing
operations primarily through permitting and emissions control requirements. The
Clean Air Act also indirectly affects coal mining operations by extensively
regulating the emissions from coal-fired industrial boilers and power plants,
which are the largest end-users of our coal. These regulations can take a
variety of forms, as explained below. The Clean Air Act imposes obligations on the Environmental Protection Agency,
or EPA, and the states to implement regulatory programs that will lead to the
attainment and maintenance of EPA-promulgated ambient air quality standards,
including standards for sulfur dioxide, particulate matter, nitrogen oxides and
ozone. Owners of coal-fired power plants and industrial boilers have been
required to expend considerable resources in an effort to comply with these
ambient air standards. Significant additional emissions control expenditures
will be needed in order to meet the current national ambient air standard for
ozone. In particular, coal-fired power plants will be affected by state
regulations designed to achieve attainment of the ambient air quality standard
for ozone. Ozone is produced by the combination of two precursor pollutants:
volatile organic compounds and nitrogen oxides. Nitrogen oxides are a
by-product of coal combustion. Accordingly, emissions control requirements for
new and expanded coal-fired power plants and industrial boilers will continue
to become more demanding in the years ahead. In July 1997, the EPA adopted more stringent ambient air quality standards for
particulate matter and ozone. In a February 2001 decision, the U.S. Supreme
Court largely upheld the EPAs position, although it remanded the EPAs ozone
implementation policy for further consideration. On remand, the Court of
Appeals for the D.C. Circuit affirmed the EPAs adoption of these more
stringent ambient air quality standards. As a result of the finalization of
these standards, states that are not in attainment for these standards will
have to revise their State Implementation Plans to include provisions for the
control of ozone precursors and/or particulate matter. Revised State
Implementation Plans could require electric power generators to further reduce
nitrogen oxide and particulate matter emissions. The potential need to achieve
such emissions reductions could result in reduced coal consumption by electric
power generators. Thus, future regulations regarding ozone, particulate matter
and other pollutants could restrict the market for coal and our development of
new mines. This in turn may result in decreased production and a corresponding
decrease in our revenues. Although the future scope of these ozone and
particulate matter regulations cannot be predicted, future regulations
regarding these and other ambient air standards could restrict the market for
coal and the development of new mines. 33




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The EPA has also
initiated a regional haze program designed to protect and to improve visibility
at and around National Parks, National Wilderness Areas and International
Parks. This program restricts the construction of new coal-fired power plants
whose operation may impair visibility at and around federally protected areas.
Moreover, this program may require certain existing coal-fired power plants to
install additional control measures designed to limit haze-causing emissions,
such as sulfur dioxide, nitrogen oxides and particulate matter. By imposing
limitations upon the placement and construction of new coal-fired power plants,
the EPAs regional haze program could affect the future market for coal. Additionally, the U.S. Department of Justice, on behalf of the EPA, has filed
lawsuits against several investor-owned electric utilities for alleged
violations of the Clean Air Act. The EPA claims that these utilities have
failed to obtain
permits required under the Clean Air Act for alleged major modifications to
their power plants. We supply coal to some of the currently affected utilities,
and it is possible that other of our customers will be sued. These lawsuits
could require the utilities to pay penalties and install pollution control
equipment or undertake other emission reduction measures, which could adversely
impact their demand for coal. New regulations concerning the routine maintenance provisions of the New Source
Review program were published in October 2003. Fourteen states, the District of
Columbia and a number of municipalities filed lawsuits challenging these
regulations, and in December 2003 the Court stayed the effectiveness of these
rules. In January 2004, the EPA Administrator announced that EPA would be
taking new enforcement actions against utilities for violations of the existing
New Source Review requirements, and shortly thereafter, EPA issued enforcement
notices to several electric utility companies. In January 2004, EPA proposed two new rules pursuant to the Clean Air Act that,
once final, may require additional controls and impose more stringent
requirements at coal-fired power generation facilities. First, EPA is seeking
to lower nickel and mercury emissions at new and existing sources by requiring
the use of Maximum Achievable Control Technology (MACT) and by implementing a
nationwide cap and trade program. Second, EPA has proposed to require the
submission of State Implementation Plans by 29 states and the District of
Columbia to include control measures to reduce the emissions of sulfur dioxide
and/or nitrogen oxides, pursuant to the 8-hour ozone standard established
pursuant to the Clean Air Act. Should either or both of these proposed rules
become final, additional costs may be associated with operating coal-fired
power generation facilities that may render coal a less attractive fuel source. Other Clean Air Act programs are also applicable to power plants that use our
coal. For example, the acid rain control provisions of Title IV of the Clean
Air Act require a reduction of sulfur dioxide emissions from power plants.
Because sulfur is a natural component of coal, required sulfur dioxide
reductions can affect coal mining operations. Title IV imposes a two phase
approach to the implementation of required sulfur dioxide emissions reductions.
Phase I, which became effective in 1995, regulated the sulfur dioxide emissions
levels from 261 generating units at 110 power plants and targeted the highest
sulfur dioxide emitters. Phase II, implemented January 1, 2000, made the
regulations more stringent and extended them to additional power plants,
including all power plants of greater than 25 megawatt capacity. Affected
electric utilities can comply with these requirements by:  
    
