===============================================================================
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                FORM 10-K/A
                              AMENDMENT NO. 1
            Annual Report Pursuant to Section 13 or 15(d) of the
                      Securities Exchange Act of 1934

                            FOR THE FISCAL YEAR
                          ENDED SEPTEMBER 30, 1999
                           Commission file number
                                  1-2918

                                ASHLAND INC.
                          (a Kentucky corporation)

                           I.R.S. No. 61-0122250
                        50 E. RiverCenter Boulevard
                               P. O. Box 391
                       Covington, Kentucky 41012-0391

                      Telephone Number: (606) 815-3333

              Securities Registered Pursuant to Section 12(b):

                                                     Name of each exchange
         Title of each class                          on which registered
         -------------------                         ---------------------
Common Stock, par value $1.00 per share           New York Stock Exchange
                                                   and Chicago Stock Exchange
Rights to Purchase Series A Participating         New York Stock Exchange
  Cumulative Preferred Stock                       and Chicago Stock Exchange

           Securities Registered Pursuant to Section 12(g): None

               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 [X] No [ ]

               Indicate by check mark if disclosure  of  delinquent  filers
         pursuant to Item 405 of Regulation  S-K is not  contained  herein,
         and will not be contained,  to the best of Registrant's knowledge,
         in definitive  proxy or  information  statements  incorporated  by
         reference  in Part III of this Form 10-K or any  amendment to this
         Form 10-K. [ ]

               At November 30, 1999,  based on the New York Stock  Exchange
         closing price,  the aggregate market value of voting stock held by
         non-affiliates of the Registrant was approximately $2,394,294,188.
         In  determining  this  amount,  the  Registrant  has assumed  that
         directors and executive  officers are affiliates.  Such assumption
         shall not be deemed conclusive for any other purpose.

               At  November  30,  1999,  there  were  71,290,693  shares of
         Registrant's common stock outstanding.

                    Documents Incorporated by Reference

               Portions of Registrant's  Annual Report to Shareholders  for
         the fiscal  year ended  September  30,  1999 are  incorporated  by
         reference into Parts I and II.

               Portions of Registrant's  definitive Proxy Statement for its
         January 27, 2000 Annual Meeting of Shareholders  are  incorporated
         by reference into Part III.

===============================================================================
<PAGE>
                             EXPLANATORY NOTE

         This  amendment  to the Annual  Report on Form 10-K for the fiscal
year ended September 30, 1999 of Ashland Inc. ("Ashland") is being filed to
include the audited financial  statements of Marathon Ashland Petroleum LLC
("MAP")  for the  fiscal  year  ended  December  31,  1999 and the  audited
financial  statements of Arch Coal, Inc. ("Arch") for the fiscal year ended
December 31, 1999 as required by Rule 3-09 of Regulation S-X. Ashland has a
38% equity  interest in MAP and a 58% equity  interest in Arch and accounts
for these investments using the equity method of accounting.  In accordance
with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the
text of the amended item is set forth in its entirety in the pages attached
hereto.

         A consent of  PricewaterhouseCoopers  LLP, independent accountants
for MAP, and a consent of Ernst & Young LLP, independent auditors for Arch,
are being filed as exhibits hereto.

<PAGE>

ITEM 14. EXHIBITS,  FINANCIAL  STATEMENT  SCHEDULES AND REPORTS ON FORM 8-K
     (a)  Documents  filed  as part of this Report

     (1) and (2)  Financial Statements and Financial Schedule

         The consolidated  financial  statements and financial  schedule of
         Ashland  presented or incorporated by reference in this report are
         listed in the index on Page 20.

         Audited  financial  statements of Marathon Ashland  Petroleum LLC.
         Financial  statement  schedules  are omitted  because they are not
         applicable  as  the  required  information  is  contained  in  the
         applicable financial statements or notes thereto.

         Audited financial statements and schedule of Arch Coal, Inc.

     (3) Exhibits

         3.1 -    Second Restated  Articles of  Incorporation of Ashland,
                  as  amended to January  30,  1998  (filed as Exhibit 3 to
                  Ashland's  Form 10-Q for the quarter  ended  December 31,
                  1997 and incorporated herein by reference).
         3.2 -    By-laws of  Ashland,  as amended  to January  28,  1999
                  (filed  as  Exhibit  3.2 to  Ashland's  Form 10-Q for the
                  quarter ended December 31, 1998 and  incorporated  herein
                  by reference).
         4.1 -    Ashland agrees to provide the SEC, upon request, copies
                  of   instruments   defining  the  rights  of  holders  of
                  long-term debt of Ashland and all of its subsidiaries for
                  which consolidated or unconsolidated financial statements
                  are required to be filed with the SEC.
         4.2 -    Indenture,  dated as of August 15, 1989, as amended and
                  restated  as of August  15,  1990,  between  Ashland  and
                  Citibank,  N.A.,  as Trustee  (filed as  Exhibit  4(a) to
                  Ashland's  Form 10-K for the fiscal year ended  September
                  30, 1991 and incorporated herein by reference).
         4.3 -    Rights  Agreement,  dated as of May 16,  1996,  between
                  Ashland Inc. and Harris Trust and Savings Bank,  together
                  with Form of Right  Certificate  (filed as Exhibits  4(a)
                  and 4(c), respectively,  to Ashland's Form 8-A filed with
                  the  SEC on May  16,  1996  and  incorporated  herein  by
                  reference).

     The following  Exhibits 10.1 through 10.16 are  compensatory  plans or
arrangements  or  management  contracts  required  to be filed as  exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.

         10.1 -   Amended  Stock  Incentive  Plan for Key  Employees  of
                  Ashland Inc. and its Subsidiaries.
         10.2 -   Ashland   Inc.   Deferred   Compensation   Plan   for
                  Non-Employee Directors.
         10.3 -   Tenth  Amended and Restated  Ashland Inc.  Supplemental
                  Early Retirement Plan for Certain Employees.
         10.4 -   Ashland  Inc.  Incentive  Compensation  Plan  (filed as
                  Exhibit 10.6 to  Ashland's  Form 10-K for the fiscal year
                  ended  September  30,  1993 and  incorporated  herein  by
                  reference).
         10.5 -   Ashland Inc. Salary Continuation Plan (filed as Exhibit
                  10(c).11 to Ashland's Form 10-K for the fiscal year ended
                  September 30, 1988 and incorporated herein by reference).
         10.6 -   Form of  Ashland  Inc.  Executive  Employment  Contract
                  between  Ashland Inc. and certain  executive  officers of
                  Ashland.
         10.7 -   Form of Indemnification  Agreement between Ashland Inc.
                  and each  member  of its  Board of  Directors  (filed  as
                  Exhibit  10(c).13 to  Ashland's  Form 10-K for the fiscal
                  year ended September 30, 1990 and incorporated  herein by
                  reference).

<PAGE>

         10.8 -   Ashland Inc.  Nonqualified  Excess Benefit Pension Plan
                  (filed as Exhibit  10.11 to  Ashland's  Form 10-K for the
                  fiscal year ended  September  30,  1998 and  incorporated
                  herein by reference).
         10.9 -   Ashland Inc. Long-Term Incentive Plan.
         10.10-   Ashland Inc. Directors' Charitable Award Program (filed
                  as Exhibit  10.13 to  Ashland's  Form 10-K for the fiscal
                  year ended September 30, 1996 and incorporated  herein by
                  reference).
         10.11-   Ashland Inc. 1993 Stock Incentive Plan.
         10.12-   Ashland  Inc.  1995  Performance  Unit  Plan  (filed as
                  Exhibit 10.2 to Ashland's Form 10-Q for the quarter ended
                  December 31, 1998 and incorporated herein by reference).
         10.13-   Ashland  Inc.  Incentive  Compensation  Plan  for  Key
                  Executives.
         10.14-   Ashland Inc. Deferred Compensation Plan.
         10.15-   Ashland  Inc.  1997  Stock  Incentive  Plan  (filed as
                  Exhibit 10.18 to Ashland's  Form 10-K for the fiscal year
                  ended  September  30,  1998 and  incorporated  herein  by
                  reference).
         10.16-   Retirement  Agreement with Michael D. Rose, director of
                  Ashland.
         10.17-   Amended  and  Restated   Limited   Liability   Company
                  Agreement of Marathon  Ashland  Petroleum LLC dated as of
                  December 31, 1998.
         10.18-   Put/Call,  Registration Rights and Standstill Agreement
                  as amended  to  December  31,  1998  among  Marathon  Oil
                  Company,  USX  Corporation,  Ashland  Inc.  and  Marathon
                  Ashland Petroleum.
         11   -   Computation of Earnings Per Share (appearing on Page 41
                  of Ashland's Annual Report to Shareholders,  incorporated
                  by reference herein,  for the fiscal year ended September
                  30, 1999).
         12   -   Computation  of Ratios of Earnings to Fixed Charges and
                  Earnings to Combined  Fixed Charges and  Preferred  Stock
                  Dividends.
         13   -   Portions of Ashland's  Annual  Report to  Shareholders,
                  incorporated  by  reference  herein,  for the fiscal year
                  ended September 30, 1999.
         21   -   List of subsidiaries.
         23.1 -   Consent of Ernst & Young LLP.
         23.2 -   Consent of PricewaterhouseCoopers LLP.
         23.3 -   Consent of Ernst & Young LLP.
         24   -   Power of Attorney,  including  resolutions of the Board
                  of Directors.
         27   -   Financial  Data  Schedule  for the  fiscal  year ended
                  September 30, 1999.

     Upon written or oral  request,  a copy of the above  exhibits  will be
     furnished  at cost.

     (b)  Reports on Form 8-K
     A report  on Form 8-K was  filed on  September  29,  1999 to  announce
certain events relating to Ashland's tender offer for Superfos a/s.

     A report on Form 8-K was filed on October 6, 1999 to  announce  that a
tax-free  spin-off  would  be  Ashland's  preferred   alternative  for  its
investment  in Arch Coal.  The report also noted that  Ashland is reviewing
its alternatives with respect to a change in its ownership in MAP.

     A report on Form 8-K was filed on October 12,  1999 to  announce  that
shareholders  representing  more than 90% of the share  capital of Superfos
a/s  accepted  Ashland's  September  27, 1999 offer and that  Ashland  will
implement the tender offer.

<PAGE>
                                 SIGNATURES

         Pursuant to the  requirements  of the  Securities  Exchange Act of
1934,  the  registrant  has duly caused this  Amendment to be signed on its
behalf by the undersigned thereunto duly authorized.

                                          ASHLAND INC.
                                        ---------------------
                                          (Registrant)



Date:    March 21, 2000                 /s/ David L. Hausrath
                                        ------------------------------------
                                        Name: David L. Hausrath
                                        Title:   Vice President and
                                                 General Counsel
<PAGE>
              MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES

                 AUDITED CONSOLIDATED FINANCIAL STATEMENTS

                             December 31, 1999

                                  CONTENTS
<TABLE>
<CAPTION>

                                                                                                                           Page

<S>                                                                                                                         <C>
REPORT OF INDEPENDENT ACCOUNTANTS:                                                                                          1

CONSOLIDATED FINANCIAL STATEMENTS:

     CONSOLIDATED STATEMENT OF OPERATIONS --------------------------------------------------------------------              2
     CONSOLIDATED BALANCE SHEET ------------------------------------------------------------------------------              3
     CONSOLIDATED STATEMENT OF CASH FLOWS --------------------------------------------------------------------              4
     CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL --------------------------------------------------------------              5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

     NOTE A     -  BUSINESS DESCRIPTION AND BASIS OF PRESENTATION --------------------------------------------              6
     NOTE B     -  SUMMARY OF PRINCIPAL ACCOUNTING POLICIES --------------------------------------------------              6
     NOTE C     -  NEW ACCOUNTING STANDARD -------------------------------------------------------------------              8
     NOTE D     -  RELATED PARTY TRANSACTIONS ----------------------------------------------------------------              8
     NOTE E     -  REVENUES ----------------------------------------------------------------------------------              9
     NOTE F     -  OTHER ITEMS -------------------------------------------------------------------------------              9
     NOTE G     -  PENSIONS AND OTHER POSTRETIREMENT BENEFITS ------------------------------------------------              9
     NOTE H     -  INCOME TAXES ------------------------------------------------------------------------------             11
     NOTE I     -  INVENTORIES -------------------------------------------------------------------------------             12
     NOTE J     -  INVESTMENTS AND LONG-TERM RECEIVABLES -----------------------------------------------------             12
     NOTE K     -  PROPERTY, PLANT AND EQUIPMENT -------------------------------------------------------------             13
     NOTE L     -  LONG-TERM DEBT ----------------------------------------------------------------------------             13
     NOTE M     -  SUPPLEMENTAL CASH FLOW INFORMATION --------------------------------------------------------             14
     NOTE N     -  LEASES ------------------------------------------------------------------------------------             14
     NOTE O     -  DERIVATIVE INSTRUMENTS --------------------------------------------------------------------             14
     NOTE P     -  FAIR VALUE OF FINANCIAL INSTRUMENTS -------------------------------------------------------             16
     NOTE Q     -  CONTINGENCIES AND COMMITMENTS -------------------------------------------------------------             16

</TABLE>

<PAGE>

PRICEWATERHOUSECOOPERS
                                                 PricewaterhouseCoopers LLP
                                                           600 Grant Street
                                                       Pittsburgh PA  15219
                                                   Telephone (412) 355-6000


                     REPORT OF INDEPENDENT ACCOUNTANTS


February 8, 2000

To the Board of Managers of
Marathon Ashland Petroleum LLC

In our opinion, the accompanying consolidated balance sheet and the related
consolidated  statements  of  operations,  cash flows and members'  capital
present  fairly,  in all  material  respects,  the  financial  position  of
Marathon Ashland  Petroleum LLC and its subsidiaries  (MAP) at December 31,
1999 and 1998, and the results of their operations and their cash flows for
the years then ended, in conformity with  accounting  principles  generally
accepted  in  the  United  States.   These  financial  statements  are  the
responsibility  of MAP's  management;  our  responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards  generally
accepted in the United  States,  which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining,  on a test
basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing  the  accounting  principles  used  and  significant
estimates  made  by  management,   and  evaluating  the  overall  financial
statement  presentation.  We believe  that our audits  provide a reasonable
basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

<PAGE>


CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in Millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                                             Year Ended December 31
                                                                                ----------------------------------------------
                                                                                      1999                         1998
                                                                                -----------------           ------------------
<S>                                                                             <C>                         <C>
REVENUES:

       Sales - Note E                                                           $         20,256            $          19,202
       Dividend and affiliate income                                                          18                           13
       Gain (loss) on disposal of assets                                                      (3)                           6
       Other income                                                                           22                           20
                                                                                -----------------           ------------------

              Total revenues                                                              20,293                       19,241
                                                                                -----------------           ------------------

COSTS AND EXPENSES:

       Cost of sales (excludes items shown below) - Note E                                14,921                       13,743
       Selling, general and administrative expenses                                          369                          387
       Depreciation and amortization                                                         283                          275
       Taxes other than income taxes - Note E                                              4,098                        3,929
       Inventory market valuation charge (credit) - Note I                                  (552)                         269
                                                                                -----------------           ------------------

              Total costs and expenses                                                    19,119                       18,603
                                                                                -----------------           ------------------

INCOME FROM OPERATIONS:                                                                    1,174                          638
Net interest and other financial income - Note F                                               5                           17
                                                                                -----------------           ------------------

INCOME BEFORE INCOME TAXES:                                                                1,179                          655
Provision for estimated income taxes - Note H                                                  2                            1
                                                                                -----------------           ------------------

NET INCOME                                                                      $          1,177            $             654
                                                                                =================           ==================

</TABLE>







The accompanying notes are an integral part of these consolidated financial
statements.

                                     2
<PAGE>


CONSOLIDATED BALANCE SHEET (Dollars in Millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                                                   December 31
                                                                                ----------------------------------------------
                                                                                      1999                         1998
                                                                                -----------------           ------------------
<S>                                                                             <C>                         <C>
ASSETS:
       Current assets:

              Cash and cash equivalents, including amounts invested
                    with related parties of $0 and $272 - Note D                $             38            $             272
              Receivables, less allowance for doubtful accounts of $3
                    and $3                                                                 1,135                          911
              Inventories - Note I                                                         1,820                        1,264
              Related party receivables - Note D                                              39                           35
              Other current assets                                                            41                           82
                                                                                -----------------           ------------------
                           Total current assets                                            3,073                        2,564

       Investments and long-term receivables - Note J                                        108                          110
       Long-term related party receivables - Note D                                           --                            6
       Property, plant and equipment - net - Note K                                        3,711                        3,525
       Prepaid pensions - Note G                                                              --                           44
       Other noncurrent assets                                                                89                           81
                                                                                -----------------           ------------------

                           Total assets                                         $          6,981            $           6,330
                                                                                =================           ==================

LIABILITIES:
       Current liabilities:

              Accounts payable                                                  $          1,914            $           1,427
              Accounts payable to related parties - Note D                                    33                           13
              Distribution payable to related parties - Note D                                --                          272
              Payroll and benefits payable                                                    79                          118
              Accrued taxes                                                                   33                           35
              Long-term debt due within one year - Note L                                      7                           --
                                                                                -----------------           ------------------
                           Total current liabilities                                       2,066                        1,865

       Long-term debt - Note L                                                                15                            7
       Long-term deferred income taxes - Note H                                                3                            3
       Employee benefits - Note G                                                            258                          250
       Deferred credits and other liabilities                                                 26                           22
                                                                                -----------------           ------------------

                           Total liabilities                                               2,368                        2,147
                                                                                -----------------           ------------------

MEMBERS' CAPITAL (details on page 5)
       Members' contributed capital                                             $          4,218            $           4,188
       Retained earnings                                                                     395                           --
       Accumulated other comprehensive income (loss)                                          --                           (5)
                                                                                -----------------           ------------------
                           Total members' capital                                          4,613                        4,183
                                                                                -----------------           ------------------

                           Total liabilities and members' capital               $          6,981            $           6,330
                                                                                =================           ==================


</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.

