UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 333-107569-03

Arch Western Resources, LLC

(Exact name of registrant as specified in its charter)


Delaware		43-1811130
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification Number)

One CityPlace Drive, Suite 300, St. Louis, Missouri		63141
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (314) 994-2700

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At November 15, 2010, the registrant’s common equity consisted solely of undenominated membership interests, 99.5% of which were held by Arch Western Acquisition Corporation and 0.5% of which were held by a subsidiary of BP p.l.c.

Table of Contents


	Page
Part I FINANCIAL INFORMATION		1
Item 1. Financial Statements		1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23

Part II OTHER INFORMATION		23
Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Reserved		23
Item 5. Other Information		23
Item 6. Exhibits		25
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands)


	Three Months Ended September 30						Nine Months Ended September 30
	2010			2009			2010			2009
	(unaudited)
Revenues
Coal sales	$	550,198		$	390,313		$	1,504,523		$	1,167,369

Costs, expenses and other
Cost of coal sales		445,814			323,973			1,239,893			1,005,640
Depreciation, depletion and amortization		39,756			38,290			123,883			113,058
Amortization of acquired sales contracts, net		10,038			78			26,005			(92	)
Selling, general and administrative expenses		8,172			12,654			27,421			29,722
Other operating income, net		(1,093	)		(3,492	)		(3,597	)		(5,363	)

		502,687			371,503			1,413,605			1,142,965


Income from operations		47,511			18,810			90,918			24,404

Interest expense, net:
Interest expense		(15,892	)		(16,915	)		(50,966	)		(50,264	)
Interest income, primarily from Arch Coal, Inc.		13,714			11,318			39,732			34,684

		(2,178	)		(5,597	)		(11,234	)		(15,580	)


Other non-operating expense
Loss on early extinguishment of debt		(6,776	)		—			(6,776	)		—

		(6,776	)		—			(6,776	)		—


Net income	$	38,557		$	13,213		$	72,908		$	8,824

Net income (loss) attributable to redeemable membership interest	$	181		$	31		$	325		$	(11	)
Net income attributable to non-redeemable membership interest	$	38,376		$	13,182		$	72,583		$	8,835

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

Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)


	September 30,		December 31,
	2010		2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	61,911	$	6,819
Receivables		2,234		8,379
Inventories		140,878		165,650
Other		17,151		23,350

Total current assets		222,174		204,198

Property, plant and equipment, net		1,487,723		1,548,300

Other assets:
Receivable from Arch Coal, Inc.		1,440,112		1,541,243
Other		11,509		14,172

Total other assets		1,451,621		1,555,415


Total assets	$	3,161,518	$	3,307,913


LIABILITIES AND MEMBERSHIP INTERESTS
Current liabilities:
Accounts payable	$	98,486	$	74,508
Accrued expenses		129,200		144,432
Commercial paper		55,716		49,452

Total current liabilities		283,402		268,392
Long-term debt		451,780		954,782
Note payable to Arch Coal, Inc.		225,000		—
Asset retirement obligations		291,756		274,914
Accrued postretirement benefits other than pension		29,473		28,819
Accrued pension benefits		35,745		34,523
Accrued workers’ compensation		3,848		4,067
Other noncurrent liabilities		52,391		26,744

Total liabilities		1,373,395		1,592,241

Redeemable membership interest		10,173		8,962

Non-redeemable membership interest		1,777,950		1,706,710


Total liabilities and membership interests	$	3,161,518	$	3,307,913

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

Arch Western Resources, LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)


	Nine Months Ended September 30
	2010			2009
	(unaudited)
OPERATING ACTIVITIES
Net income	$	72,908		$	8,824
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization		123,883			113,058
Amortization of acquired sales contracts, net		26,005			(92	)
Loss on early extinguishment of debt		6,776			—
Changes in:
Receivables		6,145			(2,006	)
Inventories		24,772			(17,818	)
Accounts payable and accrued expenses		12,142			(42,529	)
Other		50,529			47,279


Cash provided by operating activities		323,160			106,716


INVESTING ACTIVITIES
Capital expenditures		(66,828	)		(106,766	)
Change in receivable from Arch Coal, Inc.		75,383			21,760
Proceeds from dispositions of property, plant and equipment		74			80
Additions to prepaid royalties		(2,835	)		(2,409	)
Reimbursement of deposits on equipment		—			3,209


Cash provided by (used in) investing activities		5,794			(84,126	)


FINANCING ACTIVITIES
Repayment of long-term debt, including redemption premium		(505,627	)		—
Loan from Arch Coal, Inc.		225,000			—
Net proceeds from (repayments on) commercial paper		6,264			(22,059	)
Debt financing costs		(390	)		(140	)
Contribution from non-redeemable membership interest		891			—


Cash used in financing activities		(273,862	)		(22,199	)


Increase in cash and cash equivalents		55,092			391
Cash and cash equivalents, beginning of period		6,819			2,851


Cash and cash equivalents, end of period	$	61,911		$	3,242

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

Arch Western Resources, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Arch Western Resources, LLC and its subsidiaries and controlled entities (the “Company”). Arch Coal, Inc. (“Arch Coal”) has a 99.5% common membership interest in the Company, while BP p.l.c. has a 0.5% common membership interest and a preferred membership interest in the Company. The terms of the Company’s membership agreement grant a put right to BP p.l.c., where BP p.l.c. may require Arch Coal to purchase its membership interest. The terms of the agreement state that the price of the membership interest shall be determined by mutual agreement between the members. Intercompany transactions and accounts have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and U.S. Securities and Exchange Commission regulations. In the opinion of management, all adjustments, consisting of normal, recurring accruals considered necessary for a fair presentation, have been included. Results of operations for the three and nine month periods ended September 30, 2010 are not necessarily indicative of results to be expected for the year ending December 31, 2010. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

2. Accounting Policies

There are no new accounting pronouncements whose adoption is expected to have a material impact on the Company’s condensed consolidated financial statements.