    burning lower sulfur coal, either exclusively or mixed with higher sulfur coal;
    
    installing pollution control devices such as scrubbers, which reduce the emissions from high sulfur coal;
    
    reducing electricity generating levels; or
    
    purchasing or trading emissions credits. Specific emissions sources receive these credits, which electric utilities and
industrial concerns can trade or sell to allow other units to emit higher
levels of sulfur dioxide. Each credit allows its holder to emit one ton of
sulfur dioxide. 34




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In addition to emissions control requirements designed to control acid rain and
to attain the national ambient air quality standards, the Clean Air Act also
imposes standards on sources of hazardous air pollutants. Although these
standards have not yet been extended to coal mining operations, the EPA
recently announced that it will regulate hazardous air pollutants from
coal-fired power plants. Under the Clean Air Act, coal-fired power plants will
be required to control hazardous air pollution emissions by no later than 2009.
These controls are likely to require significant new improvements in controls
by power plant owners. The most prominently targeted pollutant is mercury,
although other by-products of coal combustion may be covered by future
hazardous air pollutant standards for coal combustion sources. Other proposed initiatives may have an effect upon coal operations. One such
proposal is the Bush Administrations recently announced Clear Skies
Initiative. As proposed, this initiative is designed to reduce emissions of
sulfur dioxide, nitrogen oxides, and mercury from power plants. Other so-called
multi-pollutant bills, which could regulate additional air pollutants, have
been proposed by various members of Congress. While the details of all of these
proposed initiatives vary, there appears to be a movement towards increased
regulation of a number of air pollutants. Were such initiatives enacted into
law, power plants could choose to shift away from coal as a fuel source to meet
these requirements. Mine Health and Safety Laws.Stringent safety and health standards have been
imposed by federal legislation since the adoption of the Mine Safety and Health
Act of 1969. The Mine Safety and Health Act of 1977, which significantly
expanded the enforcement of health and safety standards of the Mine Safety and
Health Act of 1969, imposes comprehensive safety and health standards on all
mining operations. In addition, as part of the Mine Safety
and Health Acts of 1969 and 1977, the Black Lung Act requires payments of
benefits by all businesses conducting current mining operations to coal miners
with black lung and to some survivors of a miner who dies from this disease. Surface Mining Control and Reclamation Act.SMCRA establishes operational,
reclamation and closure standards for all aspects of surface mining as well as
many aspects of deep mining. SMCRA requires that comprehensive environmental
protection and reclamation standards be met during the course of and upon
completion of mining activities. In conjunction with mining the property, we
are contractually obligated under the terms of our leases to comply with all
laws, including SMCRA and equivalent state and local laws. These obligations
include reclaiming and restoring the mined areas by grading, shaping, preparing
the soil for seeding and by seeding with grasses or planting trees for use as
pasture or timberland, as specified in the approved reclamation plan. SMCRA also requires us to submit a bond or otherwise financially secure the
performance of our reclamation obligations. The earliest a reclamation bond can
be completely released is five years after reclamation has been achieved.
Federal law and some states impose on mine operators the responsibility for
repairing the property or compensating the property owners for damage occurring
on the surface of the property as a result of mine subsidence, a consequence of
longwall mining and possibly other mining operations. In addition, the
Abandoned Mine Lands Act, which is part of SMCRA, imposes a tax on all current
mining operations, the proceeds of which are used to restore mines closed
before 1977. The maximum tax is $0.35 per ton of coal produced from surface
mines and $0.15 per ton of coal produced from underground mines. Framework Convention on Global Climate Change.The United States and more than
160 other nations are signatories to the 1992 Framework Convention on Global
Climate Change, commonly known as the Kyoto Protocol, that is intended to limit
or capture emissions of greenhouse gases such as carbon dioxide and methane.
The U.S. Senate has neither ratified the treaty commitments, which would
mandate a reduction in U.S. greenhouse gas emissions, nor enacted any law
specifically controlling greenhouse gas emissions and the Bush Administration
has withdrawn support for this treaty. Nonetheless, future regulation of
greenhouse gases could occur either pursuant to future U.S. treaty obligations
or pursuant to statutory or regulatory changes under the Clean Air Act. Efforts
to control greenhouse gas emissions could result in reduced demand for coal if
electric power generators switch to lower carbon sources of fuel. Comprehensive Environmental Response, Compensation and Liability Act.CERCLA
and similar state laws affect coal mining operations by, among other things,
imposing cleanup requirements for threatened or actual releases of hazardous
substances that may endanger public health or welfare or the environment. Under
CERCLA and similar state laws, joint and several liability may be imposed on
waste generators, site owners and lessees and others regardless of fault or the
legality of the original disposal activity. Although the EPA excludes most
wastes generated by coal mining and processing operations from the hazardous
waste laws, such wastes can, in certain circumstances, 35