                                     3
<PAGE>


CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                                             Year Ended December 31
                                                                                ----------------------------------------------
                                                                                      1999                         1998
                                                                                -----------------           ------------------
<S>                                                                             <C>                         <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

OPERATING ACTIVITIES:

Net income                                                                      $          1,177            $             654
Adjustments to reconcile to net cash provided from
       operating activities:
       Depreciation and amortization                                                         283                          275
       Inventory market valuation charge (credit)                                           (552)                         269
       Pensions and other postretirement benefits                                             44                           22
       Deferred income taxes                                                                  (1)                          (2)
       (Gain) loss on disposal of assets                                                       3                           (6)
       Changes in:
              Current receivables                                                           (468)                         194
              Inventories                                                                    (41)                         (19)
              Current accounts payable and accrued expenses                                  752                         (126)
              Net receivables and payables with related parties                               22                           28
       All other - net                                                                        38                          (69)
                                                                                -----------------           ------------------
              Net cash provided from operating activities                                  1,257                        1,220
                                                                                -----------------           ------------------

INVESTING ACTIVITIES:

Capital expenditures                                                                        (597)                        (400)
Disposal of assets                                                                           162                           16
Property exchange trust    - deposit                                                          (4)                          --
                           - withdrawal                                                        2                           --
Affiliates - investments                                                                      --                          (22)
           - repayments of advances                                                           --                            1
                                                                                -----------------           ------------------
       Net cash used in investing activities                                                (437)                        (405)
                                                                                -----------------           ------------------

FINANCING ACTIVITIES:

Revolving credit facilities - borrowings                                                     386                           --
                            - repayments                                                    (386)                          --
Debt   - additions                                                                            --                            1
       - repayments                                                                           --                          (24)
Member distributions                                                                      (1,054)                        (555)
                                                                                -----------------           ------------------
       Net cash used in financing activities                                              (1,054)                        (578)
                                                                                -----------------           ------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                        (234)                         237

Cash and cash equivalents at beginning of year                                               272                           35
                                                                                -----------------           ------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                        $             38            $              272
                                                                                =================           ==================

</TABLE>

See Note M for supplemental cash flow information.

The accompanying notes are an integral part of these consolidated financial
statements.

                                     4
<PAGE>


CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL (Dollars in Millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                 Members' Capital                  Comprehensive Income
                                                                    Year Ended                          Year Ended
                                                                    December 31                         December 31
                                                          -------------------------------     --------------------------------
                                                              1999               1998             1999               1998
                                                          -------------     -------------     -------------     --------------
<S>                                                       <C>               <C>               <C>               <C>
MEMBERS' CONTRIBUTED CAPITAL:

       Balance at beginning of year                       $      4,188      $      4,361
       Member contributions                                         30                --
       Distribution to members                                      --              (173)
                                                          -------------     -------------
       Balance at end of year                                    4,218             4,188
                                                          -------------     -------------

RETAINED EARNINGS:

       Balance at beginning of year                                 --                --
       Net income                                                1,177               654      $      1,177      $         654
       Distributions to members                                   (782)             (654)
                                                          -------------     -------------
       Balance at end of year                                      395                --
                                                          -------------     -------------

ACCUMULATED OTHER  COMPREHENSIVE  INCOME (LOSS):
       Minimum pension liability adjustments:

              Balance at beginning of year                          (5)               (4)
              Changes during the year                                5                (1)                5                 (1)
                                                          -------------     -------------     -------------     --------------
              Balance at end of year                                --                (5)
                                                          -------------     -------------

              TOTAL COMPREHENSIVE INCOME                                                      $      1,182      $         653
                                                                                              =============     ==============

TOTAL MEMBERS' CAPITAL                                    $      4,613      $      4,183
                                                          =============     =============


</TABLE>




The accompanying notes are an integral part of these consolidated financial
statements.


                                     5

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES

NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

On  December  12, 1997  Marathon  Oil Company  (Marathon),  a wholly  owned
subsidiary of USX  Corporation  (USX),  entered into an Asset  Transfer and
Contribution  Agreement  with  Ashland  Inc.  (Ashland)  providing  for the
formation of Marathon  Ashland  Petroleum LLC (MAP).  Effective  January 1,
1998, Marathon contributed substantially all of its refining, marketing and
transportation (RM&T) operations to MAP. Also, on January 1, 1998, Marathon
acquired  certain  RM&T net  assets  from  Ashland  in  exchange  for a 38%
interest in MAP.  The purchase  price was  determined  to be $1.9  billion,
based upon an external  valuation.  The acquisition of Ashland's net assets
was accounted for under the purchase method of accounting.

In connection with the formation of MAP,  Marathon and Ashland entered into
a Limited  Liability  Company  Agreement (LLC  Agreement)  dated January 1,
1998.  The LLC Agreement  provides for an initial term expiring on December
31,  2022 (25 years from its  formation).  The term will  automatically  be
extended  for ten-year  periods,  unless a  termination  notice is given by
either party.

Also in connection  with the  formation of MAP, the parties  entered into a
Put/Call,  Registration  Rights  and  Standstill  Agreement  (the  Put/Call
Agreement). The Put/Call Agreement provides that at any time after December
31, 2004,  Ashland will have the right to sell to Marathon all of Ashland's
ownership  interest in MAP,  for an amount in cash  and/or  Marathon or USX
debt or  equity  securities  equal to the  product  of 85%  (90% if  equity
securities  are  used)  of the  fair  market  value  of MAP at  that  time,
multiplied by Ashland's  percentage  interest in MAP. Payment could be made
at closing,  or at Marathon's  option, in three equal annual  installments,
the first of which would be payable at closing.  At any time after December
31,  2004,  Marathon  will  have the  right to  purchase  all of  Ashland's
ownership  interests  in MAP, for an amount in cash equal to the product of
115% of the fair market value of MAP at that time,  multiplied by Ashland's
percentage interest in MAP.

In 1999, MAP recorded capital  contributions  from Marathon and Ashland for
environmental improvements of $2 million and $28 million, respectively. The
LLC  Agreement  stipulates  that  ownership  interest  in MAP  will  not be
adjusted as a result of such contributions.

MAP is engaged in petroleum  supply,  refining,  marketing & transportation
operations  and  includes   Speedway   SuperAmerica  LLC,  a  wholly  owned
subsidiary,  which  operates  retail  outlets for  petroleum  products  and
merchandise.  In  addition,  MAP,  through  its  wholly  owned  subsidiary,
Marathon  Ashland  Pipe Line  LLC,  is  actively  engaged  in the  pipeline
transportation of crude oil and petroleum products.

In the second quarter of 1999, MAP sold Scurlock Permian LLC, its crude oil
gathering  business,  to Plains Marketing,  L.P. for $137 million. In 1999,
MAP recorded a pretax loss of $16 million related to the sale.

On December 10, 1999, MAP finalized the transaction  with Ultramar  Diamond
Shamrock ("UDS") to purchase 178 UDS owned and operated  convenience stores
and 5 product  terminals.  In addition,  MAP was assigned supply  contracts
with UDS  branded  jobbers  who  supply  242  branded  jobber  stations  in
Michigan.  This  transaction was accounted for under the purchase method of
accounting.

NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

PRINCIPLES APPLIED IN CONSOLIDATION - The consolidated financial statements
include the accounts of MAP and the  majority-owned  subsidiaries  which it
controls. Investments in undivided interest pipelines are consolidated on a
pro  rata  basis.   Investments  in  other  entities  over  which  MAP  has
significant  influence  are  accounted  for  using  the  equity  method  of
accounting  and are  carried at MAP's  share of net assets  plus  advances.
Investments  in companies  whose stocks have no readily  determinable  fair
value are carried at cost.

USE  OF  ESTIMATES  -  Generally  accepted  accounting  principles  require
management  to make  estimates  and  assumptions  that affect the  reported
amounts of assets and liabilities,  the disclosure of contingent assets and
liabilities  at year-end and the reported  amounts of revenues and expenses
during  the  year.   Significant   items  subject  to  such  estimates  and
assumptions  include the carrying  value of  long-lived  assets;  valuation
allowances for  receivables  and  inventories;  environmental  liabilities,
liabilities for potential tax deficiencies and potential  litigation claims
and settlements;  and assets and obligations  related to employee benefits.
Additionally,  certain  estimated  liabilities are recorded when management
commits  to a plan to close an  operating  facility  or to exit a  business
activity.  Actual  results could differ from the estimates and  assumptions
used.



                                     6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued

REVENUE  RECOGNITION - Revenues  principally  include  sales,  dividend and
affiliate income and gains or losses on the disposal of assets.

Sales are recognized  when products are shipped or services are provided to
customers.  Consumer excise taxes on petroleum products and merchandise and
matching crude oil and refined products  buy/sell  transactions  settled in
cash are included in both revenues and costs and  expenses,  with no effect
on income.

Dividend and affiliate income includes MAP's  proportionate share of income
from equity method  investments and dividend income from other investments.
Dividend income is recognized when dividend payments are received.

When  long-lived  assets  depreciated  on an  individual  basis are sold or
otherwise  disposed of, any gains or losses are reflected in income.  Gains
on disposal of  long-lived  assets are  recognized  when  earned,  which is
generally at the time of closing.  If a loss on disposal is expected,  such
losses are recognized  when  long-lived  assets are  reclassified as assets
held for sale. Proceeds from disposal of long-lived assets depreciated on a
group basis are credited to accumulated  depreciation and amortization with
no immediate effect on income.

CASH AND CASH EQUIVALENTS - Cash and cash equivalents  include cash on hand
and on deposit and  investments  with related parties in highly liquid debt
instruments  with  maturities  of  three  months  or  less.  See Note D for
information regarding investments with related parties.

INVENTORIES - Inventories  are carried at lower of cost or market.  Cost of
inventories is determined  primarily  under the last-in,  first-out  (LIFO)
method.

DERIVATIVE INSTRUMENTS - MAP uses commodity-based derivative instruments to
manage its exposure to price risk. Management is authorized to use futures,
forwards,  swaps and options  related to the purchase or sale of crude oil,
refined  products and natural gas. While MAP's risk  management  activities
generally  reduce market risk exposure due to unfavorable  commodity  price
changes for raw material  purchases and products sold,  such activities can
also encompass strategies which assume price risk.

     COMMODITY-BASED  HEDGING  TRANSACTIONS - For transactions that qualify
     for hedge  accounting,  the resulting gains or losses are deferred and
     subsequently  recognized in income from operations,  as a component of
     sales or cost of sales, in the same period as the underlying  physical
     transaction.  To qualify for hedge  accounting,  derivative  positions
     cannot  remain open if the  underlying  physical  market risk has been
     removed.  If such derivative  positions remain in place, they would be
     marked-to-market  and accounted  for as trading and other  activities.
     Recorded  deferred gains or losses are reflected  within other current
     and  noncurrent  assets or accounts  payable and deferred  credits and
     other liabilities, as appropriate.

     COMMODITY-BASED  TRADING AND OTHER ACTIVITIES - Derivative instruments
     used for trading and other  activities  are  marked-to-market  and the
     resulting  gains or losses are recognized in the current period within
     income  from  operations.  This  category  also  includes  the  use of
     derivative  instruments  that have no offsetting  underlying  physical
     market risk.

LONG-LIVED   ASSETS  -  Property,   plant  and  equipment  are  depreciated
principally  by  the  straight-line   method.   Expenditures  for  refinery
turnarounds are expensed  ratably in the calendar year in which they occur.
MAP evaluates  impairment of its assets on an individual  asset basis or by
logical groupings of assets.  Assets deemed to be impaired are written down
to their fair value,  including  any  related  goodwill,  using  discounted
future cash flows and, if available, comparable market values.

ENVIRONMENTAL   LIABILITIES  -  MAP  provides  for  remediation  costs  and
penalties when the  responsibility  to remediate is probable and the amount
of associated costs is reasonably  determinable.  Generally,  the timing of
remediation  accruals  coincides with completion of a feasibility  study or
the  commitment  to a formal plan of action.  Remediation  liabilities  are
accrued  based on  estimates of known  environmental  exposure and could be
discounted in certain  instances.  If recoveries of remediation  costs from
third parties are probable, a receivable is recorded.

INSURANCE - MAP is insured for  catastrophic  casualty and certain property
and business interruption  exposures, as well as those risks required to be
insured by law or contract.  Costs  resulting  from  noninsured  losses are
charged against income upon occurrence.

INCOME TAXES - MAP is a limited liability  company,  and therefore,  except
for several small subsidiary  corporations,  is not subject to U.S. federal
income  taxes.  Accordingly,  the  taxable  income or loss  resulting  from
operations of MAP is ultimately included in




                                     7
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued

the U.S.  federal income tax returns of USX and Ashland.  MAP is,  however,
subject to income taxes in certain state, local and foreign jurisdictions.

RECLASSIFICATIONS  - Certain  reclassifications  of prior  year's data have
been made to conform to 1999 classifications.

NOTE C - NEW ACCOUNTING STANDARD

In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial   Accounting   Standards  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities"  (SFAS No.  133).  This new  Standard
requires  recognition of all derivatives as either assets or liabilities at
fair  value.  SFAS No.  133 may  result in  additional  volatility  in both
current  period  earnings  and  other  comprehensive  income as a result of
recording  recognized  and  unrecognized  gains and losses  resulting  from
changes  in the  fair  value  of  derivative  instruments.  The  transition
adjustment  resulting  from  adoption of SFAS No. 133 will be reported as a
cumulative effect of a change in accounting principle.

Under the new Standard,  MAP may elect not to designate certain  derivative
instruments as hedges even if the strategy  qualifies for hedge  accounting
treatment.  This approach would eliminate the administrative  effort needed
to measure  effectiveness  and  monitor  such  instruments;  however,  this
approach  also may  result  in  additional  volatility  in  current  period
earnings.

MAP  cannot  reasonably  estimate  the  effect of  adoption  on either  the
financial position or results of operations. It is not possible to estimate
what  effect  this  Statement  will have on future  results of  operations,
although greater period-to-period  volatility is likely. MAP plans to adopt
the Standard effective January 1, 2001.

NOTE D - RELATED PARTY TRANSACTIONS

MAP sales in 1999 and 1998 to Ashland and its affiliates  were $198 million
and $185 million,  respectively;  and sales to USX and its affiliates  were
$50 million and $10 million,  respectively.  MAP purchases in 1999 and 1998
from  Ashland  and its  affiliates  totaled  $6  million  and $18  million,
respectively;  and  purchases  from  USX and its  affiliates  totaled  $297
million  and $284  million,  respectively.  Such  transactions  were in the
ordinary   course  of  business  and  included  the   purchase,   sale  and
transportation of crude oil and petroleum products. These transactions were
conducted under terms comparable to those with unrelated parties.

During the years ended  December  31, 1999 and 1998,  Ashland and  Marathon
provided  computer,  treasury,  accounting,  internal  auditing  and  legal
services  and  facilities  to MAP.  Billings to MAP for these  services and
facilities  for the years ended  December  31,  1999 and 1998 from  Ashland
totaled  $19  million and $27  million,  respectively.  Billings to MAP for
these  services and  facilities  for the years ended  December 31, 1999 and
1998 from USX and its  affiliates  totaled  $47  million  and $83  million,
respectively.

As of December 31, 1999 and 1998,  related party  receivables  included $26
million and $22  million,  respectively,  of accounts  receivable  due from
Ashland  and its  affiliates;  and  accounts  payable  to  related  parties
included $2 million and $3  million,  respectively,  due to Ashland and its
affiliates.  As of December 31, 1999 and 1998,  related  party  receivables
included $13 million and $13 million,  respectively, of accounts receivable
due from USX and its  affiliates;  and accounts  payable to related parties
included  $31 million  and $10  million,  respectively,  due to USX and its
affiliates.

As of  December  31,  1998,  the  distribution  payable to related  parties
included $169 million due to Marathon and $103 million due to Ashland.