3. Debt

Refinancing of senior notes

On September 8, 2010, the Company redeemed $500.0 million aggregate principal amount of the outstanding 6.75% senior notes at a redemption price of 101.125%. The Company funded this redemption with cash transferred from Arch Coal in the form of a loan of $225.0 million and a repayment of a portion of the balance receivable from Arch Coal. See Note 7, “Related Party Transactions” for details on the loan. The Company recognized a loss on the redemption of $6.8 million, including the payment of the $5.6 million redemption premium, the write-off of $3.3 million of unamortized debt financing costs, partially offset by the write-off of $2.1 million of the original issue premium on the 6.75% senior notes.

The loan was made pursuant to an intercompany credit agreement with Arch Coal. Under the intercompany credit agreement, the Company may borrow up to $675.0 million through July 1, 2013, or such later date as designated by Arch Coal. Interest on loans outstanding under the agreement is calculated at a per annum rate equal to the three month LIBOR rate plus 200 or 250 basis points, depending on the Company’s leverage ratio, as defined in the agreement, at the date the rate is determined. Interest is due on any outstanding loans on the first day of each calendar quarter. The Company may repay the balance of the loan at any time, in whole or in part, without penalty. It is currently management’s intention not to prepay the balance of the loan within the next year. Therefore, the loan is classified on the accompanying condensed consolidated balance sheets as noncurrent.

Amendments to agreements

On March 25, 2010, the Company entered into an amendment to its commercial paper program which decreased the maximum aggregate principal amount of the program to $75 million from $100 million. The commercial paper program is supported by a line of credit that expires on April 30, 2011.

4. Inventories

Inventories consist of the following:


	September 30,		December 31,
	2010		2009
	(In thousands)
Coal	$	33,070	$	42,316
Repair parts and supplies, net of allowance		107,808		123,334

	$	140,878	$	165,650

The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $13.2 million at September 30, 2010, and $12.6 million at December 31, 2009.

5. 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: At September 30, 2010 and December 31, 2009, the carrying amounts of cash and cash equivalents approximate fair value.

Debt: The fair value of the Company’s debt, including commercial paper and excluding intercompany debt, was $511.3 million and $992.3 million at September 30, 2010 and December 31, 2009, respectively. Fair values are based upon observed prices in active markets when available or from valuation models using market information.

6. Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income items are transactions recorded in membership interests during the year, excluding net income and transactions with members.

The following table presents the components of comprehensive income:


	Three Months Ended					Nine Months Ended
	September 30					September 30
	2010			2009		2010			2009
				(In thousands)
Net income	$	38,557		$	13,213	$	72,908		$	8,824
Other comprehensive income:
Pension, postretirement and other post-employment benefits — reclassifications into net income		(425	)		14,387		(1,276	)		14,680

Total comprehensive income	$	38,132		$	27,600	$	71,632		$	23,504

7. Related Party Transactions

Transactions with Arch Coal may not be at arm’s length. If the transactions were negotiated with an unrelated party, the impact could be material to the Company’s results of operations.

The Company’s cash transactions are managed by Arch Coal. Cash paid to or from the Company that is not considered a distribution, a contribution, or a loan is recorded in an Arch Coal receivable account. In addition, any amounts owed between the Company and Arch Coal are recorded in the account. At September 30, 2010 and December 31, 2009 the receivable from Arch Coal was approximately $1.4 billion and $1.5 billion, respectively. This amount earns interest from Arch Coal at the prime interest rate. Interest earned on the note was $13.6 million and $11.3 million for the three months ended September 30, 2010 and 2009, respectively, and $39.4 million and $34.6 million for the nine months ended September 30, 2010 and 2009, respectively. The receivable is payable on demand; however, it is currently management’s intention to not demand payment of the receivable within the next year. Therefore, the receivable is classified on the accompanying condensed consolidated balance sheets as noncurrent.

As mentioned in Note 3 “Debt”, during the third quarter of 2010, the Company received a loan of $225.0 million and a repayment of a portion of the balance receivable from Arch Coal to redeem $500.0 million aggregate principal amount of

the outstanding 6.75% senior notes at a redemption price of 101.125%. Interest on the loan was $0.4 million for the three months ended September 30, 2010.

The Company is a party to Arch Coal’s accounts receivable securitization program. Under the program, the Company sells its receivables to Arch Coal without recourse at a discount based on the prime interest rate and days sales outstanding. During the three months ended September 30, 2010 and 2009, the Company sold $442.3 million and $315.8 million, respectively, of trade accounts receivable to Arch Coal at a total discount of $1.0 million and $0.7 million, respectively. During the nine months ended September 30, 2010 and 2009, the Company sold $1.3 billion and $1.0 billion, respectively, of trade accounts receivable to Arch Coal at a discount of $3.0 million and $2.5 million, respectively. These transactions are recorded through the Arch Coal receivable account.

For the three month periods ended September 30, 2010 and 2009, the Company incurred production royalties of $27.0 million and $10.1 million, respectively, payable to Arch Coal under sublease agreements. For the nine month periods ended September 30, 2010 and 2009, the Company incurred production royalties of $65.9 million and $31.3 million, respectively, payable to Arch Coal under sublease agreements. These amounts are reported as cost of coal sales in the accompanying condensed consolidated statements of income.

The Company is charged selling, general and administrative services fees by Arch Coal. Expenses are allocated based on Arch Coal’s best estimates of proportional or incremental costs, whichever is more representative of costs incurred by Arch Coal on behalf of the Company. Amounts allocated to the Company by Arch Coal were $8.2 million and $12.7 million for the three months ended September 30, 2010 and 2009, respectively, and $27.4 million and $29.7 million for the nine months ended September 30, 2010 and 2009, respectively. Such amounts are reported as selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

8. Contingencies

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 estimable. After conferring with counsel, it is the opinion of management that the ultimate resolution of pending claims will not have a material adverse effect on the condensed consolidated financial condition, results of operations or liquidity of the Company.