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constitute hazardous
substances for the purposes of CERCLA. In addition, the disposal, release or
spilling of some products used by coal companies in operations, such as
chemicals, could implicate the liability provisions of the statute. Thus, coal
mines that we currently own or have previously owned or operated, and sites to
which we sent waste materials, may be subject to liability under CERCLA and
similar state laws. In particular, we may be liable under CERCLA or similar
state laws for the cleanup of hazardous substance contamination at sites where
we own surface rights. Mining Permits and Approvals.Mining companies must obtain numerous permits
that strictly regulate environmental and health and safety matters in
connection with coal mining, some of which have significant bonding
requirements. In connection with obtaining these permits and approvals, we may
be required to prepare and present to federal, state or local authorities data
pertaining to the effect or impact that any proposed production of coal may
have upon the environment. The requirements imposed by any of these
authorities may be costly and time consuming and may delay commencement or
continuation of mining operations. Regulations also provide that a mining
permit can be refused or revoked if an officer, director or a shareholder with
a 10% or greater interest in the entity is affiliated with another entity that
has outstanding permit violations. Thus, past or ongoing violations of federal
and state mining laws could provide a basis to revoke existing permits and to
deny the issuance of additional permits. Regulatory authorities exercise considerable discretion in the timing of permit
issuance. Also, private individuals and the public at large possess rights to
comment on and otherwise engage in the permitting process, including through
intervention in the courts. Accordingly, the permits we need for our mining
operations may not be issued, or, if issued, may not be issued in a timely
fashion, or may involve requirements that may be changed or interpreted in a
manner which restricts our ability to conduct our mining operations or to do so
profitably. Under the federal Clean Water Act, state regulatory authorities
must conduct an antidegradation review before approving permits for the
discharge of pollutants into waters that have been designated by the state as
high quality. This review involves public and intergovernmental scrutiny of
permits and requires permittees to demonstrate that the proposed activities are
justified in order to accommodate significant economic or social development in
the area where the waters are located. If the plaintiffs are successful, the
exemption from the antidegradation review policy is revoked and we
discharge into waters designated as high quality by the state, the cost, time
and difficulty associated with obtaining and complying with Clean Water Act
permits for our affected surface mining operations would increase and may
hinder our ability to conduct such operations profitably. In order to obtain mining permits and approvals from state regulatory
authorities, mine operators, including us, must submit a reclamation plan for
restoring, upon the completion of mining operations, the mined property to its
prior condition, productive use or other permitted condition. Typically we
submit the necessary permit applications several months before we plan to begin
mining a new area. In our experience, permits generally are approved several
months after a completed application is submitted. In the past, we have
generally obtained our mining permits without significant delay. However, we
cannot be sure that we will not experience difficulty in obtaining mining
permits in the future. Future legislation and administrative regulations may emphasize the protection
of the environment and, as a consequence, the activities of mine operators,
including us, may be more closely regulated. Legislation and regulations, as
well as future interpretations of existing laws, may also require substantial
increases in equipment expenditures and operating costs, as well as delays,
interruptions or the termination of operations. We cannot predict the possible
effect of such regulatory changes. Under some circumstances, substantial fines and penalties, including revocation
or suspension of mining permits, may be imposed under the laws described above.
Monetary sanctions and, in severe circumstances, criminal sanctions may be
imposed for failure to comply with these laws. Surety Bonds.Federal and state laws require us to obtain surety bonds to
guarantee performance or payment of certain long-term obligations including
mine closure and reclamation costs, federal and state workers compensation
benefits, coal leases and other miscellaneous obligations. It has become
increasingly difficult for us to secure new surety bonds or retain existing
bonds without the posting of collateral. In addition, surety bond costs have
increased and the market terms of such bonds have generally become more
unfavorable. We may be unable to maintain our surety bonds or acquire new bonds
in the future due to lack of availability, higher expense, unfavorable market
terms, or an inability to post sufficient collateral. Our failure to maintain,
or inability to acquire, surety bonds that are required by state and federal
law would have a material adverse impact on us. 36