In connection with the formation of MAP, certain Marathon debt was assigned
to MAP. Marathon agreed to reimburse MAP for this debt and related interest
expense.  During  1998,  Marathon  reimbursed  MAP  $24  million  for  debt
repayments.  Long-term  related  party  receivables  at  December  31, 1998
included  $6  million   due  from   Marathon   for  future   debt   payment
reimbursements.  The  current  related  party  receivable  from USX and its
affiliates  at December 31, 1999  included $6 million due from Marathon for
future debt payment reimbursements.

A revolving  credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon  (collectively  the Lenders) and MAP (Borrower).  This
agreement  provides  that the Lenders  may loan to the  Borrower up to $500
million at defined  short-term market rates. At December 31, 1999 and 1998,
there were no borrowings  against this facility.  During 1999, MAP borrowed
and repaid $386 million under this revolving credit facility.



                                     8


<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE D - RELATED PARTY TRANSACTIONS - Continued

On November 16, 1998,  MAP entered  into  agreements  with USX and Ashland,
which  allow MAP to invest its  surplus  cash  balances on a daily basis at
competitive  interest  rates with USX and Ashland in proportion up to their
ownership interests in MAP. These agreements expired on March 15, 1999, but
have been amended and extended with an  expiration  date of March 15, 2000.
At December 31, 1998,  amounts held by USX and Ashland,  which are included
in  cash  and  cash  equivalents,  were  $169  million  and  $103  million,
respectively.  At December 31, 1999, there was no cash invested under these
agreements.  During the years ended  December  31, 1999 and 1998,  interest
income  earned  from  these  investments  was $4  million  and $1  million,
respectively,  from  Ashland and $5 million  and $0 million,  respectively,
from USX.

NOTE E - REVENUES

The items below are  included in revenues and costs and  expenses,  with no
effect on income.
<TABLE>
<CAPTION>

                                                                                                        Year Ended December 31
                                                                                                     ---------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     -----------

<S>                                                                                                  <C>             <C>
Consumer excise taxes on petroleum products and merchandise                                          $     3,973     $    3,824
Matching crude oil and refined product buy/sell transactions settled in cash                               2,851          3,657


NOTE F - OTHER ITEMS

                                                                                                        Year Ended December 31
                                                                                                     ---------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     ----------

NET INTEREST AND OTHER FINANCIAL INCOME

       INTEREST AND OTHER FINANCIAL INCOME:
       Interest income - third parties                                                               $        3      $       22
       Interest income - related parties                                                                      9               1
                                                                                                     -----------     -----------
              Total                                                                                          12              23
                                                                                                     -----------     -----------

       INTEREST AND OTHER FINANCIAL COSTS:
       Interest incurred                                                                                      2               1
       Other                                                                                                  5               5
                                                                                                     -----------     -----------
              Total                                                                                           7               6
                                                                                                     -----------     -----------

       NET INTEREST AND OTHER FINANCIAL INCOME                                                       $        5      $       17
                                                                                                     ===========     ===========

</TABLE>

NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS

MAP has a noncontributory  defined benefit pension plan and several related
excess benefit plans covering  substantially all employees.  Benefits under
its final pay formula are based  primarily  upon age,  years of service and
the  highest  three  years  earnings  during  the  last  ten  years  before
retirement.  Benefits under its pension equity formula are based  primarily
upon  age,  years of  service  and the final  three  years of  earnings  at
retirement.

MAP also has defined benefit retiree health and life insurance plans (other
benefits)  covering most employees upon their  retirement.  Health benefits
are provided, for the most part, through comprehensive  hospital,  surgical
and major  medical  benefit  provisions  subject  to various  cost  sharing
features. Life insurance benefits are provided to certain nonunion and most
union  represented  retiree  beneficiaries  primarily  based on  employees'
annual base salary at retirement. Other benefits have not been prefunded.



                                     9
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued
<TABLE>
<CAPTION>

                                                                     Pension Benefits                         Other Benefits
                                                                  ----------------------                  ----------------------
                                                                                            (Millions)
                                                                     1999         1998                      1999         1998
                                                                  ---------     --------                  ---------    ---------
<S>                                                               <C>           <C>                       <C>          <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION:

Benefit obligation at January 1                                   $    525      $    52                   $    242     $      6
Service cost                                                            41           26                         10            7
Interest cost                                                           33           20                         13           10
Plan amendments                                                         19          (10)                       (44)         (20)
Actuarial (gains) losses                                              (110)          57                        (71)          56
Acquisition and merger                                                  14          392                          4          184
Benefits paid                                                          (38)         (12)                        (1)          (1)
Settlement, curtailment and termination benefits                        (2)          --                         (1)          --
                                                                  ---------     --------                  ---------    ---------
Benefit obligations at December 31                                $    482      $   525                   $    152     $    242
                                                                  =========     ========                  =========    =========

CHANGE IN PLAN ASSETS:

Fair value of plan assets at January 1                            $    528      $    24
Actual return on plan assets                                            55           41
Acquisition and merger                                                  13          467
Employer contributions                                                   2            8
Benefits paid                                                          (38)         (12)
                                                                  ---------     --------
Fair value of plan assets at December 31                          $    560      $   528
                                                                  =========     ========

FUNDED STATUS OF PLANS AT DECEMBER 31: (A)                        $     78      $     3                   $   (152)    $   (242)
Unrecognized net gain from transition                                  (10)         (12)                        --           --
Unrecognized prior service costs (credits)                              24            6                        (64)         (35)
Unrecognized actuarial (gains) losses                                 (127)          (4)                         4           86
Additional minimum liability (b)                                        (1)          (6)                        --           --
                                                                  ---------     --------                  ---------    ---------
Accrued benefit cost                                              $    (36)     $   (13)                  $   (212)    $   (191)
                                                                  =========     ========                  =========    =========

(a)    Includes   several  small  plans  that  have
       accumulated   benefit obligations
       and no plan assets:

          Accumulated benefit obligation                          $     (6)     $    (9)
          Projected benefit obligation                                 (14)         (15)
(b)    Additional minimum liability recorded
       was offset by the following:
          Intangible asset                                        $      1      $     1
                                                                  ---------     --------
          Accumulated other comprehensive income (loss):
             Beginning of year                                    $     (5)     $    (4)
             Change during year                                          5           (1)
                                                                  ---------     --------
                Balance at end of year                            $     --      $    (5)
                                                                  =========     ========

COMPONENTS OF NET PERIODIC BENEFIT COST:

Service cost                                                      $     41      $    26                   $     10     $      7
Interest cost                                                           33           20                         13           10
Expected return on plan assets                                         (46)         (32)                        --           --
Amortization of prior service costs                                      1           --                         (6)          --
Amortization of actuarial losses                                         1           --                          3           --
Amortization of transition gain                                         (2)          --                         --           --
Other plans                                                              2            2                         --           --
Settlement, curtailment and termination benefits                         2           --                         (1)          --
                                                                  ---------     --------                  ---------    ---------
Net periodic benefit cost                                         $     32      $    16                   $     19     $     17
                                                                  =========     ========                  =========    =========

ACTUARIAL ASSUMPTIONS AT DECEMBER 31:

Discount rate                                                          8.0%         6.5%                       8.0%         6.5%
Expected annual return on plan assets                                  9.5%         9.5%                       N/A           N/A
Increase in compensation rate                                          5.0%         5.0%                       5.0%         5.0%


</TABLE>

                                    10

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued

For measurement  purposes,  an 8% annual rate of increase in the per capita
cost of covered  health care  benefits  was assumed for 2000.  The rate was
assumed  to  decrease  gradually  to 5% for 2006 and  remain at that  level
thereafter.

A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
<TABLE>
<CAPTION>

                                                                       1-Percentage                            1-Percentage
                                                                      Point Increase                          Point Decrease
                                                                  ----------------------                  ------------------
                                                                                            (Millions)
<S>                                                                    <C>                                    <C>
Effect on total of service and interest
   cost components                                                     $          4                           $         (3)
Effect on postretirement benefit obligation                                      24                                    (20)


NOTE H - INCOME TAXES

The taxable  income or loss resulting  from  operations of MAP,  except for
several  small  subsidiary  corporations,  is  ultimately  included  in the
federal income tax returns of USX and Ashland. MAP is, however,  subject to
taxation in certain state, local and foreign jurisdictions.

Provisions (credits) for estimated income taxes:
</TABLE>
<TABLE>
<CAPTION>

                                                                               Year Ended December 31
                                                     ---------------------------------------------------------------------------
                                                                                     (Millions)
                                                                     1999                                   1998
                                                     -----------------------------------     -----------------------------------
                                                     Current      Deferred      Total        Current      Deferred     Total

<S>                                                  <C>          <C>           <C>          <C>          <C>          <C>
Federal                                              $     --     $     (1)     $    (1)     $    --      $     --     $     --
State and local                                             1           --            1            3            (2)           1
Foreign                                                     2           --            2           --            --           --
                                                     ---------    ---------     --------     --------     ---------    ---------
Total                                                $      3     $     (1)     $     2      $     3      $     (2)    $      1
                                                     =========    =========     ========     ========     =========    =========

</TABLE>

Deferred tax liabilities at December 31, 1999 and 1998 of $5 million and $5
million, respectively,  principally arise from differences between the book
and tax basis of  inventories  and property,  plant and  equipment.  Pretax
income in 1999 and 1998  included $3 million and $1 million,  respectively,
attributable to foreign sources.



                                    11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE I - INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                                                              December 31
                                                                                                     ---------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     -----------

<S>                                                                                                  <C>            <C>
Crude oil and natural gas liquids                                                                    $       688    $       715
Refined products and merchandise                                                                           1,051          1,028
Supplies and sundry items                                                                                     81             73
                                                                                                     -----------    ------------
              Total (at cost)                                                                              1,820          1,816
Less inventory market valuation reserve                                                                       --            552
                                                                                                     -----------    ------------

              Net inventory carrying value                                                           $     1,820    $     1,264
                                                                                                     ============   ============
</TABLE>

Inventories  of crude  oil and  refined  products  are  valued  by the LIFO
method.  The LIFO method  accounted  for 93% and 90% of total  inventory at
December 31, 1999 and 1998,  respectively.  Current  acquisition costs were
estimated to exceed the above  inventory  values at December  31, 1999,  by
approximately $194 million.

The  inventory  market  valuation  reserve  reflects  the  extent  that the
recorded  LIFO cost  basis of crude oil and  refined  products  inventories
exceeds net realizable value. The reserve is decreased to reflect increases
in market prices and inventory  turnover and increased to reflect decreases
in market prices.  Changes in the inventory market valuation reserve result
in noncash charges or credits to costs and expenses.

NOTE J - INVESTMENTS AND LONG-TERM RECEIVABLES
<TABLE>
<CAPTION>

                                                                                                              December 31
                                                                                                     ---------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     -----------

<S>                                                                                                  <C>             <C>
Equity method investments                                                                            $      101      $      106
Receivables due after one year                                                                                5               4
Property exchange trust                                                                                       2              --
                                                                                                     -----------     -----------

              Total                                                                                  $      108      $      110
                                                                                                     ===========     ===========
</TABLE>

The following  represents  summarized  financial  information of affiliates
accounted for by the equity method of accounting:
<TABLE>
<CAPTION>

                                                                                                        Year Ended December 31
                                                                                                     ----------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     ------------
<S>                                                                                                  <C>             <C>
Income data:
       Revenues                                                                                      $      207      $      171
       Operating income                                                                                      78              61
       Net income                                                                                            44              31

                                                                                                              December 31
                                                                                                     ----------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     -----------
Balance sheet data:
       Current assets                                                                                $       76      $       57
       Noncurrent assets                                                                                    614             647
       Current liabilities                                                                                   76              84
       Noncurrent liabilities                                                                               441             455

</TABLE>
Dividends and  partnership  distributions  received from equity  affiliates
were $18  million  and $14  million  in 1999 and  1998,  respectively.  MAP
purchases  from  equity  affiliates  totaled $50 million and $63 million in
1999 and 1998, respectively. MAP sales to equity affiliates were immaterial
in both years.

                                    12
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE K - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>

                                                                                                              December 31
                                                                                                     ---------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     -----------

<S>                                                                                                  <C>             <C>
Refining                                                                                             $     2,208     $    2,027
Marketing                                                                                                  2,184          1,945
Transportation                                                                                             1,271          1,310
Other                                                                                                         11              5
                                                                                                     -----------     -----------
              Total                                                                                  $     5,674     $    5,287
Less accumulated depreciation and amortization                                                             1,963          1,762
                                                                                                     ------------    -----------
              Net                                                                                    $     3,711     $    3,525
                                                                                                     ============    ===========
</TABLE>

Property,  plant and equipment at December 31, 1999,  includes gross assets
acquired  under  capital  leases of $20 million with no related  amounts in
accumulated depreciation and amortization.

NOTE L - LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                                                              December 31
                                                                                                     ---------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     -----------

<S>                                                                                                  <C>             <C>
Capital lease obligations                                                                            $       15      $       --
Variable rate Michigan Underground Storage Tank Interest Rate Subsidy
   Loan due 2000 (a)                                                                                          6               6
5% Promissory Note due 2009                                                                                   1               1
Revolving credit facilities (b) (c)                                                                          --              --
                                                                                                     -----------     -----------
              Total (d)                                                                                      22               7
   Less amount due within one year                                                                            7              --
                                                                                                     -----------     -----------

              Long-term debt due after one year                                                      $       15      $        7
                                                                                                     ===========     ===========


</TABLE>

(a) This program was created in  connection  with the Michigan  Underground
    Storage  Tank  Assurance  Act  to  assist  owners  in the  clean  up of
    underground storage tank systems. MAP pays interest monthly, based on a
    monthly LIBOR rate plus 5/8%. An interest subsidy is received quarterly
    from the State of Michigan  calculated at a rate of 6.1% per annum. The
    effective rate of this loan during 1999 and 1998,  including the effect
    of the interest subsidy,  was 1.6%.  Marathon is obligated to reimburse
    MAP for all payments with respect to this debt.

(b) MAP has a revolving credit facility for $100 million that terminates in
    July 2000 and a $400 million  revolving credit facility that terminates
    in July 2003.  Interest is based on defined short-term market rates for
    both facilities.  During the terms of the agreements,  MAP is obligated
    to pay a variable  facility fee on total  commitments.  At December 31,
    1999,  the  facility  fee was 0.11% for the $100  million  facility and
    0.125% for the $400 million facility.  At December 31, 1999, the unused
    and available  credit was $429 million,  which reflects  reductions for
    outstanding  letters  of  credit.  In the event  that MAP  defaults  on
    indebtedness  (as defined in the  agreement) in excess of $100 million,
    USX has guaranteed the payment of any outstanding obligations.

(c) In 1998,  MAP entered into a revolving  credit  agreement with Marathon
    and Ashland for $500 million that  terminated on December 31, 1998, and
    which was  renewed on an  uncommitted  basis for 1999.  This  agreement
    expired on December 31, 1999,  but has been extended with an expiration
    date of March 15, 2001.  Interest is based on defined short-term market
    rates.  At December 31, 1999, the unused and available  credit was $500
    million.

(d) Required payments of long-term debt for the years 2001 through 2004 are
    $1 million per year.

                                    13


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>

                                                                                                        Year Ended December 31
                                                                                                     ---------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     -----------
<S>                                                                                                  <C>             <C>
CASH PROVIDED FROM OPERATING ACTIVITIES INCLUDES:

       Interest and other financial costs paid                                                       $       (2)     $       (1)
       Income taxes paid                                                                                     (5)             (3)
NON-CASH INVESTING AND FINANCING ACTIVITIES:

       Liabilities assumed in acquisitions                                                                   16              --


NOTE N - LEASES
</TABLE>

Future  minimum   commitments  for  capital  and  operating  leases  having
noncancelable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>

                                                                       Capital          Operating
                                                                       Leases            Leases
                                                                     -----------      -----------
                                                                              (Millions)

<C>                                                                  <C>              <C>
2000                                                                 $        2       $       50
2001                                                                          2               39
2002                                                                          2               28
2003                                                                          2               17
2004                                                                          2               10
Later years                                                                  14               31
Sublease rentals                                                             --               (6)
                                                                     -----------      -----------

       Total minimum lease payments                                  $       24       $      169
                                                                                      ===========

Less imputed interest costs:                                                 (9)
                                                                     -----------
       Present value of minimum lease payments
       included in long-term debt                                    $       15
                                                                     ===========

</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>

                                                                                                        Year Ended December 31
                                                                                                     ---------------------------
                                                                                                              (Millions)

                                                                                                         1999           1998
                                                                                                     -----------     -----------

<S>                                                                                                  <C>             <C>
Minimum rental                                                                                       $       66      $       74
Contingent rental                                                                                            11              11
Sublease rentals                                                                                             (6)             (1)
                                                                                                     -----------     -----------
              Net rental expense                                                                     $       71      $       84
                                                                                                     ===========     ===========
</TABLE>

MAP leases a wide  variety of  facilities  and  equipment  under  operating
leases,  including land and building space,  office  equipment,  production
facilities and  transportation  equipment.  Most  long-term  leases include
renewal options and, in certain leases, purchase options.