9. Segment Information

The Company has two reportable business segments, which are based on the major low-sulfur coal basins in which the Company operates. Both of these reportable business segments include a number of mine complexes. The Company manages its coal sales by coal basin, not by individual mine complex. Geology, coal transportation routes to customers, regulatory environments and coal quality are generally consistent within a basin. Accordingly, market and contract pricing have developed by coal basin. Mine operations are evaluated based on their per-ton operating costs (defined as including all mining costs but excluding pass-through transportation expenses), as well as on other non-financial measures, such as safety and environmental performance. The Company’s reportable segments are the Powder River Basin (PRB) segment, with operations in Wyoming, and the Western Bituminous (WBIT) segment, with operations in Utah, Colorado and southern Wyoming.

Operating segment results for the three and nine month periods ended September 30, 2010 and 2009 are presented below. Results for the operating segments include all direct costs of mining. Corporate, Other and Eliminations includes corporate overhead, other support functions, and the elimination of intercompany transactions.

The asset amounts below represent an allocation of assets used in the segments’ cash-generating activities. The amounts in the Corporate, Other and Eliminations represent primarily intercompany receivables.


						Corporate,
						Other and
	PRB		WBIT			Eliminations			Consolidated
			(In thousands)
Three months ended September 30, 2010
Coal sales	$	412,165	$	138,033		$	—		$	550,198
Income from operations		39,450		15,190			(7,129	)		47,511
Depreciation, depletion and amortization		21,752		18,004			—			39,756
Amortization of acquired sales contracts, net		10,038		—			—			10,038
Capital expenditures		7,922		20,703			—			28,625

Three months ended September 30, 2009
Coal sales	$	242,022	$	148,291		$	—		$	390,313
Income from operations		11,112		17,083			(9,385	)		18,810
Depreciation, depletion and amortization		17,434		20,856			—			38,290
Amortization of acquired sales contracts, net		78		—			—			78
Capital expenditures		7,518		13,871			—			21,389

Nine months ended September 30, 2010
Coal sales	$	1,101,700	$	402,823		$	—		$	1,504,523
Income from operations		74,311		41,500			(24,893	)		90,918
Total assets		1,037,767		649,791			1,473,960			3,161,518
Depreciation, depletion and amortization		67,452		56,431			—			123,883
Amortization of acquired sales contracts, net		26,005		—			—			26,005
Capital expenditures		12,321		54,507			—			66,828

Nine months ended September 30, 2009
Coal sales	$	786,117	$	381,252		$	—		$	1,167,369
Income from operations		45,834		5,781			(27,211	)		24,404
Total assets		835,601		708,157			1,512,800			3,056,558
Depreciation, depletion and amortization		54,038		59,020			—			113,058
Amortization of acquired sales contracts, net		219		(311	)		—			(92	)
Capital expenditures		49,389		57,377			—			106,766

A reconciliation of segment income from operations to consolidated net income is presented below.


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2010			2009			2010			2009
				(In thousands)
Income from operations	$	47,511		$	18,810		$	90,918		$	24,404
Interest expense		(15,892	)		(16,915	)		(50,966	)		(50,264	)
Interest income		13,714			11,318			39,732			34,684
Loss on early extinguishment of debt		(6,776	)		—			(6,776	)		—

Net income	$	38,557		$	13,213		$	72,908		$	8,824

10. Supplemental Condensed Consolidating Financial Information

Pursuant to the indenture governing the Arch Western Finance senior notes, certain wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes on a joint and several basis. The following tables present condensed consolidating financial information for (i) the Company, (ii) the issuer of the senior notes (Arch Western Finance, LLC, a wholly-owned subsidiary of the Company), (iii) the Company’s wholly-owned subsidiaries (Thunder Basin Coal Company, LLC, Mountain Coal Company, LLC, and Arch of Wyoming, LLC), on a combined basis, which are guarantors under the Notes, and (iv) the Company’s majority-owned subsidiary, Canyon Fuel LLC, which is not a guarantor under the Notes.

Condensed Consolidating Statements of Income
Three Months Ended September 30, 2010
(in thousands)


							Guarantor			Non-Guarantor
	Parent Company			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Coal sales	$	—		$	—		$	451,092		$	99,106		$	—		$	550,198
Cost of coal sales		(995	)		—			368,282			78,527			—			445,814
Depreciation, depletion and amortization		—			—			28,664			11,092			—			39,756
Amortization of acquired sales contracts, net		—			—			10,038			—			—			10,038
Selling, general and administrative expenses		8,172			—			—			—			—			8,172
Other operating income, net		(47	)		—			(782	)		(264	)		—			(1,093	)

		7,130			—			406,202			89,355			—			502,687
Income from investment in subsidiaries		46,881												(46,881	)		—

Income from operations		39,751			—			44,890			9,751			(46,881	)		47,511
Interest expense		(14,779	)		(14,132	)		—			(199	)		13,218			(15,892	)
Interest income		13,585			13,218			100			29			(13,218	)		13,714

		(1,194	)		(914	)		100			(170	)		—			(2,178	)

Other nonoperating expense
Loss on early extinguishment of debt		—			(6,776	)		—			—			—			(6,776	)

Net income (loss)	$	38,557		$	(7,690	)	$	44,990		$	9,581		$	(46,881	)	$	38,557

Condensed Consolidating Statements of Income
Three Months Ended September 30, 2009
(in thousands)


							Guarantor			Non-Guarantor
	Parent Company			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Coal sales	$	—		$	—		$	272,170		$	118,143		$	—		$	390,313
Cost of coal sales		(220	)		—			242,086			82,508			(401	)		323,973
Depreciation, depletion and amortization		—			—			23,277			15,013			—			38,290
Amortization of acquired sales contracts, net		—			—			78			—			—			78
Selling, general and administrative expenses		12,654			—			—			—			—			12,654
Other operating income, net		(3,049	)		—			(440	)		(404	)		401			(3,492	)