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Endangered Species.The federal Endangered Species Act and counterpart state
legislation protects species threatened with possible extinction. Protection of
endangered species may have the effect of prohibiting or delaying us from
obtaining mining permits and may include restrictions on timber harvesting,
road building and other mining or agricultural activities in areas containing
the affected species. A number of species indigenous to our properties are
protected under the Endangered Species Act. Based on the species that have been
identified to date and the current application of applicable laws and
regulations, however, we do not believe there are any species protected under
the Endangered Species Act that would materially and adversely affect our
ability to mine coal from our properties in accordance with current mining
plans. Other Environmental Laws Affecting Us.We are required to comply with numerous
other federal, state and local environmental laws in addition to those
previously discussed. These additional laws include, for example, the Resource
Conservation and Recovery Act, the Safe Drinking Water Act, the Toxic Substance
Control Act and the Emergency Planning and Community Right-to-Know Act. We
believe that we are in substantial compliance with all applicable environmental
laws. Competition The coal industry is intensely competitive, primarily as a result of the
existence of numerous producers in the coal-producing regions in which we
operate, and some of our competitors may have greater financial resources. We
compete with several major and smaller coal producers. Additionally, we are
subject to the continuing risk of reduced profitability as a result of excess
industry capacity and weak power demand by the industrial sector of the
economy, which led us to reduce the rate of coal production from planned levels
and adversely impacted our profitability. Electric Industry Factors; Customer Creditworthiness Demand for coal and the prices that we will be able to obtain for our coal are
closely linked to coal consumption patterns of the domestic electric generation
industry, which has accounted for approximately 90% of domestic coal
consumption in recent years. These coal consumption patterns are influenced by
factors beyond our control, including the demand for electricity (which is
dependent to a significant extent on summer and winter temperatures and the
strength of the economy); government regulation; technological developments and
the location, availability, quality and price of competing sources of coal;
other fuels such as natural gas, oil and nuclear; and alternative energy
sources such as hydroelectric power. Demand for our low-sulfur coal and the
prices that we will be able to obtain for
it will also be affected by the price and availability of high-sulfur coal,
which can be marketed in tandem with emissions allowances in order to meet
federal Clean Air Act requirements. Any reduction in the demand for our coal by
the domestic electric generation industry may cause a decline in profitability. Electric utility deregulation is expected to provide incentives to generators
of electricity to minimize their fuel costs and is believed to have caused
electric generators to be more aggressive in negotiating prices with coal
suppliers. Deregulation may have a negative effect on our profitability to the
extent it causes our customers to be more cost-sensitive. In addition, our ability to receive payment for coal sold and delivered depends
on the creditworthiness of our customers. In general, the creditworthiness of
our customers has deteriorated. If such trends continue, our acceptable
customer base may be limited. Terms of Long-Term Coal Supply Contracts We sell a substantial portion of our coal under long-term coal supply
agreements, which are contracts with a term greater than 12 months. The prices
for coal shipped under these contracts may be below the current market price
for similar type coal at any given time. For the nine months ended September
30, 2004, the weighted average price of coal sold under our long-term contracts
was $8.36 per ton. As a consequence of the substantial volume of our sales
which are subject to these long-term agreements, we have less coal available
with which to capitalize on stronger coal prices if and when they arise. In
addition, because long-term contracts typically allow the customer to elect
volume flexibility, our ability to realize the higher prices that may be
available on the spot market may be restricted when customers elect to purchase
higher volumes under such contracts. Our exposure to market-based pricing may
also be increased should customers elect to purchase fewer tons. In addition,
the increasingly short terms of sales contracts and the consequent absence of
price adjustment provisions in such contracts make it more likely that we will
not be able to recover inflation related increases in mining costs during the
contract term. 37