NOTE O - DERIVATIVE INSTRUMENTS

MAP uses commodity-based derivative instruments to manage exposure to price
fluctuations  related to the anticipated purchase of crude oil, natural gas
and  refined  products.  The  derivative  instruments  used,  as part of an
overall risk management program,  include exchange-traded futures contracts
and options,  and instruments which require  settlement in cash such as OTC
commodity swaps and OTC options. While risk management activities generally
reduce market risk exposure due to unfavorable  commodity price changes for
raw  material  purchases  and  products  sold,  such  activities  can  also
encompass   strategies   which  assume   certain   price  risk  in  certain
transactions.




                                    14
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE O - DERIVATIVE INSTRUMENTS - Continued

MAP  remains  at risk  for  possible  changes  in the  market  value of the
derivative  instrument;  however,  such risk should be  mitigated  by price
changes in the  underlying  hedged item. MAP is also exposed to credit risk
in the event of nonperformance by counterparties.  The credit worthiness of
counterparties is subject to continuing review, including the use of master
netting  agreements  to the  extent  practical,  and  full  performance  is
anticipated.

The  following  table  sets  forth  quantitative  information  by  class of
derivative instrument:
<TABLE>
<CAPTION>

                                                                                        Recognized
                                                       Fair              Carrying         Trading       Recorded
                                                       Value              Amount          Gain or       Deferred       Aggregate
                                                      Assets              Assets        (Loss) for       Gain or        Contract
(Millions)                                         (Liabilities)(a)(b) (Liabilities)     the Year        (Loss)         Values(c)
----------                                         -----------------   -------------  ------------   ------------    ------------
<S>                                                <C>                 <C>            <C>            <C>             <C>
DECEMBER 31, 1999:
  Exchange-traded commodity futures:               $                   $              $              $               $
    Trading                                                --                  --              4             --               8
    Other than trading                                     --                  --             --             18             243
  Exchange-traded commodity options:
    Trading                                                --                  --              4             --             179
    Other than trading                                     (6) (d)             (6)            --             (9)            793
  OTC commodity swaps (e):

    Trading                                                --                  --             --             --              --
    Other than trading                                     (3) (f)             (3)            --             (3)             69
  OTC commodity options:
    Trading                                                --                  --             --             --              --
    Other than trading                                     --                  --             --             --               7
                                                   -----------         -----------    -----------    -----------     -----------
        Total commodities                          $       (9)         $       (9)    $        8     $        6      $    1,299
                                                   ===========         ===========    ===========    ===========     ===========

DECEMBER 31, 1998:
  Exchange-traded commodity futures:               $                   $                             $               $
    Trading                                                --                  --                            --              --
    Other than trading                                     --                  --                            (3)             96
  Exchange-traded commodity options:
    Trading                                                --                  --                            --              --
    Other than trading                                      1   (d)             1                             1             709
  OTC commodity swaps (e):

    Trading                                                --                  --                            --              --
    Other than trading                                     --   (f)            --                            --             140
                                                   -----------         -----------                   -----------     -----------
        Total commodities                          $        1          $        1                    $       (2)     $      945
                                                   ===========         ===========                   ===========     ===========

</TABLE>

(a)  The fair value amounts for OTC positions are based on various  indices
     or dealer quotes.  The  exchange-traded  futures contracts and certain
     option contracts do not have a corresponding  fair value since changes
     in the market prices are settled on a daily basis.

(b)  The  aggregate  average  fair value of all trading  activities  for the
     period ended December 31, 1999 was $3 million.

(c)  Contract or notional  amounts do not quantify risk  exposure,  but are
     used in the calculation of cash settlements  under the contracts.  The
     contract  or  notional  amounts  do not  reflect  the  extent to which
     positions may offset one another.

(d)  Includes  fair values as of December 31, 1999 and 1998,  for assets of
     $7 million and $20 million and for  liabilities  of $(13)  million and
     $(19) million, respectively.

(e)  The OTC swap  arrangements  vary in  duration  with  certain  contracts
     extending into mid-2000.

(f)  Includes  fair values as of December 31, 1999 and 1998,  for assets of
     $0 million  and $25 million and for  liabilities  of $(3)  million and
     $(25) million, respectively.


                                    15

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying  value of most financial  instruments  are based on historical
costs.  The  carrying  values  of cash and cash  equivalents,  receivables,
payables, and debt approximate their fair value.

MAP's unrecognized  financial  instruments consist of financial guarantees.
It is not  practicable  to  estimate  the  fair  value  of  these  forms of
financial instrument  obligations because there are no quoted market prices
for  transactions  which are  similar in nature.  For  details  relating to
financial guarantees, see Note Q.

NOTE Q - CONTINGENCIES AND COMMITMENTS

MAP is the subject of, or party to, a number of pending or threatened legal
actions,  contingencies  and  commitments  involving  a variety of matters,
including  laws and  regulations  relating to the  environment.  Certain of
these  matters  are  discussed  below.  The  ultimate  resolution  of these
contingencies could,  individually or in the aggregate,  be material to the
MAP financial statements. However, management believes that MAP will remain
a viable and  competitive  enterprise even though it is possible that these
contingencies could be resolved unfavorably.

ENVIRONMENTAL MATTERS - MAP is subject to federal, state, local and foreign
laws and  regulations  relating to the  environment.  These laws  generally
provide for control of pollutants released into the environment and require
responsible  parties to undertake  remediation of hazardous  waste disposal
sites.  Penalties  may be imposed for  noncompliance.  Marathon and Ashland
have retained the  liabilities,  subject to certain  thresholds,  for costs
associated  with  remediating  properties  conveyed  to MAP for  conditions
existing  prior to  January  1,  1998.  The  costs  associated  with  these
thresholds are not expected to be material to the MAP financial statements.
At December 31, 1999 and 1998,  MAP's accrued  liabilities  for remediation
totaled  $6  million  and $3  million,  respectively.  It is not  presently
possible to estimate  the  ultimate  amount of all  remediation  costs that
might be incurred or the  penalties  that may be imposed.  Receivables  for
recoverable  costs from certain states,  under programs to assist companies
in clean  up  efforts  related  to  underground  storage  tanks  at  retail
marketing outlets,  were $3 million and $1 million at December 31, 1999 and
1998, respectively.

MAP has made substantial capital  expenditures to bring existing facilities
into compliance with various laws relating to the environment.  In 1999 and
1998, such capital  expenditures  for  environmental  controls  totaled $24
million and $42 million,  respectively.  MAP anticipates  making additional
such expenditures in the future;  however,  the exact amounts and timing of
such  expenditures  are uncertain  because of the  continuing  evolution of
specific regulatory requirements.

GUARANTEES  - At  December  31,  1999 and  1998,  MAP's  pro rata  share of
obligations  of LOCAP  INC.  and  Southcap  Pipe Line  Company  secured  by
throughput and deficiency  agreements  totaled $19 million and $23 million,
respectively. Under the agreements, MAP is required to advance funds if the
affiliates  are unable to service  debt.  Any such  advances are treated as
prepayments of future transportation charges.

COMMITMENTS - At December 31, 1999 and 1998, MAP's contract commitments for
capital expenditures for property,  plant and equipment totaled $14 million
and $38 million, respectively.


                                       16
<PAGE>
                     ARCH COAL, INC. AND SUBSIDIARIES

                 AUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                  CONTENTS
<TABLE>
<CAPTION>

                                                                                                                           Page*

<S>                                                                                                                         <C>
REPORT OF INDEPENDENT AUDITORS:                                                                                             46
CONSOLIDATED FINANCIAL STATEMENTS:

     CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------------------------------------              48
     CONSOLIDATED BALANCE SHEETS -----------------------------------------------------------------------------              49
     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY----------------------------------------------------------              50
     CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------------------------------------              51
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------              52

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

     SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS --------------------------------------------------------              25

</TABLE>

ALL  OTHER  SCHEDULES  FOR  WHICH  PROVISION  IS  MADE  IN  THE  APPLICABLE
ACCOUNTING  REGULATIONS OF THE  SECURITIES AND EXCHANGE  COMMISSION ARE NOT
REQUIRED UNDER THE RELATED  INSTRUCTIONS OR ARE INAPPLICABLE AND,THEREFORE,
HAVE BEEN OMITTED.



<PAGE>


REPORT OF INDEPENDENT AUDITORS


To the Stockholders and Board of Directors
Arch Coal, Inc.

  We have audited the accompanying consolidated balance sheets of Arch Coal,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  In our opinion, the financial statements referred to above (appearing on pages
48 to 72 of this annual report) present fairly, in all material respects, the
consolidated financial position of Arch Coal, Inc. and subsidiaries at December
31, 1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

  As discussed in Note 3 to the financial statements, in 1999, the Company
changed its method of accounting for depreciation of its preparation plants and
loadouts.


                                                               Ernst & Young LLP

Louisville, Kentucky
January 21, 2000

46
<PAGE>


Consolidated Statements of Operations

(in thousands of dollars except per share data)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31
                                                             --------------------------------------
                                                                1999           1998         1997
---------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>          <C>
Revenues
 Coal sales...........................................        $1,509,596   $1,428,171   $1,034,813
 Income from equity investment........................            11,129        6,786           --
 Other revenues.......................................            46,657       70,678       32,062
                                                             --------------------------------------
                                                               1,567,382    1,505,635    1,066,875
                                                             --------------------------------------
Costs and expenses
 Cost of coal sales...................................         1,426,105    1,313,400      916,802
 Selling, general and administrative expenses.........            46,357       44,767       28,885
 Amortization of coal supply agreements...............            36,532       34,551       18,063
 Write-down of impaired assets........................           364,579           --           --
 Merger-related expenses..............................                --           --       39,132
 Other expenses.......................................            20,835       25,070       22,111
                                                             --------------------------------------
                                                               1,894,408    1,417,788    1,024,993
                                                             --------------------------------------
   Income (loss) from operations......................          (327,026)      87,847       41,882
Interest expense, net:
 Interest expense.....................................           (90,058)     (62,202)     (17,822)
 Interest income......................................             1,291          756          721
                                                             --------------------------------------
                                                                 (88,767)     (61,446)     (17,101)
                                                             --------------------------------------
   Income (loss) before income taxes, extraordinary
    loss and cumulative effect of accounting change...          (415,793)      26,401       24,781

Benefit from income taxes.............................           (65,700)      (5,100)      (5,500)
                                                             --------------------------------------
   Income (loss) before extraordinary loss and
    cumulative effect of accounting change............          (350,093)      31,501       30,281

Extraordinary loss from the extinguishment of debt,
 net of taxes.........................................                --       (1,488)          --

Cumulative effect of accounting change, net of taxes..             3,813           --           --
                                                             --------------------------------------
   Net income (loss)..................................        $ (346,280)  $   30,013   $   30,281
                                                             ======================================
Basic and diluted earnings (loss) per common share:
Income (loss) before extraordinary item and
 cumulative effect of accounting change...............        $    (9.12)  $      .79   $     1.00

Extraordinary loss from the extinguishment of debt,
 net of taxes.........................................                --         (.03)          --

Cumulative effect of accounting change, net of taxes..               .10           --           --
                                                             --------------------------------------
Basic and diluted earnings (loss) per common share....        $    (9.02)  $      .76   $     1.00
                                                             ======================================
</TABLE>


   The accompanying notes are an integral part of the consolidated financial
                                  statements.

48
<PAGE>

Consolidated Balance Sheets

(in thousands of dollars except share and per share data)


<TABLE>
<CAPTION>
                                                                                     December 31
                                                                              -------------------------
                                                                                 1999           1998
=======================================================================================================
<S>                                                                           <C>            <C>
Assets
Current assets
  Cash and cash equivalents................................................   $    3,283     $   27,414
  Trade accounts receivable................................................      162,802        202,871
  Other receivables........................................................       25,659         24,584
  Inventories..............................................................       62,382         68,455
  Prepaid royalties........................................................        1,310         13,559
  Deferred income taxes....................................................       21,600          8,694
  Other....................................................................        8,916          7,757
                                                                              -------------------------
    Total current assets...................................................      285,952        353,334
                                                                              -------------------------
Property, plant and equipment
  Coal lands and mineral rights............................................    1,170,956      1,476,703
  Plant and equipment......................................................    1,042,128      1,111,120
  Deferred mine development................................................       92,265         80,926
                                                                              -------------------------
                                                                               2,305,349      2,668,749
  Less accumulated depreciation, depletion and amortization................     (826,178)      (732,005)
                                                                              -------------------------
    Property, plant and equipment, net.....................................    1,479,171      1,936,744
                                                                              -------------------------
Other assets
  Prepaid royalties........................................................           --         31,570
  Coal supply agreements...................................................      151,978        201,965
  Deferred income taxes....................................................      182,500         83,209
  Investment in Canyon Fuel................................................      199,760        272,149
  Other....................................................................       33,013         39,249
                                                                              -------------------------
    Total other assets.....................................................      567,251        628,142
                                                                              -------------------------
    Total assets...........................................................   $2,332,374     $2,918,220
                                                                              =========================
Liabilities and stockholders' equity
Current liabilities
  Accounts payable.........................................................   $  109,359     $  129,528
  Accrued expenses.........................................................      145,561        142,630
  Current portion of debt..................................................       86,000         61,000
                                                                              -------------------------
    Total current liabilities..............................................      340,920        333,158
Long-term debt.............................................................    1,094,993      1,309,087
Accrued postretirement benefits other than pension.........................      343,993        343,553
Accrued reclamation and mine closure.......................................      129,869        150,636
Accrued workers' compensation..............................................      105,190        105,333
Accrued pension cost.......................................................       22,445         18,524
Other noncurrent liabilities...............................................       53,669         39,713
                                                                              -------------------------
    Total liabilities......................................................    2,091,079      2,300,004
                                                                              -------------------------
Stockholders' equity
  Common stock, $.01 par value, 100,000,000 shares authorized,
   38,164,482 issued and outstanding in 1999 and 39,371,581
   issued and outstanding in 1998..........................................          397            397
  Paid-in capital..........................................................      473,335        473,116
  Retained earnings (deficit)..............................................     (213,466)       150,423
  Treasury stock, at cost (1,541,146 shares at December 31, 1999 and
   333,952 shares at December 31, 1998)....................................      (18,971)        (5,720)
                                                                              -------------------------
    Total stockholders' equity.............................................      241,295        618,216
                                                                              -------------------------
    Total liabilities and stockholders' equity.............................   $2,332,374     $2,918,220
                                                                              =========================
</TABLE>


   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                                                              49
<PAGE>

Consolidated Statements of Stockholders' Equity
Three years ended December 31, 1999
(in thousands of dollars except share and per share data)

<TABLE>
<CAPTION>
                                                                    Retained     Treasury
                                               Common   Paid-In     Earnings     Stock at
                                                Stock   Capital     (Deficit)      Cost        Total
-------------------------------------------------------------------------------------------------------
<S>                                            <C>      <C>         <C>          <C>         <C>
Balance at December 31, 1996..................  $209    $  8,392    $ 122,025    $     --    $ 130,626
  Net income..................................                         30,281                   30,281
  Dividends paid ($.445 per share)............                        (13,630)                 (13,630)
  Issuance of 18,660,054 shares of common
    stock to  stockholders of Ashland
    Coal, Inc. pursuant to the merger
    agreement.................................   187     462,984                               463,171
  Issuance of 49,400 shares of common stock
    under the stock incentive plan............     1       1,049                                 1,050
                                               --------------------------------------------------------
Balance at December 31, 1997..................   397     472,425      138,676          --      611,498
  Net income..................................                         30,013                   30,013
  Dividends paid ($.46 per share).............                        (18,266)                 (18,266)
  Issuance of 47,635 shares of common
    stock under the stock incentive plan......               691                                   691
  Treasury stock purchases (333,952 shares)...                                     (5,720)      (5,720)
                                               --------------------------------------------------------
Balance at December 31, 1998..................   397     473,116      150,423      (5,720)     618,216
  Net loss....................................                       (346,280)                (346,280)
  Dividends paid ($.46 per share).............                        (17,609)                 (17,609)
  Issuance of 95 shares of common stock
    under the stock incentive plan............                 1                                     1
  Treasury stock purchases (1,396,700 shares),
    net of issuances (189,506 shares).........               218                  (13,251)     (13,033)
                                               --------------------------------------------------------
Balance at December 31, 1999..................  $397    $473,335    $(213,466)   $(18,971)   $ 241,295
                                               ========================================================
</TABLE>

  The accompanying notes are an integral part of the consolidated financial
                                  statements.