		9,385			—			265,001			97,117			—			371,503
Income from investment in subsidiaries		28,064			—			—			—			(28,064	)		—

Income from operations		18,679			—			7,169			21,026			(28,064	)		18,810
Interest expense		(16,745	)		(15,940	)		1			(262	)		16,031			(16,915	)
Interest income		11,279			16,031			1			38			(16,031	)		11,318

		(5,466	)		91			2			(224	)		—			(5,597	)

Net income	$	13,213		$	91		$	7,171		$	20,802		$	(28,064	)	$	13,213

Condensed Consolidating Statements of Income
Nine Months Ended September 30, 2010
(in thousands)


							Guarantor			Non-Guarantor
	Parent Company			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Coal sales	$	—		$	—		$	1,216,688		$	287,835		$	—		$	1,504,523
Cost of coal sales		(2,116	)		—			1,018,475			226,098			(2,564	)		1,239,893
Depreciation, depletion and amortization		—			—			87,358			36,525			—			123,883
Amortization of acquired sales contracts, net		—			—			26,005			—			—			26,005
Selling, general and administrative expenses		27,421			—			—			—			—			27,421
Other operating income, net		(412	)		—			(2,314	)		(3,435	)		2,564			(3,597	)

		24,893			—			1,129,524			259,188			—			1,413,605

Income from investment in subsidiaries		107,456			—			—			—			(107,456	)		—

Income from operations		82,563			—			87,164			28,647			(107,456	)		90,918
Interest expense		(49,030	)		(46,592	)		—			(625	)		45,281			(50,966	)
Interest income		39,375			45,281			287			70			(45,281	)		39,732

		(9,655	)		(1,311	)		287			(555	)		—			(11,234	)

Other nonoperating expense
Loss on early extinguishment of debt		—			(6,776	)		—			—			—			(6,776	)

Net income (loss)	$	72,908		$	(8,087	)	$	87,451		$	28,092		$	(107,456	)	$	72,908

Condensed Consolidating Statements of Income
Nine Months Ended September 30, 2009
(in thousands)


							Guarantor			Non-Guarantor
	Parent Company			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Coal sales	$	—		$	—		$	881,317		$	286,052		$	—		$	1,167,369
Cost of coal sales		644			—			789,371			217,493			(1,868	)		1,005,640
Depreciation, depletion and amortization		—			—			72,424			40,634			—			113,058
Amortization of acquired sales contracts, net		—			—			(92	)		—			—			(92	)
Selling, general and administrative expenses		29,722			—			—			—			—			29,722
Other operating income, net		(3,181	)		—			(1,652	)		(2,398	)		1,868			(5,363	)

		27,185			—			860,051			255,729			—			1,142,965

Income from investment in subsidiaries		52,203			—			—			—			(52,203	)		—

Income from operations		25,018			—			21,266			30,323			(52,203	)		24,404
Interest expense		(50,647	)		(47,977	)		983			(717	)		48,094			(50,264	)
Interest income		34,453			48,094			30			201			(48,094	)		34,684

		(16,194	)		117			1,013			(516	)		—			(15,580	)

Net income	$	8,824		$	117		$	22,279		$	29,807		$	(52,203	)	$	8,824

Condensed Consolidating Balance Sheets
September 30, 2010
(in thousands)


						Guarantor		Non-Guarantor
	Parent Company			Issuer		Subsidiaries		Subsidiaries		Eliminations			Consolidated
Cash and cash equivalents	$	1,769		$	—	$	60,060	$	82	$	—		$	61,911
Receivables		826			—		849		559		—			2,234
Inventories		—			—		106,660		34,218		—			140,878
Other		3,133			1,008		4,849		8,161		—			17,151

Total current assets		5,728			1,008		172,418		43,020		—			222,174


Property, plant and equipment, net		—			—		1,217,491		270,232		—			1,487,723

Investment in subsidiaries		2,730,081			—		—		—		(2,730,081	)		—
Receivable from Arch Coal, Inc.		1,422,379			—		—		17,733		—			1,440,112
Intercompanies		(2,072,038	)		462,995		1,313,682		295,361		—			—
Other		1,293			1,775		4,163		4,278		—			11,509

Total other assets		2,081,715			464,770		1,317,845		317,372		(2,730,081	)		1,451,621

Total assets	$	2,087,443		$	465,778	$	2,707,754	$	630,624	$	(2,730,081	)	$	3,161,518


Accounts payable	$	1,864		$	—	$	82,423	$	14,199	$	—		$	98,486
Accrued expenses		3,052			7,594		106,991		11,563		—			129,200
Commercial paper		55,716			—		—		—		—			55,716

Total current liabilities		60,632			7,594		189,414		25,762		—			283,402

Long-term debt		—			451,780		—		—		—			451,780
Note payable to Arch Coal, Inc.		225,000			—		—		—		—			225,000
Asset retirement obligations		—			—		281,115		10,641		—			291,756
Accrued postretirement benefits other than pension		6,363			—		15,005		8,105		—			29,473
Accrued pension benefits		7,152			—		20,573		8,020		—			35,745
Accrued workers’ compensation		(1,470	)		—		1,240		4,078		—			3,848
Other noncurrent liabilities		1,643			—		50,683		65		—			52,391

Total liabilities		299,320			459,374		558,030		56,671		—			1,373,395

Redeemable membership interest		10,173			—		—		—		—			10,173
Non-redeemable membership interest		1,777,950			6,404		2,149,724		573,953		(2,730,081	)		1,777,950

Total liabilities and membership interests	$	2,087,443		$	465,778	$	2,707,754	$	630,624	$	(2,730,081	)	$	3,161,518