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Reserve Depletion Our profitability depends substantially on our ability to mine coal reserves
that have the geological characteristics that enable them to be mined at
competitive costs. Replacement reserves may not be available when required or,
if available, may not be capable of being mined at costs comparable to those
characteristic of the depleting mines. We have in the past acquired and will in
the future acquire, coal reserves for our mine portfolio from third parties. We
may not be able to accurately assess the geological characteristics of any
reserves that we acquire, which may adversely affect our profitability and
financial condition. Potential Fluctuations in Operating Results  Factors Routinely Affecting
Results of Operations Our mining operations are inherently subject to changing conditions that can
affect levels of production and production costs at particular mines for
varying lengths of time and can result in decreases in profitability. Weather
conditions, equipment replacement or repair, fuel and supply prices, insurance
costs, fires, variations in coal seam thickness, amounts of overburden rock and
other natural materials, and other geological conditions have had, and can be
expected in the future to have, a significant impact on operating results. A
prolonged disruption of production at any of our principal mines, particularly
the Black Thunder mine in Wyoming, would result in a decrease, which could be
material, in our revenues and profitability. Other factors affecting the production and sale of our coal that could result
in decreases in profitability include: (i) expiration or termination of, or
sales price redeterminations or suspension of deliveries under, coal supply
agreements; (ii) disruption or increases in the cost of transportation
services; (iii) changes in laws or regulations, including permitting
requirements; (iv) litigation; (v) work stoppages or other labor difficulties;
(vi) mine worker vacation schedules and related maintenance activities; and
(vii) changes in coal market and general economic conditions. Transportation The coal industry depends on rail, trucking and barge transportation to deliver
shipments of coal to customers, and transportation costs are a significant
component of the total cost of supplying coal. Disruption or insufficient
availability of these transportation services could temporarily impair our
ability to supply coal to customers and thus adversely affect our business and
the results of our operations. In addition, increases in transportation costs
associated with our coal, or increases in our transportation costs relative to
transportation costs for coal produced by our competitors or of other fuels,
could adversely effect our business and results of operations. Reserves  Title; Leasehold Interests We base our reserve information on geological data assembled and analyzed by
our staff, which includes various engineers and geologists, and periodically
reviewed by outside firms. The reserve estimates are annually updated to
reflect production of coal from the reserves and new drilling or other data
received. There are numerous uncertainties inherent in estimating quantities of
recoverable reserves, including many factors beyond our control. Estimates of
economically recoverable coal reserves and net cash flows necessarily depend
upon a number of variable factors and assumptions, such as geological and
mining conditions which may not be fully identified by available exploration
data or may differ from experience in current operations, historical production
from the area compared with production from other producing areas, the assumed
effects of regulation by governmental agencies, and assumptions concerning coal
prices, operating costs, severance and excise taxes, development costs, and
reclamation costs, all of which may cause estimates to vary considerably from
actual results. For these reasons, estimates of the economically recoverable quantities
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of net cash flows expected
therefrom, prepared by different engineers or by the same engineers at
different times, may vary substantially. Actual coal tonnage recovered from
identified reserve areas or properties, and revenues and expenditures with
respect to our reserves, may vary from estimates, and such variances may be
material. These estimates thus may not accurately reflect our actual reserves. Most of our mining operations are conducted on properties we lease. The loss of
any lease could adversely affect our ability to develop the associated
reserves. Because title to most of our leased properties and mineral rights is
not usually verified until we have made a commitment to develop a property,
which may not occur until after we have 38