50
<PAGE>

Consolidated Statements of Cash Flows

(in thousands of dollars)

<TABLE>
<CAPTION>
                                                                                                     Year Ended December 31
                                                                                            -----------------------------------
                                                                                                 1999          1998        1997
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>          <C>           <C>
Operating activities
Net income (loss)......................................................................     $(346,280)   $   30,013    $ 30,281
Adjustments to reconcile to cash provided by
     operating activities:
     Depreciation, depletion and amortization..........................................       235,658       204,307     143,632
     Prepaid royalties expensed........................................................        14,217        19,694       8,216
     Net gain on disposition of assets.................................................        (7,459)      (41,512)     (4,802)
     Income from equity investment.....................................................       (11,129)       (6,786)          -
     Distributions from equity investment..............................................        83,178        18,850           -
     Cumulative effect of accounting change............................................        (3,813)            -           -
     Merger-related expenses...........................................................             -             -      33,096
     Write-down of impaired assets.....................................................       364,579             -           -
     Changes in operating assets and liabilities.......................................       (69,471)      (24,671)    (28,842)
     Other.............................................................................        20,483       (11,872)      8,682
                                                                                            -----------------------------------
          Cash provided by operating activities........................................       279,963       188,023     190,263
                                                                                            -----------------------------------
Investing activities
Payments for acquisition...............................................................             -    (1,126,706)          -
Additions to property, plant and equipment.............................................       (98,715)     (141,737)    (77,309)
Proceeds from coal supply agreements...................................................        14,067             -           -
Additions to prepaid royalties.........................................................       (26,057)      (26,252)     (7,967)
Additions to notes receivable..........................................................             -       (10,906)          -
Proceeds from disposition of property, plant and equipment.............................        26,347        34,230       5,267
                                                                                            -----------------------------------
          Cash used in investing activities............................................       (84,358)   (1,271,371)    (80,009)
                                                                                            -----------------------------------
Financing activities
Proceeds from (payments on) revolver and lines of credit...............................       (37,884)      176,582      78,897
Net proceeds from (payments on) term loans.............................................      (151,210)      958,441           -
Payments on notes......................................................................             -       (42,860)   (181,110)
Payments for debt issuance costs.......................................................             -       (12,725)          -
Proceeds from sale and leaseback of equipment..........................................             -        45,442           -
Dividends paid.........................................................................       (17,609)      (18,266)    (13,630)
Proceeds from sale of common stock.....................................................             -           691       1,050
Proceeds from sale of treasury stock...................................................         2,549             -           -
Purchases of treasury stock............................................................       (15,582)       (5,720)          -
                                                                                            -----------------------------------
          Cash provided by (used in) financing activities..............................      (219,736)    1,101,585    (114,793)
                                                                                            -----------------------------------
          Increase (decrease) in cash and cash equivalents.............................       (24,131)       18,237      (4,539)
Cash and cash equivalents, beginning of year...........................................        27,414         9,177      13,716
                                                                                            -----------------------------------
Cash and cash equivalents, end of year.................................................     $   3,283    $   27,414    $  9,177
                                                                                            ===================================
Supplemental cash flow information:
Cash paid during the year for interest.................................................     $ 100,781    $   48,760    $ 18,593
Cash paid during the year for income taxes, net of refunds.............................     $  11,251    $   29,090    $ 21,918
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                                                              51
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)


NOTE 1. ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Arch Coal, Inc.
and its subsidiaries ("the Company"), which operate in the coal mining industry.
The Company operates one reportable segment: the production of steam and
metallurgical coal from surface and deep mines throughout the United States, for
sale to utility, industrial and export markets. The Company's mines are
primarily located in the central Appalachian and western regions of the United
States. All subsidiaries (except as noted below) are wholly owned. Significant
intercompany transactions and accounts have been eliminated in consolidation.

  The Company's 65% ownership of Canyon Fuel, LLC ("Canyon Fuel") is accounted
for on the equity method in the consolidated financial statements as a result of
certain super-majority voting rights in the joint venture agreement. Income from
Canyon Fuel is reflected in the consolidated statements of operations as income
from equity investment. (See additional discussion in "Investment in Canyon
Fuel" in Note 6.)

  The Company's 17.5% partnership interest in Dominion Terminal Associates is
accounted for on the equity method in the consolidated balance sheets. Allocable
costs of the partnership for coal loading and storage are included in other
expenses in the consolidated statements of operations.

Accounting Estimates

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


Cash and Cash Equivalents

Cash and cash equivalents are stated at cost. Cash equivalents consist of highly
liquid investments with an original maturity of three months or less when
purchased.

Inventories

Inventories are comprised of the following:


                                                    December 31
                                               ---------------------
                                                   1999         1998
--------------------------------------------------------------------
Coal.......................................... $ 28,183     $ 25,789
Supplies......................................   34,199       42,666
                                               ---------------------
                                               $ 62,382     $ 68,455
                                               ---------------------

Coal and supplies inventories are valued at the lower of average cost or market.
The Company has recorded a valuation allowance for slow-moving and obsolete
supplies inventories of $23.5 million and $23.9 million at December 31, 1999 and
1998, respectively.

Coal Acquisition Costs and Prepaid Royalties

Coal lease rights obtained through acquisitions are capitalized and amortized
primarily by the units-of-production method over the estimated recoverable
reserves.

  Rights to leased coal lands are often acquired through royalty payments. Where
royalty payments represent prepayments recoupable against production, they are
capitalized, and amounts expected to be recouped within one year are classified
as a current asset. As mining occurs on these leases, the prepayment is charged
to cost of coal sales.

Coal Supply Agreements

Acquisition costs allocated to coal supply agreements (sales contracts) are
capitalized and amortized on the basis of coal to be shipped over the term of
the contract. Accumulated amortization for sales contracts was $131.4 million
and $94.8 million at December 31, 1999 and 1998, respectively.


52
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


Exploration Costs

Costs related to locating coal deposits and determining the economic mineability
of such deposits are expensed as incurred.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Interest costs applicable to
major asset additions are capitalized during the construction period.
Expenditures which extend the useful lives of existing plant and equipment are
capitalized. Costs of purchasing rights to coal reserves and developing new
mines or significantly expanding the capacity of existing mines are capitalized
and amortized using the units-of-production method over the estimated
recoverable reserves. Except for preparation plants and loadouts, plant and
equipment are depreciated principally on the straight-line method over the
estimated useful lives of the assets, which range from three to 20 years.
Effective January 1, 1999, preparation plants and loadouts are depreciated using
the units-of-production method over the estimated recoverable reserves subject
to a minimum level of depreciation (see additional discussion in "Change in
Accounting Method" in Note 3). Prior to January 1, 1999, preparation plants and
loadouts were depreciated on a straight-line basis over their estimated useful
lives.

Asset Impairment

If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the value of the asset
will not be recoverable, as determined based on projected undiscounted cash
flows related to the asset over its remaining life, then the carrying value of
the asset is reduced to its estimated fair value. (See additional discussion in
"Restructuring Charge and Write-Down of Impaired Assets" in Note 2.)

Revenue Recognition

Coal sales revenues include sales to customers of coal produced at Company
operations and coal purchased from other companies. The Company recognizes
revenue from coal sales at the time title passes to the customer. Revenues from
sources other than coal sales, including gains and losses from dispositions of
long-term assets, are included in other revenues and are recognized as services
are performed or otherwise earned.

Interest Rate Swap Agreements

The Company enters into interest-rate swap agreements to modify the interest
characteristics of outstanding Company debt. The swap agreements essentially
convert variable-rate debt to fixed-rate debt. These agreements require the
exchange of amounts based on variable interest rates for amounts based on fixed
interest rates over the life of the agreement. The Company accrues amounts to be
paid or received under interest-rate swap agreements over the lives of the
agreements. Such amounts are recognized as adjustments to interest expense over
the lives of agreements, thereby adjusting the effective interest rate on the
Company's debt. The fair values of the swap agreements are not recognized in the
financial statements. Gains and losses on terminations of interest-rate swap
agreements are deferred on the balance sheets (in other long-term liabilities)
and amortized as an adjustment to interest expense over the remaining original
term of the terminated swap agreement.

Income Taxes

Deferred income taxes are based on temporary differences between the financial
statement and tax basis of assets and liabilities existing at each balance sheet
date using enacted tax rates for years during which taxes are expected to be
paid or recovered.


                                                                              53
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)


Stock-Based Compensation

These financial statements include the disclosure requirements of Financial
Accounting Standards Board Statement No. 123 ("FAS 123"), Accounting for Stock-
Based Compensation. With respect to accounting for its stock options, as
permitted under FAS 123, the Company has retained the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees, and related Interpretations.

NOTE 2. RESTRUCTURING CHARGE AND WRITE-DOWN OF IMPAIRED ASSETS

In 1999, the Company recorded a pre-tax charge of $23.1 million related to the
restructuring of its administrative workforce, the closure of its Dal-Tex mining
operation in West Virginia due to permitting problems and the closure of several
mines in Kentucky and Illinois due to the depressed coal prices and increased
competition from western coal mines. Of the $23.1 million charge, $20.3 million
was recorded in cost of coal sales, $2.3 million was recorded in selling,
general and administrative expenses and $.5 million was recorded in other
expenses in the Company's consolidated statement of operations. The
restructuring of the administrative workforce included the elimination of 81
administrative jobs, 58 of which were corporate and the remainder of which were
subsidiary positions all of which was part of a corporate-wide effort to reduce
general and administrative expenses. The mine closures included the termination
of 161 employees. As of December 31, 1999, 74 administrative and 65 mine
employees have been terminated. The following are the components of
severance and other exit costs included in the restructuring charge along with
related 1999 activity:

<TABLE>
<CAPTION>
                                                              Balance at
                                            Utilized in     December 31,
                             1999 Charge           1999             1999
------------------------------------------------------------------------
<S>                          <C>            <C>             <C>
Employee costs..............     $ 7,354         $  704          $ 6,650
Obligations for
  non-cancelable
  lease payments............       9,858            484            9,374
Reclamation
  liabilities...............       3,667          1,200            2,467
Depreciation
  acceleration..............       2,172          2,172               --
                             -------------------------------------------
                                 $23,051         $4,560          $18,491
                             -------------------------------------------
</TABLE>

Except for the charge related to depreciation acceleration, all of the 1999
restructuring charge will require the Company to use cash. Also, the Company
expects to utilize the balance of the amounts reserved for employee costs in
2000, while the obligations for non-cancelable lease payments and reclamation
liabilities will be utilized in future periods as lease payments are made and
reclamation procedures are performed.

  In addition, during the fourth quarter of 1999, the Company determined that
significant changes were necessary in the manner and extent in which certain
central Appalachia coal assets would be deployed. The anticipated changes were
determined during the Company's annual planning process and were necessitated by
the adverse legal and regulatory rulings related to surface mining techniques
(see Note 20), as well as the continued negative pricing trends related to
central Appalachia coal production experienced by the Company. As a result of
the planned changes in the deployment of its long-


54
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


lived assets in the central Appalachia region and pursuant to FAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, the Company evaluated the recoverability of its active mining
operations and its coal reserves for which no future mining plans exist. This
evaluation indicated that the future undiscounted cash flows of three mining
operations, Dal-Tex, Hobet 21 and Coal-Mac, and certain coal reserves with no
future mining plans were below the carrying value of such long-lived assets.
Accordingly, during the fourth quarter of 1999, the Company adjusted the
operating assets and coal reserves to their estimated fair value of
approximately $99.7 million, resulting in a non-cash impairment charge of $364.6
million (including $50.6 million relating to operating assets and $314.0 million
relating to coal reserves). The estimated fair value for the three mining
operations was based on anticipated future cash flows discounted at a rate
commensurate with the risk involved. The estimated fair value for the coal
reserves with no future mining plans was based upon the fair value of these
properties to be derived from subleased operations. The impairment loss has been
recorded as a loss from the write-down of impaired assets in the consolidated
statements of operations.

NOTE 3. CHANGE IN ACCOUNTING METHOD

Through December 31, 1998, plant and equipment had principally been depreciated
on the straight-line method over the estimated useful lives of the assets, which
range from three to 20 years. Effective January 1, 1999, depreciation on the
Company's preparation plants and loadouts was computed using the units-of-
production method, which is based upon units produced, subject to a minimum
level of depreciation. These assets are usage-based assets and their economic
lives are typically based and measured on coal throughput. The Company believes
the units-of-production method is preferable to the method previously used
because the new method recognizes that depreciation of this equipment is related
substantially to physical wear due to usage as well as to the passage of time.
This method, therefore, more appropriately matches production costs over the
lives of the preparation plants and loadouts with coal sales revenue and results
in a more accurate allocation of the cost of the physical assets to the periods
in which the assets are consumed. The cumulative effect of applying the new
method for years prior to 1999 is an increase to income of $3.8 million net-of-
tax ($6.3 million pre-tax) reported as a cumulative effect of accounting change
in the consolidated statement of operations for the year ended December 31,
1999. In addition, the net loss of the Company, excluding the cumulative effect
of accounting change, for the year ended December 31, 1999 is $.2 million less,
or $.01 per share less, than it would have been if the Company had continued to
follow the straight-line method of depreciation of equipment for preparation
plants and loadouts.

  The unaudited pro-forma amounts below reflect the retroactive application of
units-of-production depreciation on preparation plants and loadouts and the
corresponding elimination of the cumulative effect of the accounting change.

<TABLE>
<CAPTION>
                                                  Year Ended
                                                 December 31
                                     ------------------------------------
                                          1999          1998         1997
-------------------------------------------------------------------------
<S>                                  <C>             <C>          <C>
Net income (loss)
  as reported....................... $(346,280)      $30,013      $30,281
Pro-forma net
  income (loss).....................  (350,093)       29,511       32,442
Basic and diluted earnings
  (loss) per common share
  as reported.......................     (9.02)         0.76         1.00
Pro-forma basic and diluted
  earnings (loss) per
  common share......................     (9.12)         0.74         1.07
</TABLE>


                                                                              55
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)


NOTE 4. MERGER AND ACQUISITION

On June 1, 1998, the Company acquired the Colorado and Utah coal operations of
Atlantic Richfield Company ("ARCO") and simultaneously combined the acquired
ARCO operations and the Company's Wyoming operations with ARCO's Wyoming
operations in a new joint venture named Arch Western Resources, LLC ("Arch
Western"). The principal operating units of Arch Western are Thunder Basin Coal
Company, L.L.C., owned 100% by Arch Western, which operates two coal mines in
the Southern Powder River Basin in Wyoming; Mountain Coal Company, L.L.C., owned
100% by Arch Western, which operates a coal mine in Colorado; Canyon Fuel
Company, LLC ("Canyon Fuel"), 65% owned by Arch Western and 35% by ITOCHU Coal
International Inc., a subsidiary of ITOCHU Corporation, which operates three
coal mines in Utah; and Arch of Wyoming, LLC, owned 100% by Arch Western, which
operates two coal mines in the Hanna Basin of Wyoming.

  Arch Western is 99% owned by the Company and 1% owned by ARCO. The transaction
was valued at approximately $1.14 billion and a wholly owned subsidiary of the
Company is the managing member of Arch Western. The transaction has been
accounted for under the purchase method of accounting. Accordingly, the cost to
acquire ARCO's U.S. coal operations has been allocated to the assets acquired
and liabilities assumed according to their respective estimated fair values.
Results of operations of the acquired operations are included in the
consolidated statements of operations effective June 1, 1998. The acquired ARCO
operations continue to produce low-sulfur coal for sale to primarily domestic
utility customers.

  On July 1, 1997, Ashland Coal, Inc. ("Ashland Coal") merged with a subsidiary
of the Company. Under the terms of the merger, Ashland Coal's stockholders
received one share of the Company's common stock for each common share of
Ashland Coal and 20,500 shares of the Company's common stock for each share of
Ashland Coal preferred stock. A total of 18,660,054 shares of Company common
stock were issued in the merger, resulting in a total purchase price (including
fair value of stock options and transaction-related fees) of approximately
$464.8 million. The merger was accounted for under the purchase method of
accounting. Results of operations of Ashland Coal are included in the
consolidated statements of operations effective July 1, 1997.

  Summarized below are the unaudited pro forma combined results of operations
for the years ended December 31, 1998 and 1997. These results reflect the July
1, 1997 Ashland Coal merger as if it had occurred on January 1, 1997 and the
June 1, 1998 Arch Western transaction as if it had occurred on January 1, 1998
and 1997.

<TABLE>
<CAPTION>
                                                 1998            1997
---------------------------------------------------------------------
<S>                                        <C>             <C>
Revenues.................................. $1,669,824      $1,792,582
Income before extraordinary item..........     22,994          36,175
Net income................................     21,506          36,175
Earnings per share before
  extraordinary loss......................        .58             .91
Earnings per share........................        .54             .91
</TABLE>

In the opinion of the management of the Company, all adjustments necessary to
present pro forma results of operations have been made. The unaudited pro forma
results of operations do not purport to be indicative of the results that would
have occurred had these transactions actually occurred at the beginning of the
relevant periods or of the results of operations that may be achieved in the
future.