Condensed Consolidating Balance Sheets
December 31, 2009
(in thousands)


						Guarantor		Non-Guarantor
	Parent Company			Issuer		Subsidiaries		Subsidiaries		Eliminations			Consolidated
Cash and cash equivalents	$	6,714		$	—	$	61	$	44	$	—		$	6,819
Receivables		5,536			—		2,123		720		—			8,379
Inventories		—			—		127,907		37,743		—			165,650
Other		10,423			2,153		3,892		6,882		—			23,350

Total current assets		22,673			2,153		133,983		45,389		—			204,198


Property, plant and equipment, net		—			—		1,258,695		289,605		—			1,548,300

Investment in subsidiaries		2,621,530			—		—		—		(2,621,530	)		—
Receivable from Arch Coal, Inc		1,509,032			—		—		32,211		—			1,541,243
Intercompanies		(2,364,534	)		993,857		1,141,474		229,203		—			—
Other		1,785			5,325		2,543		4,519		—			14,172

Total other assets		1,767,813			999,182		1,144,017		265,933		(2,621,530	)		1,555,415

Total assets	$	1,790,486		$	1,001,335	$	2,536,695	$	600,927	$	(2,621,530	)	$	3,307,913


Accounts payable	$	4,176		$	—	$	55,514	$	14,818	$	—		$	74,508
Accrued expenses		2,885			32,063		97,649		11,835		—			144,432
Commercial paper		49,452			—		—		—		—			49,452

Total current liabilities		56,513			32,063		153,163		26,653		—			268,392

Long-term debt		—			954,782		—		—		—			954,782
Asset retirement obligations		—			—		264,873		10,041		—			274,914
Accrued postretirement benefits other than pension		6,346			—		14,858		7,615		—			28,819
Accrued pension benefits		11,307			—		16,936		6,280		—			34,523
Accrued workers’ compensation		(1,199	)		—		1,217		4,049		—			4,067
Other noncurrent liabilities		1,847			—		24,864		33		—			26,744

Total liabilities		74,814			986,845		475,911		54,671		—			1,592,241

Redeemable membership interest		8,962			—		—		—		—			8,962
Non-redeemable membership interest		1,706,710			14,490		2,060,784		546,256		(2,621,530	)		1,706,710

Total liabilities and membership interests	$	1,790,486		$	1,001,335	$	2,536,695	$	600,927	$	(2,621,530	)	$	3,307,913

Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2010
(in thousands)


							Guarantor			Non-Guarantor
	Parent Company			Issuer			Subsidiaries			Subsidiaries			Consolidated
Cash provided by (used in) operating activities	$	(30,882	)		(25,220	)	$	310,083		$	69,179		$	323,160
Investing Activities
Capital expenditures		—			—			(49,664	)		(17,164	)		(66,828	)
Change in receivable from Arch Coal, Inc		60,905			—			—			14,478			75,383
Proceeds from dispositions of property, plant and equipment		—			—			45			29			74
Additions to prepaid royalties		—			—			(2,509	)		(326	)		(2,835	)

Cash provided by (used in) investing activities		60,905			—			(52,128	)		(2,983	)		5,794

Financing Activities
Repayment of long-term debt, including redemption premium		—			(505,627	)		—			—			(505,627	)
Loan from Arch Coal, Inc		225,000			—			—			—			225,000
Net proceeds from commercial paper		6,264			—			—			—			6,264
Debt financing costs		(375	)		(15	)		—			—			(390	)
Contribution from non-redeemable membership interest		891			—			—			—			891
Transactions with affiliates, net		(266,748	)		530,862			(197,956	)		(66,158	)		—

Cash provided by (used in) financing activities		(34,968	)		25,220			(197,956	)		(66,158	)		(273,862	)

Increase (decrease) in cash and cash equivalents		(4,945	)		—			59,999			38			55,092
Cash and cash equivalents, beginning of period		6,714			—			61			44			6,819

Cash and cash equivalents, end of period	$	1,769		$	—		$	60,060		$	82		$	61,911

Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2009
(in thousands)


							Guarantor			Non-Guarantor
	Parent Company			Issuer			Subsidiaries			Subsidiaries			Consolidated
Cash provided by (used in) operating activities	$	(67,736	)	$	(15,319	)	$	120,076		$	69,695		$	106,716
Investing Activities
Capital expenditures		—			—			(86,665	)		(20,101	)		(106,766	)
Change in receivable from Arch Coal, Inc		24,372			—			—			(2,612	)		21,760
Proceeds from dispositions of property, plant and equipment		—			—			55			25			80
Additions to prepaid royalties		—			—			(2,209	)		(200	)		(2,409	)
Reimbursement of deposits on equipment		—			—			3,209			—			3,209

Cash provided by (used in) investing activities		24,372			—			(85,610	)		(22,888	)		(84,126	)
Financing Activities
Net payments on commercial paper		(22,059	)		—			—			—			(22,059	)
Debt financing costs		(125	)		(15	)		—			—			(140	)
Transactions with affiliates, net		66,022			15,334			(34,491	)		(46,865	)		—

Cash provided by (used in) financing activities		43,838			15,319			(34,491	)		(46,865	)		(22,199	)

Increase (decrease) in cash and cash equivalents		474			—			(25	)		(58	)		391
Cash and cash equivalents, beginning of period		2,690			—			84			77			2,851

Cash and cash equivalents, end of period	$	3,164		$	—		$	59		$	19		$	3,242

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This document contains “forward-looking statements” — that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties arise from changes in the demand for our coal by the domestic electric generation industry; from legislation and regulations relating to the Clean Air Act and other environmental initiatives; from regulations relating to mine safety; from operational, geological, permit, labor and weather-related factors; from fluctuations in the amount of cash we generate from operations; from future integration of acquired businesses; and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. For a description of some of the risks and uncertainties that may affect our future results, see “Risk Factors” under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.