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obtained necessary permits and
completed exploration of the property, our right to mine certain of our
reserves may be adversely affected if defects in title or boundaries exist. In
order to obtain leases or mining contracts to conduct mining operations on
property where these defects exist, we have had to, and may in the future have
to, incur unanticipated costs. In addition, we may not be able to successfully
negotiate new leases or mining contracts for properties containing additional
reserves or maintain our leasehold interests in properties on which mining
operations are not commenced during the term of the lease. Acquisitions We continually seek to expand our operations and coal reserves in the regions
in which we operate through acquisitions of businesses and assets, including
leases of coal reserves. Acquisition transactions inherent risks, such as:  
    
    uncertainties in assessing the value, strengths, weaknesses,
contingent and other liabilities and potential profitability of
acquisition or other transaction candidates;
    
    the potential loss of key personnel of an acquired business;
    
    the ability to achieve identified operating and financial synergies
anticipated to result from an acquisition or other transaction;
    
    problems that could arise from the integration of the acquired
business;
    
    unanticipated changes in business, industry or general economic
conditions that affect the assumptions underlying the acquisition or
other transaction rationale; and
    
    unexpected development costs, such as those related to the
development of the Little Thunder reserves, that adversely affect our
profitability. Any one or more of these factors could cause us not to realize the benefits
anticipated to result from the acquisition of businesses or assets. Post Retirement Benefits We estimate our future postretirement medical and pension benefit obligations
based on various assumptions, including:  
    
    actuarial estimates;
    
    assumed discount rates;
    
    estimates of mine lives;
    
    expected returns on pension plan assets; and
    
    changes in health care costs. Based on changes in our assumptions, our annual postretirement health and
pension benefit costs increased by approximately $1.2 million in 2003. If our
assumptions relating to these benefits change in the future, our costs could
further increase, which would reduce our profitability. In addition, future
regulatory and accounting changes relating
to these benefits could result in increased obligations or additional costs,
which could also have a material adverse effect on our financial results. Certain Contractual Arrangements The agreement under which we were formed provides that Arch Western Acquisition
Corporation, as managing member, generally has exclusive power and authority to
conduct, manage and control our business. However, consent of BP p.l.c., our
other member would generally be required in the event that we propose to make a
distribution, incur indebtedness, sell properties or merge or consolidate with
any other entity if, at such time, we have a debt rating less favorable than
specified ratings with Moodys Investors Service or Standard & Poors or fail
to meet specified indebtedness and interest ratios. The membership interests in Canyon Fuel, which operates three coal mines in
Utah, were owned 65% by us and 35% by a subsidiary of ITOCHU Corporation of
Japan until July 30, 2004 when Arch Coal acquired ITOCHUs 35% interest in
Canyon Fuel. The agreement that governed the management and operations of
Canyon Fuel prior to July 30, 2004 provided for a management board to manage
its business and affairs. Some major business decisions 39




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concerning Canyon Fuel
required the vote of 70% of the membership interests and therefore limited our
ability to make these decisions. These decisions include admission of
additional members; approval of annual business plans; the making of
significant capital expenditures; sales of coal below specified prices;
agreements between Canyon Fuel and any member; the institution or settlement of
litigation; a material change in the nature of Canyon Fuels business or a
material acquisition; the sale or other disposition, including by merger, of
assets other than in the ordinary course of business; incurrence of
indebtedness; the entering into of leases; and the selection and removal of
officers. The Canyon Fuel agreement also contained various restrictions on the
transfer of membership interests in Canyon Fuel. 40