NOTE 5. MERGER-RELATED EXPENSES

During 1997, in connection with the Ashland Coal merger, the Company recorded a
one-time charge of $39.1 million (before tax), or $23.8 million (after tax),
comprised of termination benefits


56
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


and relocation costs of $8.1 million and costs of $31.0 million associated with
the idling of duplicate facilities. The $8.1 million costs arising from the
termination benefits and relocation costs have been paid. The $31.0 million
costs associated with the idling of duplicate facilities reduced the book value
of the duplicate facilities. A portion of this charge related to Big Sandy
Terminal. As a result of a change in management strategy related to the Big
Sandy Terminal, the assets were sold in 1998 for a pre-tax gain of $7.5 million.

NOTE 6. INVESTMENT IN CANYON FUEL

The following tables present unaudited summarized financial information for
Canyon Fuel which, as part of the June 1, 1998 Arch Western transaction
(described in Note 4), was acquired by the Company and is accounted for on the
equity method.

<TABLE>
<CAPTION>
                                                               Seven
                                              Year            Months
                                             Ended             Ended
Condensed Income                      December 31,      December 31,
Statement Information                         1999              1998
--------------------------------------------------------------------
<S>                                   <C>               <C>
Revenues.............................     $241,062          $155,634
Total costs and expenses.............      230,512           153,039
                                      ------------------------------
Net income...........................     $ 10,550          $  2,595
                                      ==============================
65% of Canyon Fuel net income........     $  6,858          $  1,687
Effect of purchase adjustments.......        4,271             5,099
                                      ------------------------------
Arch Coal's income from its equity
  investment in Canyon Fuel..........     $ 11,129          $  6,786
                                      ==============================

                                                  December 31
Condensed Balance                     ------------------------------
Sheet Information                             1999            1998
--------------------------------------------------------------------
Current assets.......................     $ 61,212        $ 87,620
Noncurrent assets....................      452,103         532,119
Current liabilities..................       37,065          31,459
Noncurrent liabilities...............       20,789          19,247
Members' equity......................      455,461         569,033
</TABLE>


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 its investment in
Canyon Fuel. The Company's investment in Canyon Fuel reflects purchase
adjustments primarily related to the reduction in amounts assigned to sales
contracts, mineral reserves and other property, plant and equipment totaling
$96.3 million at December 31, 1999 which are not reflected in the condensed
balance sheet information above.

NOTE 7. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                              December 31
                                        ------------------------
                                            1999            1998
----------------------------------------------------------------
<S>                                     <C>             <C>
Accrued payroll and
  related benefits..................... $ 27,830        $ 29,878
Accrued taxes other than
  income taxes.........................   47,727          44,665
Accrued postretirement
  benefits other than pension..........   14,755          15,555
Accrued workers'
  compensation.........................   11,144          15,869
Accrued interest.......................    6,285          17,007
Accrued reclamation and
  mine closure.........................   26,540           6,841
Other accrued expenses.................   11,280          12,815
                                        ------------------------
                                        $145,561        $142,630
                                        ========================


NOTE 8. INCOME TAXES

Significant components of the provision (benefit) for income taxes are as
follows:
                                                    December 31
                                        -----------------------------------
                                            1999         1998          1997
---------------------------------------------------------------------------
Current:
  Federal.............................. $  6,796     $  8,077      $  8,250
  State................................       --         (260)         (250)
                                        -----------------------------------
Total current..........................    6,796        7,817         8,000
Deferred:
  Federal..............................  (54,135)     (12,583)      (13,180)
  State................................  (18,361)        (334)         (320)
                                        -----------------------------------
Total deferred.........................  (72,496)     (12,917)      (13,500)
                                        -----------------------------------
                                        $(65,700)    $ (5,100)     $ (5,500)
                                        ===================================
</TABLE>


A reconciliation of the statutory federal income tax expense (benefit) on the
Company's pretax income (loss) before extraordinary loss and cumulative effect
of accounting change to the


                                                                              57
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)



actual provision (benefit) for income taxes follows:

<TABLE>
<CAPTION>
                                                    December 31
                                       -------------------------------------
                                            1999          1998          1997
----------------------------------------------------------------------------
<S>                                    <C>            <C>           <C>
Income tax expense
  (benefit) at statutory
  rate................................ $(145,526)     $  9,240      $  8,673
Percentage depletion
  allowance...........................   (15,000)      (14,437)      (13,543)
State taxes, net of effect of
  federal taxes.......................   (18,361)         (594)         (570)
Change in valuation
  allowance...........................   112,345            --            --
Non-deductible expenses...............       284           621           236
Other, net............................       558            70          (296)
                                       -------------------------------------
                                        $(65,700)     $ (5,100)     $ (5,500)
                                       =====================================
</TABLE>


The Company's federal income tax returns for the years 1995 and 1996 are
currently under review by the Internal Revenue Service (IRS).

  During 1997, the Company settled its protest of certain adjustments proposed
by the IRS for the federal income tax returns for the years 1987 through 1989. A
deposit of $8.0 million was made in April 1997 in anticipation of the
settlement.

  During 1998, the Company settled its protest of certain unagreed issues with
the IRS for the federal income tax returns for the years 1990 and 1991. A final
payment of $0.5 million was paid in June 1998 and charged against previously
recorded reserves. The IRS audit of the federal income tax returns for the years
1992 through 1994 was completed during 1998 and agreed to at the examination
level. A payment of $15.5 million was made in December 1998 in settlement of all
issues. A significant number of the issues were timing in nature and the tax
paid related to these temporary differences is accounted for as a deferred tax
asset and the remaining tax and interest paid was charged against previously
recorded reserves. A portion of the payment related to items that were settled
in the 1987 through 1991 audits previously discussed. Permanent differences
included a reduction in percentage depletion and a decrease in cost depletion
related to the settlement for the adjustment in fair market value of certain
coal reserves.

  During 1999, the Company settled an audit of former Ashland Coal, Inc. for the
years January 1995 through June 1997. A payment of $.1 million was made in
January 1999 in settlement of all issues.

  Management believes that the Company has adequately provided for any income
taxes and interest which may ultimately be paid with respect to all open tax
years.

  Significant components of the Company's deferred tax assets and liabilities
that result from carryforwards and temporary differences between the financial
statement basis and tax basis of assets and liabilities are summarized as
follows:

<TABLE>
<CAPTION>
                                                      December 31
                                                ------------------------
                                                    1999            1998
------------------------------------------------------------------------
<S>                                             <C>             <C>
Deferred tax assets:
  Postretirement benefits other
     than pension                               $139,796        $136,004
  Alternative minimum tax credit
     carryforward                                 91,604          70,897
  Workers' compensation................           43,029          29,345
  Reclamation and mine closure.........           30,016          22,567
  Net operating loss carryforwards.....           11,507          10,232
  Plant and equipment..................           49,069              --
  Advance royalties....................           24,064              --
  Other................................           25,514          17,983
                                                ------------------------
     Gross deferred tax assets.........          414,599         287,028
  Valuation allowance..................         (112,345)             --
                                                ------------------------
     Total deferred tax assets.........          302,254         287,028
                                                ------------------------
Deferred tax liabilities:
  Coal lands and mineral rights........            8,965          78,869
  Plant and equipment..................               --          78,359
  Leases...............................           21,990           7,884
  Coal supply agreements...............           36,750          17,390
  Other................................           30,449          12,623
                                                ------------------------
     Total deferred tax liabilities....           98,154         195,125
                                                ------------------------
         Net deferred tax asset........          204,100          91,903
     Less current asset................           21,600           8,694
                                                ------------------------
         Long-term deferred tax asset..         $182,500        $ 83,209
                                                ========================
</TABLE>


58
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


The Company has a net operating loss carryforward for regular income tax
purposes of $35.4 million which will expire in the years 2008 to 2019. The
Company has an alternative minimum tax credit carryforward of $91.6 million
which may carry forward indefinitely to offset future regular tax in excess of
alternative minimum tax.

  During 1999, the Company recorded a valuation allowance for a portion of its
deferred tax assets that management believes, more likely than not, will not be
realized. These deferred tax assets include a portion of the alternative minimum
tax credits and some of the deductible temporary differences that will likely
not be realized at the maximum effective tax rate.

NOTE 9. DEBT AND FINANCING ARRANGEMENTS

Debt consists of the following:

<TABLE>
<CAPTION>
                                                            December 31
                                                   ---------------------------
                                                         1999             1998
------------------------------------------------------------------------------
<S>                                                <C>              <C>
Indebtedness to banks under lines of
  credit (weighted average rate at
  December 31, 1998--5.40%)....................... $       --       $   12,884

Indebtedness to banks under revolving
  credit agreement, expiring
  May 31, 2003 (weighted average rate
  at December 31, 1999--7.61%;
  December 31, 1998--6.27%).......................    365,000          390,000

Variable rate fully amortizing term loan
  payable quarterly from July 1, 2001
  through May 31, 2003 (weighted
  average rate at December 31, 1999--
  7.49%; December 31, 1998--6.16%)................    135,000          285,000

Variable rate non-amortizing term loan
due May 31, 2003 (weighted average
rate at December 31, 1999--7.85%;
December 31, 1998--6.87%).........................    675,000          675,000

Other.............................................      5,993            7,203
                                                   ---------------------------
                                                    1,180,993        1,370,087
Less current portion..............................     86,000           61,000
                                                   ---------------------------
Long-term debt.................................... $1,094,993       $1,309,087
                                                   ===========================
</TABLE>


In connection with the Arch Western transaction, the Company entered into two
new five-year credit facilities: a $675 million non-amortizing term loan in the
name of Arch Western, the entity owning the right to the coal reserves and
operating assets acquired in the Arch Western transaction, and a $900 million
credit facility in the name of the Company, including a $300 million fully
amortizing term loan and a $600 million revolver. Borrowings under the Company's
new credit facilities were used to finance the acquisition of ARCO's Colorado
and Utah coal operations, to pay related fees and expenses, to refinance
existing corporate debt and for general corporate purposes. The Company
recognized an extraordinary charge of $1.5 million (net of a tax benefit of $.9
million) related to the refinancing of a July 1, 1997 credit facility and the
prepayment of certain other notes. Borrowings under the Arch Western credit
facility were used to fund a portion of a $700 million cash distribution by Arch
Western to ARCO, which distribution occurred simultaneously with ARCO's
contribution of its Wyoming coal operations and certain other assets to Arch
Western. The $675 million term loan is secured by Arch Western's membership
interests in its subsidiaries. The Arch Western credit facility is not
guaranteed by the Company. The rate of interest on the borrowings under the
agreements is, at the Company's option, the PNC Bank base rate or a rate based
on LIBOR.

  On August 23, 1999, the Company prepaid $105 million or seven required
quarterly installments on the $300 million fully amortizing term loan. The next
required quarterly installment will be July 1, 2001. The prepayments were funded
by additional borrowings under the $600 million revolver.

  The Company periodically establishes uncommitted lines of credit with banks.
These agreements generally provide for short-term borrowings at market rates. At
December 31, 1999, there were $65 million of such agreements in effect, of which
no borrowings were outstanding.

  Except for amounts expected to be repaid in 2000, amounts borrowed under the
revolving


                                                                              59
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)

credit agreement and the bank lines of credit are classified as long-term as the
Company has the intent and the ability to maintain these borrowings on a long-
term basis. Aggregate maturities of debt at December 31, 1999 for the next five
years are $86.0 million in 2000, $30.5 million in 2001, $60.5 million in 2002,
$1.0 billion in 2003 and $.6 million in 2004.

  Terms of the Company's credit facilities and leases contain financial and
other restrictive covenants that limit the ability of the Company to, among
other things, pay dividends, effect acquisitions or dispositions and borrow
additional funds, and require the Company to, among other things, maintain
various financial ratios and comply with various other financial covenants.
Failure by the Company to comply with such covenants could result in an event of
default which, if not cured or waived, could have a material adverse effect on
the Company. At December 31, 1999, as a result of the effect of the write-down
of impaired assets and other restructuring costs, the Company did not comply
with certain of these restrictive covenant requirements, for which the Company
received an amendment on January 21, 2000. These amendments contain, among other
things, provisions for the payment of fees of .25% and an increase in the
interest rate of .375% associated with the Company's term loan and the $600
million revolver. In addition, the amendments require the pledging of assets to
collateralize the term loan and the $600 million revolver by May 20, 2000. The
assets to be pledged are expected to include equity interests in wholly owned
entities, certain real property interests, accounts receivable and inventory of
the Company.

  The Company enters into interest-rate swap agreements to modify the interest
characteristics of the Company's outstanding debt. At December 31, 1999, the
Company had interest-rate swap agreements having a total notional value of $780
million. These swap agreements are used to convert variable-rate debt to fixed-
rate debt. Under these swap agreements, the Company pays a weighted-average
fixed rate of 5.53% (before the credit spread over LIBOR) and is receiving a
weighted-average variable rate based upon 30-day and 90-day LIBOR. At December
31, 1999, the remaining terms of the swap agreements ranged from 32 to 56
months.

NOTE 10. FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts approximate fair value.

Debt: The carrying amounts of the Company's borrowings under its revolving
credit agreement, lines of credit, variable rate term loans and other long-term
debt approximate their fair value.

Interest rate swaps: The fair values of interest rate swaps are based on quoted
prices, which reflect the present value of the difference between estimated
future amounts to be paid and received. At December 31, 1999 and 1998, the fair
value of these swaps is an asset of $27.4 million and a liability of $14.2
million, respectively.

NOTE 11. ACCRUED WORKERS' COMPENSATION

The Company is liable under the federal Mine Safety and Health Act of 1977, as
amended, to provide for pneumoconiosis (black lung) benefits to eligible
employees, former employees, and dependents with respect to claims filed by such
persons on or after July 1, 1973. The Company is also liable under various
states' statutes for black lung benefits. The Company currently provides for
federal and state claims principally through a self-insurance program. Charges
are being made to operations as determined by inde-

60
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


pendent actuaries, at the present value of the actuarially computed present and
future liabilities for such benefits over the employees' applicable years of
service. In addition, the Company is liable for workers' compensation benefits
for traumatic injuries which are accrued as injuries are incurred. Workers'
compensation costs (credits) include the following components:
<TABLE>
<CAPTION>

                                               1999     1998     1997
----------------------------------------------------------------------
<S>                                         <C>      <C>      <C>
Self-insured black lung benefits:
Service cost.............................   $ 1,671  $ 1,022  $   678
Interest cost............................     3,522    3,173    2,353
Net amortization and deferral............       327      111  (10,084)
                                          ---------------------------
                                              5,520    4,306   (7,053)
Other workers' compensation benefits.....    13,241   19,396   12,182
                                          ---------------------------
                                            $18,761  $23,702  $ 5,129
                                          ===========================
</TABLE>

The actuarial assumptions used in the determination of black lung benefits
included a discount rate of 7.50% as of December 31, 1999 (7.00% and 7.25% as of
December 31, 1998 and 1997, respectively) and a black lung benefit cost
escalation rate of 4% in 1999, 1998 and 1997. In consultation with independent
actuaries, the Company changed the discount rate, black lung benefit cost
escalation rate, rates of disability and other assumptions used in the actuarial
determination of black lung liabilities as of January 1, 1993, to better reflect
actual experience. The effect of these changes was a significant increase in the
unrecognized net gain. This gain was amortized through 1997 and totaled $10.8
million (before tax) and $6.6 million (after tax) in 1997.

  Summarized below is information about the amounts recognized in the
consolidated balance sheets for workers' compensation benefits:

<TABLE>
<CAPTION>

                                                                     December 31
                                                               -----------------------
                                                                 1999          1998
--------------------------------------------------------------------------------------
<S>                                                            <C>           <C>
Actuarial present value for self-insured black lung:

   Benefits contractually recoverable from others............. $  3,254      $  4,649

   Benefits for Company employees.............................   48,267        51,137
                                                               ------------------------
   Accumulated black lung benefit obligation..................   51,521        55,786

   Unrecognized net gain (loss)...............................    4,890        (1,722)
                                                               ------------------------
                                                                 56,411        54,064
Traumatic and other workers' compensation.....................   59,923        67,138
                                                               ------------------------

Accrued workers' compensation.................................  116,334       121,202

Less amount included in accrued expenses......................   11,144        15,869
                                                               ------------------------
                                                               $105,190      $105,333
                                                               ========================
</TABLE>
Receivables related to benefits contractually recoverable from others of $3.3
million in 1999 and $4.7 million in 1998 are recorded in other long-term assets.