Overview

We are a subsidiary of Arch Coal, Inc., one of the largest coal producers in the United States. We sell substantially all of our coal to power plants and industrial facilities. Our two reportable business segments are based on the low-sulfur U.S. coal producing regions in which we operate — the Powder River Basin and the Western Bituminous region. These geographically distinct areas are characterized by geology, coal transportation routes to consumers, regulatory environments and coal quality. These regional similarities have caused market and contract pricing environments to develop by coal region and form the basis for the segmentation of our operations.

The Powder River Basin is located in northeastern Wyoming and southeastern Montana. The coal we mine from surface operations in this region is very low in sulfur content and has a low heat value compared to the other region in which we operate. The price of Powder River Basin coal is generally less than that of coal produced in other regions because Powder River Basin coal exists in greater abundance, is easier to mine and thus has a lower cost of production. In addition, Powder River Basin coal is generally lower in heat content, which requires some electric power generation facilities to blend it with higher Btu coal or retrofit some existing coal plants to accommodate lower Btu coal. The Western Bituminous region includes western Colorado, eastern Utah and southern Wyoming. Coal we mine from underground and surface mines in this region typically is low in sulfur content and varies in heat content.

Growth in domestic and global coal demand combined with declining domestic coal production have positively impacted coal markets during 2010. Year-to-date U.S. power generation increased approximately 4% through the third week of October, in response to improving economic conditions, as well as favorable weather trends across most regions of the U.S. We estimate that U.S. steam coal consumption grew by 6.5% through September 2010, driven by the increase in power generation as well as improving industrial demand. We expect that 2010 U.S. coal exports will improve over 2009 levels, linked primarily to increased demand for metallurgical coal.

Conversely, U.S. coal production has declined more than 6 million tons through the first nine months of 2010, according to data released by MSHA. We expect supply pressures in the Eastern U.S., driven by the crossover of high quality steam coal into metallurgical markets and declining supply, to create growth potential for other coal basins, particularly the Powder River Basin. Coal production in the Powder River Basin increased 2 million tons through September 30, 2010, and forward prices for Powder River Basin coal have improved since the beginning of the year.

We temporarily suspended production at our Dugout Canyon mine in Carbon County, Utah, on April 29, 2010 after an increase in carbon monoxide levels resulted from a heating event in a previously mined area. After permanently sealing the area, we resumed full coal production on May 21, 2010. On June 22, 2010, an ignition event at our longwall resulted in a second evacuation of all underground employees at the mine. All employees were safely evacuated in both events. The resumption of mining required us to render the mine’s atmosphere inert, ventilate the longwall area, determine the cause of the ignition, implement preventive measures, and secure an MSHA-approved longwall ventilation plan. We restarted the longwall system on September 9, 2010, and resumed production at normalized levels by the end of September. As a result of the outages in the second and third quarters, the Dugout Canyon mine incurred a loss of $10.4 million for the three months ended September 30, 2010, and $28.9 million for the nine months ended September 30, 2010. We have provided additional information about the performance of our operating segments under the heading “Operating segment results”.

Results of Operations

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Summary. Our improved results during the third quarter of 2010, when compared to the third quarter of 2009, were influenced primarily by higher operating margins stemming primarily from the contribution of the Jacobs Ranch mining complex to us from Arch Coal on October 1, 2009.

Revenues. The following table summarizes information about coal sales for the three months ended September 30, 2010 and compares it with the information for the three months ended September 30, 2009:


	Three Months Ended September 30				Increase (Decrease)
	2010		2009		Amount			%
	(Amounts in thousands, except per ton data and percentages)
Coal sales	$	550,198	$	390,313	$	159,885			41.0	%
Tons sold		38,786		24,703		14,083			57.0	%
Coal sales realization per ton sold	$	14.18	$	15.80	$	(1.62	)		(10.3	)%

Coal sales increased in the third quarter of 2010 from the third quarter of 2009, primarily due to the contribution of the Jacobs Ranch mining complex to us from Arch Coal in the fourth quarter of 2009, although improving demand for Powder River Basin coal also had an impact on sales volumes. Our coal sales realizations per ton were lower in the 2010 quarter, primarily due to the impact on our average selling price of the higher Powder River Basin volumes. We have provided more information about the tons sold and the coal sales realizations per ton by operating segment under the heading “Operating segment results”.

Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the three months ended September 30, 2010 and compares them with the information for the three months ended September 30, 2009:


							Increase (Decrease)
	Three Months Ended September 30						in Net Income
	2010			2009			$			%
				(Amounts in thousands, except percentages)
Cost of coal sales	$	445,814		$	323,973		$	(121,841	)		(37.6	)%
Depreciation, depletion and amortization		39,756			38,290			(1,466	)		(3.8	)
Amortization of acquired sales contracts, net		10,038			78			(9,960	)		N/A
Selling, general and administrative expenses		8,172			12,654			4,482			35.4
Other operating income, net		(1,093	)		(3,492	)		(2,399	)		(68.7	)

	$	502,687		$	371,503		$	(131,184	)		(35.3	)%

Cost of coal sales. Our cost of coal sales increased in the third quarter of 2010 from the third quarter of 2009 primarily due to the higher sales volumes discussed above, which was partially offset by the impact of a lower average cost per ton sold, resulting primarily from the impact of the increased Powder River Basin volumes, as well as lower per-ton production costs in the Powder River Basin. We have provided more information about our operating segments under the heading “Operating segment results”.

Depreciation, depletion and amortization and amortization of acquired sales contracts, net. When compared with the third quarter of 2009, higher depreciation and amortization costs in the third quarter of 2010 resulted primarily from the impact of the contribution of the Jacobs Ranch mining complex to us in the fourth quarter of 2009.

Selling, general and administrative expenses. Selling, general and administrative expenses represent expenses allocated to us from Arch Coal. Expenses are allocated based on Arch Coal’s best estimates of proportional or incremental costs, whichever is more representative of costs incurred by Arch Coal on our behalf. Costs charged during the three months ended September 30, 2009 include Arch Coal’s year-to-date costs related to the acquisition of the Jacobs Ranch mining complex.