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is contained under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations in this report and is incorporated herein by reference. 
 ITEM 4. CONTROLS AND PROCEDURES The information required by this Item is contained under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations in this report and is incorporated herein by reference. 
 PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The information required by this Item is contained in the Contingencies 
Legal Contingencies section of Managements Discussion and Analysis of
Financial Condition and Results of Operations in this report and is
incorporated herein by reference. 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES Nothing to report under this item. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Nothing to report under this item. 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing to report under this item. 
 ITEM 5. OTHER INFORMATION Nothing to report under this item. 
 ITEM 6. EXHIBITS Exhibits required to be furnished by Item 601 of Regulation S-K are listed
below. The Company may have omitted certain exhibits in accordance with Item
601(b)(4)(iii)(A) of Regulation S-K. The Company agrees to furnish such
documents to the Commission upon request. Documents not designated as being
incorporated herein by reference are filed herewith. The exhibit numbers below
correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 41




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3.1
    
    Certificate of Formation (incorporated herein by reference to Exhibit 3.3 to
the Form S-4 (File No. 333-107569) filed on August 1, 2003 by Arch Western
Finance, LLC, Arch Western Resources, LLC, Arch of Wyoming, LLC, Mountain
Coal Company, L.L.C., and Thunder Basin Coal Company, L.L.C.).3.2
    
    Limited Liability Company Agreement (incorporated herein by reference to
Exhibit 3.4 to the Form S-4 (File No. 333-107569) filed on August 1, 2003 by
Arch Western Finance, LLC, Arch Western Resources, LLC, Arch of Wyoming, LLC,
Mountain Coal Company, L.L.C., and Thunder Basin Coal Company, L.L.C.).4.1
    
    Indenture, dated June 25, 2003, by and among Arch Western Finance, LLC, Arch
Western Resources, LLC, Arch of Wyoming, LLC, Mountain Coal Company, L.L.C.
Thunder Basin Coal Company, L.L.C. and The Bank of New York, as trustee
(incorporated herein by reference to Exhibit 4.1 to the Form S-4 (File No.
333-107569) filed on August 1, 2003 by Arch Western Finance, LLC, Arch
Western Resources, LLC, Arch of Wyoming, LLC, Mountain Coal Company, L.L.C.,
and Thunder Basin Coal Company, L.L.C.).4.2
    
    First Supplemental Indenture, dated October 22, 2004, by and among Arch
Western Finance, LLC, Arch Western Resources, LLC, Arch Western Bituminous
Group, LLC, Arch of Wyoming, LLC, Mountain Coal Company, L.L.C., Thunder
Basin Coal Company, L.L.C., Triton Coal Company, LLC and The Bank of New
York, as trustee (incorporated herein by reference to Exhibit 4.4 to the
Current Report on Form 8-K filed by Arch Coal, Inc. and Arch Western
Resources, LLC on October 23, 2004).4.3
    
    Form of 6 3/4% Senior Notes due 2013 (included in Exhibit 4.1).4.4
    
    Form of Guarantee of 6 3/4% Senior Notes due 2013 (included in Exhibit 4.1).4.5
    
    Registration Rights Agreement, dated October 22, 2004, among Arch Coal, Inc.,
Arch Western Resources, LLC, Arch Western Finance, LLC, Triton Coal Company,
LLC, Arch Western Bituminous Group, LLC, Arch of Wyoming, LLC, Mountain Coal
Company, L.L.C. and Thunder Basin Coal Company, L.L.C. and Citigroup Global
Markets Inc., J.P. Morgan Securities Inc. and Morgan Stanley & Co.
Incorporated, as representatives of the initial purchasers named therein
(incorporated herein by reference to Exhibit 4.1 to the Current Report on
Form 8-K filed by Arch Coal, Inc. and Arch Western Resources, LLC on October
23, 2004).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.32.1
    
    Certification of Principal Executive Officer Relating to a Periodic Report
Containing Financial Statements.*32.2
    
    Certification of Principal Financial Officer Relating to a Periodic Report
Containing Financial Statements.* *The Exhibit attached to this Form 10-Q shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934 (the Exchange
Act) or otherwise subject to liability under the section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of
1933, as amended, or the Exchange Act, except as expressly set forth by
specific reference in such filing. 42




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ARCH WESTERN RESOURCES, LLC(Registrant)Date: November 12, 2004
    
    /s/ ROBERT J. MESSEYRobert J. MesseyVice President(Chief Accounting Officer)
 43