NOTE 12. ACCRUED RECLAMATION AND MINE CLOSING COSTS

The federal Surface Mining Control and Reclamation Act of 1977 and similar state
statutes require that mine property be restored in accordance with specified
standards and an approved reclamation plan. The Company accrues for the costs of
final mine closure reclamation over the estimated useful mining life of the
property. These costs relate to reclaiming the pit and support acreage at
surface mines and sealing portals at deep mines. Other costs of final mine
closure common to both types of mining are related to

                                                                              61
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)


reclaiming refuse and slurry ponds. The Company also accrues for significant
reclamation that is completed during the mining process prior to final mine
closure. The establishment of the final mine closure reclamation liability and
the other ongoing reclamation liability is based upon permit requirements and
requires various estimates and assumptions, principally associated with costs
and productivities. The Company accrued $12.9 million, $12.5 million and $10.8
million in 1999, 1998 and 1997, respectively, for current and final mine closure
reclamation, excluding reclamation recosting adjustments identified below. Cash
payments for final mine closure reclamation and current disturbances
approximated $15.8 million, $15.0 million and $8.5 million for 1999, 1998 and
1997, respectively. Periodically, the Company reviews its entire environmental
liability and makes necessary adjustments for permit changes as granted by state
authorities, additional costs resulting from accelerated mine closures, and
revisions to costs and productivities, to reflect current experience. These
recosting adjustments are recorded in cost of coal sales. Adjustments included a
net increase in the liability of $4.3 million and $4.9 million in 1999 and 1998,
respectively, and a net decrease in the liability of $4.4 million in 1997. The
Company's management believes it is making adequate provisions for all expected
reclamation and other costs associated with mine closures.

13.  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 health and life
insurance coverage for eligible employees. Generally, covered employees who
terminate employment after meeting the eligibility requirements for pension
benefits are also eligible for postretirement coverage for themselves and their
dependents. The salaried employee postretirement medical and dental plans are
contributory, with retiree contributions adjusted periodically, and contain
other cost-sharing features such as deductibles and coinsurance. The
postretirement medical plan for retirees who were members of the UMWA is not
contributory. The Company's current funding

62
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


policy is to fund the cost of all postretirement health and life insurance
benefits as they are paid. Summaries of the changes in the benefit obligations,
plan assets (primarily listed stocks and debt securities) and funded status of
the plans are as follows:

<TABLE>
<CAPTION>
                                                                                                                 Other
                                                                        Pension benefits                 postretirement benefits
                                                                  ------------------------------------------------------------------
                                                                       1999            1998                1999            1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>              <C>                <C>              <C>
Change in benefit obligations
Benefit obligations at January 1................................   $139,433        $ 84,085            $335,823        $333,908
Service cost....................................................      7,118           5,841               2,424           3,715
Interest cost...................................................      8,980           8,137              21,580          23,101
Benefits paid...................................................    (13,462)         (8,562)            (14,736)        (13,224)
Plan amendments.................................................       (435)         (3,809)                 --         (15,924)
Acquisition of ARCO Coal operations.............................         --          39,674                  --          13,625
Other-primarily actuarial (gain) loss...........................     (9,851)         14,067             (14,245)         (9,378)
                                                                  ------------------------------------------------------------------
Benefit obligations at December 31..............................   $131,783        $139,433            $330,846        $335,823
                                                                  ------------------------------------------------------------------
Change in plan assets
Value of plan assets at January 1...............................   $127,274        $ 64,577            $     --        $     --
Actual return on plan assets....................................     31,308          21,771                  --              --
Employer contributions..........................................      2,097           8,346              14,736          13,224
Acquisition of ARCO Coal operations.............................         --          41,142                  --              --
Benefits paid...................................................    (13,462)         (8,562)            (14,736)        (13,224)
                                                                  ------------------------------------------------------------------
Value of plan assets at December 31.............................   $147,217        $127,274            $     --        $     --
                                                                  ------------------------------------------------------------------
Funded status of the plans
Accumulated obligations less plan assets........................   $(15,434)       $ 12,159            $330,846        $335,823
Unrecognized actuarial gain.....................................     37,513           6,920              16,341           6,918
Unrecognized net transition asset...............................        689             887                  --              --
Unrecognized prior service gain.................................      2,815           2,667              11,561          16,367
                                                                  ------------------------------------------------------------------
Net liability recognized........................................   $ 25,583        $ 22,633            $358,748        $359,108
                                                                  ------------------------------------------------------------------
Balance sheet liabilities (assets)
Prepaid benefit costs...........................................   $     --        $ (1,092)           $     --        $     --
Accrued benefit liabilities.....................................     25,583          23,725             358,748         359,108
                                                                  ------------------------------------------------------------------
Net liability recognized........................................     25,583          22,633             358,748         359,108
Less current portion............................................      3,138           4,109              14,755          15,555
                                                                  ------------------------------------------------------------------
                                                                   $ 22,445        $ 18,524            $343,993        $343,553
                                                                  ==================================================================
</TABLE>

Changes in demographic information associated with the defined benefit pension
plan resulted in a $9.9 million actuarial gain in 1999 and a $14.1 million
actuarial loss for 1998. The Company's primary defined benefit pension plan was
amended January 1998 to a cash balance plan, which resulted in a $3.8 million
gain. The $14.2 million actuarial gain in the postretirement benefit plan during
1999 results primarily from reduced obligations associated with the Dal-Tex
closure. A January 1997 amendment to the postretirement benefit plan resulted in
a $15.9 million gain in 1998. The gain resulted from the implementation of a
defined dollar benefit cap which limits the Company's disbursements under the
plan. The $9.4 million actuarial gain in 1998 resulted from favorable claims
experience compared to previous projections.
                                                                              63
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)


<TABLE>
<CAPTION>
                                                                                                                 Other
                                                                        Pension benefits                 postretirement benefits
                                                                  ------------------------------------------------------------------
                                                                       1999            1998                1999            1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>                 <C>             <C>
Weighted Average Assumptions as of December 31
Discount rate....................................................     7.50%           7.00%               7.50%           7.00%
Rate of compensation increase....................................     5.25%           4.75%                 N/A             N/A
Expected return on plan assets...................................     9.00%           9.00%                 N/A             N/A
Health care cost trend on covered charges........................       N/A             N/A                5.0%            4.5%
</TABLE>

The following table details the components of pension and other postretirement
benefit costs.

<TABLE>
<CAPTION>
                                                                                                          Other
                                                              Pension benefits                    postretirement benefits
                                                      -----------------------------------------------------------------------
                                                         1999       1998       1997            1999       1998       1997
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>        <C>         <C>            <C>         <C>       <C>
Service cost...............................           $ 7,118    $ 5,841    $ 2,788         $ 2,424    $ 3,715    $ 3,717
Interest cost..............................             8,980      8,137      4,970          21,580     23,101     19,546
Expected return on plan assets.............            (9,929)    (7,521)    (4,391)             --         --         --
Other amortization and deferral............            (1,122)       790       (503)         (9,628)    (2,884)    (2,573)
                                                      -----------------------------------------------------------------------
                                                      $ 5,047    $ 7,247    $ 2,864         $14,376    $23,932    $20,690
                                                      =======================================================================
</TABLE>

The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rate by one percentage point each year would increase the accumulated
postretirement obligation as of December 31, 1999 by $44.5 million, or 13.5%,
and the net periodic postretirement benefit cost for 1999 by $3.1 million, or
21.6%.

Multiemployer Pension and Benefit Plans

Under the labor contract with the United Mine Workers of America ("UMWA"), the
Company made payments of $.2 million, $1.3 million and $2.0 million in 1999,
1998, and 1997, respectively, into a multiemployer defined benefit pension plan
trust established for the benefit of union employees. Payments are based on
hours worked and are expensed as paid. Under the Multiemployer Pension Plan
Amendments Act of 1980, a contributor to a multiemployer pension plan may be
liable, under certain circumstances, for its proportionate share of the plan's
unfunded vested benefits (withdrawal liability). The Company has estimated its
share of such amount to be $29.6 million at December 31, 1999. The Company is
not aware of any circumstances which would require it to reflect its share of
unfunded vested pension benefits in its financial statements. At December 31,
1999, approximately 23% of the Company's workforce was represented by the UMWA.
The current UMWA collective bargaining agreement expires at December 31, 2002.

  The Coal Industry Retiree Health Benefit Act of 1992 ("Benefit Act") provides
for the funding of medical and death benefits for certain retired members of the
UMWA through premiums to be paid by assigned operators (former employers),
transfers of monies in 1993 and 1994 from an overfunded pension trust
established for the benefit of retired UMWA members, and transfers from the
Abandoned Mine Lands Fund (funded by a federal tax on coal production)
commencing in 1995. The Company treats its obligation under the Benefit Act as a
participation in a multiemployer plan and recognizes expense as premiums are
paid. The Company recognized $2.7 million in 1999, $3.7 million in 1998, and
$3.9 million in 1997 in expense relative to premiums paid pursuant to the
Benefit Act.

64
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


Other Plans

The Company sponsors savings plans which were established to assist eligible
employees in providing for their future retirement needs. The Company's
contributions to the plans were $8.4 million in 1999, $6.8 million in 1998, and
$4.6 million in 1997.

NOTE 14. CAPITAL STOCK

On April 4, 1997, the Company changed its capital stock whereby the number of
authorized shares was increased to 100,000,000 common shares, the par value was
changed to $.01 per share, and a common stock split of 338.0857-for-one was
effected. All share and per share information reflect the stock split.

  On September 29, 1998, the Company's Board of Directors authorized the Company
to repurchase up to 2 million shares of Company common stock. The timing of the
purchases and the number of shares to be purchased are dependent on market
conditions. Through December 31, 1999, the Company had acquired 1,726,900 shares
under the repurchase program at an average price of $12.29 per share compared to
330,200 shares at an average price of $17.08 per share through December 31,
1998.

  On February 25, 1999, the Company's Board of Directors authorized the Company
to amend its Automatic Dividend Reinvestment Plan to provide, among other
things, that dividends may be reinvested in the Company's common stock by
purchasing authorized but unissued shares (including treasury shares) directly
from the Company, as well as by purchasing shares in the open market. On May 4,
1999, the Company filed a Form S-3 with the Securities and Exchange Commission
to register 2 million shares of the Company's common stock for issuance under
the amended Plan. As reflected in the Prospectus filed therewith, the amended
Plan provides that the Company determines whether the Plan's administrator
should reinvest dividends in shares purchased in the open market or in shares
acquired directly from the Company. The Company authorized and directed its Plan
administrator (for all shareholders who had elected to reinvest their dividends
in Company stock) to reinvest the June 15, 1999 and September 15, 1999 dividends
in the Company's treasury stock. As of December 31, 1999, approximately $2.5
million of the Company's dividends were reinvested in 189,506 shares of treasury
stock. In accordance with the terms of the amended Plan, the treasury stock was
reissued by the Company at the average of the high and low per share sales price
as reported by the New York Stock Exchange on the date of the dividends, which
averaged $13.446 per share. The Company accounts for the issuance of the
treasury stock using the average cost method.

NOTE 15. STOCK INCENTIVE PLAN

On April 22, 1998, the stockholders ratified the adoption of the 1997 Stock
Incentive Plan (the "Company Incentive Plan"), reserving 6,000,000 shares of
Arch Coal common stock for awards to officers and other selected key management
employees of the Company. The Company Incentive Plan provides the Board of
Directors with the flexibility to grant stock options, stock appreciation rights
(SARs), restricted stock awards or units, performance stock or units, merit
awards, phantom stock awards and rights to acquire stock through purchase under
a stock purchase program ("Awards"). Awards the Board of Directors elect to pay
out in cash do not count against the 6,000,000 shares authorized in the 1997
Stock Incentive Plan. Stock options outstanding under the Ashland Coal stock
incentive plans at the date of the Ashland Coal merger were substituted for
fully vested stock options in the Company Incentive Plan (and are exercisable on
the same terms and conditions including per share exercise prices as were
applicable to such options when granted). Stock options generally become
exercisable in full or in part one year from the date of grant

                                                                              65
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)


and are granted at a price equal to 100% of the fair market value of the stock
on the date of grant. SAR's entitle employees to receive a payment equal to the
appreciation in market value of the stated number of common shares from the
SAR's exercise price to the market value of the shares on the date of its
exercise. Unexercised options and SAR's lapse 10 years after the date of grant.
Restricted stock awards and restricted stock units entitle employees to purchase
shares or stock units at a nominal cost. Such awards entitle employees to vote
shares acquired and to receive any dividends thereon, but such shares cannot be
sold or transferred and are subject to forfeiture if employees terminate their
employment prior to the prescribed period, which can be from one to five years.
Restricted stock units generally carry the same restrictions and potential
forfeiture, but are generally paid in cash upon vesting. Merit awards are grants
of stock without restriction and at a nominal cost. Performance stock or unit
awards can be earned by the recipient if the Company meets certain pre-
established performance measures. Until earned, the performance awards are
nontransferable, and when earned, performance awards are payable in cash, stock,
or restricted stock as determined by the Company's Board of Directors. Phantom
stock awards are based on the appreciation of hypothetical underlying shares or
the earnings performance of such shares and may be paid in cash or in shares of
common stock. As of December 31, 1999, performance units and stock options were
the only types of awards granted. As of December 31, 1999, 361,550 performance
units had been granted and will be earned by participants based on Company
performance for the years 1998 through 2001. Information regarding stock options
under the Company Incentive Plan is as follows for the years ended December 31,
1999, 1998 and 1997:


<TABLE>
<CAPTION>


                                                          1999                        1998                        1997
                                                  ----------------------------------------------------------------------------
                                                              Weighted                    Weighted                    Weighted
                                                  Common       Average        Common       Average        Common       Average
                                                  Shares         Price        Shares         Price        Shares         Price
------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>             <C>         <C>             <C>         <C>
Options outstanding at January 1.................  1,128        $24.86           926        $25.23            --        $   --
Issued in exchange for Ashland Coal
  stock options..................................     --            --            --            --           675         23.69
Granted..........................................    744         10.69           360         22.88           300         27.88
Exercised........................................     --            --           (48)        14.50           (49)        21.25
Canceled.........................................    (63)        16.28          (110)        25.88            --            --
                                                  ------                      ------                      ------
Options outstanding at December 31...............  1,809         19.33         1,128         24.86           926         25.23
                                                  ------                      ------                      ------
Options exercisable at December 31...............    837        $24.77           600        $25.04           626        $23.88
Options available for grant at December 31.......  4,094                       4,775                       5,025

</TABLE>

The Company applies APB 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for the Company Incentive Plan.
Accordingly, no compensation expense has been recognized for the fixed stock
option portion of the Company Incentive Plan. Had compensation expense for the
fixed stock option portion of the Company Incentive Plan been determined based
on the fair value at the grant dates for awards under this plan consistent with
the method of FAS 123, Accounting for Stock-Based Compensation, the Company's
net income (loss) and earnings (loss) per common share would have been changed
to the pro forma amounts as

66
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


indicated in the table below. The fair value of options granted in 1999, 1998
and 1997 was determined to be $2.9 million, $2.3 million and $2.5 million,
respectively, using the Black-Scholes option pricing model and the weighted
average assumptions noted below. For purposes of these pro forma disclosures,
the estimated fair value of the options is recognized as compensation expense
over the options' vesting period. The stock options granted in 1999 vest over
four years, while the stock options granted in 1998 and 1997 vest ratably over
three years.

<TABLE>
<CAPTION>


                                                                                1999               1998               1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                   <C>               <C>
Pro forma (unaudited)
  Net income (loss) (in millions).........................................   $(347.7)             $29.3              $30.1
  Basic and  diluted earnings (loss) per share............................   $ (9.06)             $ .74              $ .98
                                                                             ----------------------------------------------
Weighted average fair value per share of options granted..................   $  4.13              $7.22              $8.36
                                                                             ----------------------------------------------
Assumptions (weighted average)
  Risk-free interest rate.................................................       6.6%               6.0%               6.3%
  Expected dividend yield.................................................       2.0%               2.0%               2.0%
  Expected volatility.....................................................      41.4%              31.8%              29.0%
  Expected life (in years)................................................       5.0                5.0                5.0

</TABLE>

The pro forma effect on net income (loss) for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants issued prior to 1996.

  Exercise prices for options outstanding as of December 31, 1999, range from
$10.6875 to $34.375, and the weighted average remaining contractual life at that
date was 7.3 years. The table below shows pertinent information on options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>

(Options in thousands)                            Options outstanding                               Options exercisable
-----------------------------------------------------------------------------------------------------------------------------
                                         Weighted average                                                            Weighted
Range of                Number      remaining contractual        Weighted average               Number       average exercise
exercise prices    outstanding               life (years)          exercise price          exercisable                  price
-----------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                <C>                       <C>                         <C>               <C>
$10 - $18                  754                       8.63                  $11.08                   65                 $15.24
$22 - $23                  544                       6.84                  $22.58                  342                 $22.41
$25 - $35                  511                       5.77                  $28.04                  430                 $28.07
</TABLE>

NOTE 16. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

The Company places its cash equivalents in investment-grade short-term
investments and limits the amount of credit exposure to any one commercial
issuer.

  The Company markets its coal principally to electric utilities in the United
States. As of December 31, 1999 and 1998, accounts receivable from electric
utilities located in the United States totaled $120.2 million and $152.1
million, respectively. Generally, credit is extended based on an evaluation of
the customer's financial condition, and collateral is not generally required.
Credit losses are provided for in the financial statements and historically have
been minimal.