Operating segment results. The following table shows results by operating segment for the three months ended September 30, 2010 and compares it with information for the three months ended September 30, 2009:


	Three Months Ended September 30				Increase (Decrease)
	2010		2009		$			%
Powder River Basin
Tons sold (in thousands)		34,762		20,142		14,620			72.6	%
Coal sales realization per ton sold ⁽¹⁾	$	11.79	$	11.84	$	(0.05	)		(0.4	)%
Operating margin per ton sold ⁽²⁾	$	1.12	$	0.53	$	0.59			111.3	%

Western Bituminous
Tons sold (in thousands)		4,024		4,561		(537	)		(11.8	)%
Coal sales realization per ton sold ⁽¹⁾	$	30.66	$	29.07	$	1.59			5.5	%
Operating margin per ton sold ⁽²⁾	$	3.70	$	3.66	$	0.04			1.1	%


⁽¹⁾		Coal sales prices per ton exclude certain transportation costs that we pass through to our customers. We use these financial measures because we believe the amounts as adjusted better represent the coal sales prices we achieved within our operating segments. Since other companies may calculate coal sales prices per ton differently, our calculation may not be comparable to similarly titled measures used by those companies. For the three months ended September 30, 2010, transportation costs per ton were $0.07 for the Powder River Basin and $3.64 for the Western Bituminous region. For the three months ended September 30, 2009, transportation costs per ton were $0.18 for the Powder River Basin and $3.44 for the Western Bituminous region.

⁽²⁾		Operating margin per ton sold is calculated as coal sales revenues less cost of coal sales and depreciation, depletion and amortization divided by tons sold.

Powder River Basin — The increase in sales volume in the Powder River Basin in the third quarter of 2010 when compared with the third quarter of 2009 resulted primarily from the acquisition of the Jacobs Ranch mining operations on October 1, 2009, although improving demand for Powder River Basin coal also had an impact on sales volumes. Sales prices decreased during the third quarter of 2010 when compared with the third quarter of 2009 primarily reflecting the roll-off of contracts committed when market conditions were more favorable, as well as the effect of lower sulphur dioxide emission allowance pricing. On a per-ton basis, operating margins in the third quarter of 2010 increased from the third quarter of 2009 due to a decrease in per-ton costs, which offset the impact of the lower per-ton sales prices. The decrease in per-ton costs resulted primarily from efficiencies achieved from combining the acquired Jacobs Ranch mining operations with our existing Black Thunder operations, increased base production volumes and a decrease in hedged diesel fuel costs.

Western Bituminous — In the Western Bituminous region, sales volumes in the third quarter of 2010 decreased when compared to the depressed sales volume levels in the third quarter of 2009 due primarily to the production outage at the Dugout Canyon mine for a substantial part of the quarter. Sales volumes in the third quarter of 2009 were affected by weaker market conditions that had an impact on our ability to market coal with a high ash content, which resulted from geologic conditions at our West Elk mine, and the decision to reduce production accordingly. We have recently completed construction of a preparation plant at the West Elk mine to address quality issues that could result from sandstone intrusions similar to those we encountered previously. Despite the detrimental impact in 2009 on our per-ton realizations of selling coal with a higher ash content, our realizations improved only slightly in 2010, due to ongoing soft steam coal market conditions in the region. Slightly higher per-ton operating margins in the third quarter of 2010 were the result of the higher realizations but were mostly offset by the impact of the production outage at the Dugout Canyon mine.

Net interest expense. The following table summarizes our net interest expense for the three months ended September 30, 2010 and compares it with the information for the three months ended September 30, 2009:


	Three Months Ended September 30						Increase in Net Income
	2010			2009			$		%
				(Amounts in thousands, except percentages)
Interest expense	$	(15,892	)	$	(16,915	)	$	1,023		6.0	%
Interest income		13,714			11,318			2,396		21.2

	$	(2,178	)	$	(5,597	)	$	3,419		61.1	%

On September 8, 2010, we redeemed $500.0 million aggregate principal amount of the outstanding 6.75% senior notes at a redemption price of 101.125%. We funded this redemption with cash transferred from Arch Coal in the form of a loan of $225.0 million and a repayment of a portion of the balance receivable from Arch Coal. See further discussion under the heading “Liquidity and Capital Resources”.

Interest expense consists primarily of interest on our 6.75% senior notes, the discount on trade accounts receivable sold to Arch Coal under Arch Coal’s accounts receivable securitization program, interest on our commercial paper, and interest on the $225.0 million loan from Arch Coal.

Our cash transactions are managed by Arch Coal. Cash paid to or from us that is not considered a distribution, a contribution, or a loan is recorded through a receivable from Arch Coal. The receivable balance earns interest from Arch Coal at the prime interest rate. The increase in interest income during the third quarter of 2010 when compared to the third quarter of 2009 resulted primarily from higher average receivable balance during 2010.

Other non-operating expense. The following table summarizes our other non-operating expense for the three months ended September 30, 2010 and compares it with the information for the three months ended September 30, 2009:


	Three Months Ended September 30					Decrease in Net Income
	2010			2009		$			%
				(Amounts in thousands, except percentages)
Loss on early extinguishment of debt	$	(6,776	)	$	—	$	(6,776	)		(100	)%

Amounts reported as non-operating consist of income or expense resulting from our financing activities, other than interest costs. The loss on early extinguishment of debt relates to the redemption of $500 million in principal amount of the 6.75% senior notes. The loss includes the payment of $5.6 million of redemption premium and the write-off of $3.3 million of unamortized debt financing cost, partially offset by the write-off of $2.1 million of the original issue premium.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Summary. Our results during the nine months ended September 30, 2010, when compared to the nine months ended September 30, 2009, were influenced primarily by higher operating margins stemming from the contribution of the Jacobs Ranch mining complex to us on October 1, 2009 and improved geologic conditions at our West Elk mine in the Western Bituminous region.