  The Company is committed under long-term contracts to supply coal that meets
certain quality requirements at specified prices. These prices are generally
adjusted based on indices. Quantities sold under some of these contracts may
vary from year to year within certain limits at the option of the customer.
Sales (including spot sales) to major customers were as follows:

<TABLE>
<CAPTION>
                         1999      1998      1997
-------------------------------------------------
<S>                   <C>       <C>      <C>
AEP................. $157,278  $195,682  $129,981
Southern Company....  163,826   170,452   187,800
</TABLE>

                                                                              67
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)


NOTE 17. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings
(loss) per common share:

<TABLE>
<CAPTION>

                                                                                        1999            1998        1997
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>               <C>          <C>
Numerator:
  Income (loss) before extraordinary loss and cumulative effect of
  accounting change.............................................................   $(350,093)        $31,501     $30,281
  Extraordinary loss from the extinguishment of debt, net of taxes..............          --          (1,488)         --
  Cumulative effect of accounting change, net of taxes..........................       3,813              --          --
                                                                                   ----------------------------------------
  Net income (loss).............................................................   $(346,280)        $30,013     $30,281
                                                                                   ========================================
Denominator:
  Weighted average shares-denominator for basic.................................      38,392          39,626      30,374
  Dilutive effect of employee stock options.....................................          --              25          34
                                                                                   ----------------------------------------
  Adjusted weighted average shares-denominator for diluted......................      38,392          39,651      30,408
                                                                                   ========================================
Basic and diluted earnings (loss) per common share before extraordinary
  loss and cumulative effect of accounting change...............................   $   (9.12)        $   .79     $  1.00
                                                                                   ========================================
Basic and diluted earnings (loss) per common share..............................   $   (9.02)        $   .76     $  1.00
                                                                                   ========================================
</TABLE>

At December 31, 1999, 1998 and 1997, 1.8 million, 1.1 million and .4 million
shares, respectively, were not included in the diluted earnings per share
calculation since the shares are antidilutive.

NOTE 18. SALE AND LEASEBACK

On January 29, 1998, the Company sold mining equipment for approximately $74.2
million and leased back the equipment under an operating lease with a term of
three years. This included the sale and leaseback of equipment purchased under
an existing operating lease that expired on the same day. The proceeds of the
sale were used to purchase the equipment under the expired lease for $28.3
million and to pay down debt. At the end of the lease term, the Company has the
option to renew the lease for two additional one-year periods or purchase the
equipment. Alternatively, the equipment may be sold to a third party. In the
event of such a sale, the Company will be required to make a payment to the
lessor in the event, and to the extent, that the proceeds are below a certain
threshold. The gain on the sale and leaseback of $10.7 million was deferred and
is being amortized over the base term of the lease as a reduction of rental
expense. Effective April 1, 1999, as a result of the shutdown of the Dal-Tex
operation, the Company purchased for $14.4 million several pieces of equipment
under lease that were included in this transaction and transferred them to the
Company's Wyoming operations. A pro-rata portion of the deferred gain, or $3.1
million, was offset against the cost of the assets. After the effect of this
purchase, at the end of the lease term, the remaining assets can be purchased
for $40.1 million or sold to a third party with the Company required to make a
payment to the lessor in the event, and to the extent that, proceeds are below
$31.3 million.

NOTE 19. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company receives certain services and
purchases fuel, oil and other products on a competitive basis from subsidiaries
of Ashland Inc., which totaled $4.8 million in 1999, $7.2 million in 1998, and
$4.7 million in 1997. At December 31, 1999, Ashland Inc. owns approximately 58%
of the Company's outstanding shares of common stock. Management believes that
charges between the Company and Ashland Inc. for services and purchases were
transacted on terms equivalent to those prevailing among unaffiliated parties.

  As described in Note 1, the Company has a 65% ownership interest in Canyon
Fuel which is accounted for on the equity method. The Company receives
administration and production fees

68
<PAGE>

                                                Arch Coal, Inc. and Subsidiaries


from Canyon Fuel for managing the Canyon Fuel operations. The fees recognized as
other income by the Company and as expense by Canyon Fuel were $7.0 million and
$4.1 million for the years ended December 31, 1999 and 1998, respectively.

NOTE 20. COMMITMENTS AND CONTINGENCIES

The Company leases equipment, land and various other properties under
noncancelable long-term leases, expiring at various dates. Rental expense
related to these operating leases amounted to $44.2 million in 1999, $31.4
million in 1998, and $14.9 million in 1997. The Company has also entered into
various noncancelable royalty lease agreements and federal lease bonus payments
under which future minimum payments are due. On October 1, 1998, the Company was
the successful bidder in a federal auction of certain mining rights in the 3,546
acre Thundercloud tract in the Powder River Basin of Wyoming. The Company's
lease bonus bid amounted to $158 million for the tract, of which $31.6 million
was paid on October 1, 1998 (the remaining lease bonus payments are reflected
below under the caption "Royalties"). The tract contains approximately 412
million tons of demonstrated coal reserves and is contiguous with the Company's
Black Thunder mine. Geological surveys performed by outside consultants indicate
that there are sufficient reserves relative to these properties to permit
recovery of the Company's investment.

  Minimum payments due in future years under these agreements in effect at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
               Leases   Royalties
---------------------------------
<S>           <C>       <C>
2000........  $ 29,878   $ 63,421
2001........    23,731     63,026
2002........    17,728     62,799
2003........    10,427     62,485
2004........     6,389     30,474
Thereafter..    21,950    196,805
              -------------------
              $110,103   $479,010
              ===================

</TABLE>

  On October 20, 1999, the U.S. District Court for the Southern District of West
Virginia permanently enjoined the West Virginia Division of Environmental
Protection (the "West Virginia DEP") from issuing any new permits that authorize
the construction of valley fills as part of coal mining operations in West
Virginia. The West Virginia DEP complied with the district court's  injunction
by issuing an order banning the issuance of nearly all new permits for valley
fills and prohibiting the further advancement of nearly all existing fills. The
West Virginia DEP also filed an appeal of the district court's decision with the
U.S. Court of Appeals for the Fourth Circuit. On October 29, 1999, the district
court granted a stay of its injunction, pending the outcome of the West Virginia
DEP's appeal. It is impossible to predict the outcome of the appeal. If,
however, the district court's decision is not overturned or if a legislative or
other solution is not achieved, then the Company's and other coal producer's
ability to mine coal in West Virginia will be seriously compromised. This
injunction was entered as part of the litigation that caused the delay in
obtaining mining permits for the Company's Dal-Tex operation. As a result of
such delay, the Company idled its Dal-Tex mining operation on July 23, 1999.
Reopening the Dal-Tex operation is contingent upon the district court's
injunction being overturned or a legislative or other solution being achieved,
as well as then-existing market conditions.

  The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. As of December 31, 1999, the
Company estimates that its probable aggregate loss as a result of such claims is
$5.2 million (included in other noncurrent liabilities). The Company estimates
that its reasonably possible aggregate losses from all currently pending
litigation could be as much as $.5 million (before tax) in excess of the loss
previously recognized.

                                                                              69
<PAGE>

Notes to Consolidated Financial Statements

(in thousands of dollars except share and per share data)


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 the consolidated financial condition, results
of operations or liquidity of the Company.

  The Company holds a 17.5% general partnership interest in Dominion Terminal
Associates ("DTA"), which operates a ground storage-to-vessel coal transloading
facility in Newport News, Virginia. DTA leases the facility from Peninsula Ports
Authority of Virginia ("PPAV") for amounts sufficient to meet debt-service
requirements. Financing is provided through $132.8 million of tax-exempt bonds
issued by PPAV (of which the Company is responsible for 17.5%, or $23.2 million)
which mature July 1, 2016. Under the terms of a throughput and handling
agreement with DTA, each partner is charged its share of cash operating and
debt-service costs in exchange for the right to use its share of the facility's
loading capacity and is required to make periodic cash advances to DTA to fund
such costs. On a cumulative basis, costs exceeded cash advances by $10.3 million
at December 31, 1999 (included in other noncurrent liabilities). Future
payments for fixed operating costs and debt service are estimated to
approximate $3.3 million annually through 2015 and $26.0 million in 2016.

  In connection with the Arch Western transaction, the Company entered into an
agreement pursuant to which the Company agreed to indemnify another member of
Arch Western against certain tax liabilities in the event that such liabilities
arise as a result of certain actions taken prior to June 1, 2013, including the
sale or other disposition of certain properties of Arch Western, the repurchase
of certain equity interests in Arch Western by Arch Western or the reduction
under certain circumstances of indebtedness incurred by Arch Western in
connection with the Arch Western transaction. Depending on the time at which any
such indemnification obligation was to arise, it could have a material adverse
effect on the business, results of operations and financial condition of the
Company.

NOTE 21. CASH FLOW

The changes in operating assets and liabilities as shown in the consolidated
statements of cash flows are comprised of the following:


<TABLE>
<CAPTION>

                                                             1999       1998       1997
----------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>
Decrease (increase) in operating assets:
   Receivables.........................................  $ 38,356   $(35,464)  $(12,179)
   Inventories.........................................     5,188      6,723     16,323
Increase (decrease) in operating liabilities:
   Accounts payable and accrued expenses...............   (15,593)    30,229      5,403
   Income taxes........................................   (76,952)   (35,057)   (27,448)
   Accrued postretirement benefits other than pension..       440      6,813      7,437
   Accrued reclamation and mine closure................   (20,767)     1,936     (9,370)
   Accrued workers' compensation.......................      (143)       149     (9,008)
                                                         -------------------------------
Changes in operating assets and liabilities............  $(69,471)  $(24,671)  $(28,842)
                                                         ===============================
</TABLE>

70
<PAGE>


                                                Arch Coal, Inc. and Subsidiaries


NOTE 22. ACCOUNTING DEVELOPMENT

In June 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 2000. FAS 133 permits early
adoption as of the beginning of any fiscal quarter after its issuance. FAS 133
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what effect FAS 133 will have on the earnings and financial
position of the Company.

NOTE 23. SUBSEQUENT EVENTS (UNAUDITED)

The Company temporarily idled its West Elk underground mine in Gunnison County,
Colorado, on January 28, 2000 following the detection of higher-than-normal
levels of carbon monoxide in a portion of the mine. Higher-than-normal readings
of carbon monoxide indicate that combustion is present somewhere within the
affected portion of the mine. The Company has sealed the affected portion of the
mine while it further isolates the affected area and determines the cause of and
solutions to the problem. West Elk produced approximately 7.3 million tons of
coal in 1999, employs approximately 300 people and generated approximately $13.1
million of the Company's total operating income in 1999. The Company does not
believe the mine's closure will have a material long-term effect on the
Company's financial condition, but it could have a material adverse effect on
the Company's results of operations until the mine is reopened and fully
operating.

     Ashland Inc., which owns approximately 58% of the outstanding common stock
of the Company, announced on March 16, 2000 that its Board of Directors has
declared a taxable distribution of approximately 17.4 million of its 22.1
million shares of the Company's common stock. The distribution will be in the
form of a taxable dividend, to be distributed on or around March 27, 2000 to
Ashland's stockholders of record as of March 24, 2000. Ashland also confirmed
that it plans to dispose of its remaining 4.7 million shares of the Company's
common stock in a tax efficent manner after the distribution, subject to then-
existing market conditions.

     Subsequent to December 31, 1999, the Company's Board of Directors adopted a
stockholder rights plan under which preferred share purchase rights ("Rights")
are to be distributed as a dividend to holders of Company common stock on March
20, 2000 (the "Record Date"). The Rights will become exercisable only if a
person or group (other than certain affiliated entities, including Ashland Inc.,
except in certain circumstances, an "Acquiring Person") acquires 20% or more of
the Company common stock or announces a tender or exchange offer which would
result in the Acquiring Person becoming the beneficial owner of 20% or more of
the Company's outstanding shares of common stock. When exercisable, each Right
entitles the holder to purchase 1/100 of a share of a series of junior
participating preferred stock at an exercise price of $42 per 1/100 of a share,
or in certain circumstances, will allow the holder (except for the Acquiring
Person) to purchase common stock from the Company or voting stock of the
Acquiring Person at one-half the then current market price. At its option, the
Company's Board may allow holders (except for the Acquiring Person) to exchange
their Rights for Company common stock. The Rights will expire on March 20, 2010,
subject to earlier redemption by the Company.

                                                                              71
<PAGE>

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)


NOTE 24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial data for 1999 and 1998 is summarized below:
<TABLE>
<CAPTION>

                                                                       March 31       June 30   Sept. 30       Dec. 31
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>        <C>            <C>
1999:
   Coal sales, equity income and other revenues........................$421,126       $391,292   $382,236       $ 372,728
   Income (loss) from operations.......................................  13,983/(1)/    20,739     12,602        (374,350)/(3)/
   Income (loss) before cumulative effect of accounting change.........  (2,380)         2,459     (1,820)       (348,352)
   Net income (loss)...................................................   1,433/(2)/     2,459     (1,820)       (348,352)
   Basic and diluted earnings (loss) per common share before
    cumulative effect of accounting change/(7)/........................   (0.06)          0.06      (0.05)          (9.12)
   Basic and diluted earnings (loss) per common share/(7)/.............    0.04           0.06      (0.05)          (9.12)
1998:
   Coal sales, equity income and other revenues........................$312,564/(4)/  $353,238   $424,123/(5)/  $ 415,710
   Income from operations..............................................  22,359         27,450     23,909          14,129/(6)/
   Income before extraordinary loss....................................  15,821         14,999        544             137
   Net income..........................................................  15,821         13,511        544             137
   Basic and diluted earnings per common share before
    extraordinary loss/(7)/............................................    0.40           0.38       0.01            0.00
   Basic and diluted earnings per common share/(7)/....................    0.40           0.34       0.01            0.00
</TABLE>
(1)  During the first quarter of 1999, the Company recorded a charge of $6.5
     million related to severance costs, obligations for non-cancelable lease
     payments and a change in the reclamation liability due to the shut-down of
     the Company's Dal-Tex operation.
(2)  During the first quarter of 1999, the Company changed its depreciation
     method on preparation plants and loadouts and recorded a cumulative effect
     adjustment which increased income by $3.8 million (net of tax) from
     applying the new method for years prior to 1999.
(3)  During the fourth quarter of 1999, the Company recorded a one-time pre-tax
     charge of $364.6 million to write-down the assets at its Dal-Tex, Hobet 21
     and Coal-Mac operations and write-down certain other coal reserves in
     central Appalachia and a $16.3 million pre-tax charge related to the
     restructuring of the Company's administrative work force and the closure of
     mines in Illinois, Kentucky and West Virginia.
(4)  During the first quarter of 1998, the Company recorded gains on the sale of
     surplus land totaling $7.9 million.
(5)  During the third quarter of 1998, the Company sold idle assets and reserves
     in eastern Kentucky for a gain of $18.5 million.
(6)  During the fourth quarter of 1998, the Company sold its idle Big Sandy
     Terminal for a gain of $7.5 million. This was partially offset by a net
     unfavorable adjustment of $4.9 million associated with the Company's
     routine, periodic review of reclamation accruals.
(7)  The sum of the quarterly earnings (loss) per common share amounts may not
     equal earnings (loss) per common share for the full year because per share
     amounts are computed independently for each quarter and for the year based
     on the weighted average number of common shares outstanding during each
     period.

72
<PAGE>




                                                                   SCHEDULE II

                        ARCH COAL, INC. AND SUBSIDIARIES

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

                                 (In thousands)

<TABLE>
<CAPTION>
                                    Additions
                         Balance at Charged to                            Balance at
                         Beginning  Costs and                               End of
      Description         of Year    Expenses  Deductions(/1/) Other(/2/)    Year
      -----------        ---------- ---------- --------------- ---------- ----------
<S>                      <C>        <C>        <C>             <C>        <C>
Year Ended December 31,
 1999
  Reserves Deducted from
   Asset Accounts
    Property, Plant, and
     Equipment..........  $   --      $  --        $  --         $  --     $   --
    Other Assets--Other
     Notes and Accounts
     Receivable.........      582        325          366           --         541
    Current Assets--
     Supplies Inventory.   23,901      5,966        6,325           --      23,542
Year Ended December 31,
 1998
  Reserves Deducted from
   Asset Accounts
    Property, Plant, and
     Equipment..........  $   --      $  --        $  --         $  --     $   --
    Other Assets--Other
     Notes and Accounts
     Receivable.........      471        306          195           --         582
    Current Assets--
     Supplies Inventory.   17,681      2,292        5,999         9,927     23,901
Year Ended December 31,
 1997
  Reserves Deducted from
   Asset Accounts
    Property, Plant, and
     Equipment..........  $   100     $  --        $  100        $  --     $   --
    Other Assets--Other
     Notes and Accounts
     Receivable.........      410         61          --            --         471
    Current Assets--
     Supplies Inventory.   11,313      1,218          282         5,432     17,681
</TABLE>
--------
(/1/Reserves)utilized, unless otherwise indicated.
(/2/Balances)acquired in the Arch Western transaction and Ashland Coal merger.

                                       25
<PAGE>
                                  EXHIBIT INDEX


     Exhibit No.                           Description
    ------------      -----------------------------------------------------

        23.2            Consent of PricewaterhouseCoopers LLP
        23.3            Consent of Ernst & Young LLP