Revenues. The following table summarizes information about coal sales for the nine months ended September 30, 2010 and compares it with the information for the nine months ended September 30, 2009:


	Nine Months Ended September 30				Increase (Decrease)
	2010		2009		Amount			%
	(Amounts in thousands, except per ton data and percentages)
Coal sales	$	1,504,523	$	1,167,369	$	337,154			28.9	%
Tons sold		106,516		74,608		31,908			42.8	%
Coal sales realization per ton sold	$	14.12	$	15.65	$	(1.53	)		(9.8	)%

Coal sales increased in the nine months ended September 30, 2010 from the nine months ended September 30, 2009, primarily due to the contribution of the Jacobs Ranch mining complex to us in the fourth quarter of 2009. Our coal sales realizations per ton were lower in the nine months ended September 30, 2010 due to lower realizations per ton in our Powder River Basin segment, as well as the impact on our average selling price of the higher Powder River Basin volumes. We have provided more information about the tons sold and the coal sales realizations per ton by operating segment under the heading “Operating segment results”.

Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the nine months ended September 30, 2010 and compares them with the information for the nine months ended September 30, 2009:


							Increase (Decrease)
	Nine Months Ended September 30						in Net Income
	2010			2009			$			%
				(Amounts in thousands, except percentages)
Cost of coal sales		1,239,893			1,005,640		$	(234,253	)		(23.3	)%
Depreciation, depletion and amortization		123,883			113,058			(10,825	)		(9.6	)
Amortization of acquired sales contracts, net		26,005			(92	)		(26,097	)		N/A
Selling, general and administrative expenses		27,421			29,722			2,301			7.7
Other operating income, net		(3,597	)		(5,363	)		(1,766	)		(32.9	)

		1,413,605			1,142,965		$	(270,640	)		(23.7	)%

Cost of coal sales. Our cost of coal sales increased in the nine months ended September 30, 2010 from the nine months ended September 30, 2009 primarily due to the higher sales volumes discussed above, which was partially offset by the impact of a lower average cost per ton sold, resulting from the impact of the increased Powder River Basin volumes, as well as lower per-ton production costs. We have provided more information about our operating segments under the heading “Operating segment results”.

Depreciation, depletion and amortization and amortization of acquired sales contracts, net. When compared with the nine month period ended September 30, 2010, higher depreciation and amortization costs in the nine months ended September 30, 2010 resulted primarily from the impact of the contribution of the Jacobs Ranch mining complex to us in the fourth quarter of 2009.

Selling, general and administrative expenses. Selling, general and administrative expenses represent expenses allocated to us from Arch Coal. Expenses are allocated based on Arch Coal’s best estimates of proportional or incremental costs, whichever is more representative of costs incurred by Arch Coal on our behalf. Costs allocated during the nine months ended September 30, 2009 include acquisition costs related to Arch Coal’s purchase of the Jacobs Ranch mining complex.

Operating segment results. The following table shows results by operating segment for the nine months ended September 30, 2010 and compares it with information for the nine months ended September 30, 2009:


	Nine Months Ended September 30				Increase (Decrease)
	2010		2009		$			%
Powder River Basin
Tons sold (in thousands)		94,370		62,675		31,695			50.6	%
Coal sales realization per ton sold ⁽³⁾	$	11.59	$	12.39	$	(0.80	)		(6.5	)%
Operating margin per ton sold ⁽⁴⁾	$	0.76	$	0.70	$	0.06			8.6	%

Western Bituminous
Tons sold (in thousands)		12,146		11,933		213			1.8	%
Coal sales realization per ton sold ⁽³⁾	$	29.90	$	29.00	$	0.90			3.1	%
Operating margin per ton sold ⁽⁴⁾	$	3.13	$	0.28	$	2.85			N/A


⁽³⁾		Coal sales prices per ton exclude certain transportation costs that we pass through to our customers. We use these financial measures because we believe the amounts as adjusted better represent the coal sales prices we achieved within our operating segments. Since other companies may calculate coal sales prices per ton differently, our calculation may not be comparable to similarly titled measures used by those companies. For the nine months ended September 30, 2010, transportation costs per ton were $0.08 for the Powder River Basin and $3.27 for the Western Bituminous region. For the nine months ended September 30, 2009, transportation costs per ton were $0.15 for the Powder River Basin and $2.95 for the Western Bituminous region.

⁽⁴⁾		Operating margin per ton sold is calculated as coal sales revenues less cost of coal sales and depreciation, depletion and amortization divided by tons sold.

Powder River Basin — The increase in sales volume in the Powder River Basin in 2010 when compared with 2009 resulted from the acquisition of the Jacobs Ranch mining operations on October 1, 2009, although improving demand for Powder River Basin coal in the third quarter of 2010 also had an impact on sales volumes. Decreases in sales prices during 2010 when compared with 2009 primarily reflect the roll-off of contracts committed when market conditions were more favorable. On a per-ton basis, operating margins in 2010 increased slightly, as the effect of lower sales prices was more than offset by a decrease in per-ton costs. The decrease in per-ton costs resulted from efficiencies achieved from combining the acquired Jacobs Ranch mining operations with our existing Black Thunder operations, as well as a decrease in hedged diesel fuel costs.

Western Bituminous — In the Western Bituminous region, despite a soft steam coal market in the region and the two outages at the Dugout Canyon mine in 2010, sales volumes increased slightly compared to 2009. Sales volumes in 2009 were affected by weaker market conditions that had an impact on our ability to market coal with a high ash content, which resulted from geologic conditions at our West Elk mine, and the decision to reduce production accordingly. We have recently completed construction of a preparation plant at the West Elk mine to address quality issues that could result from sandstone intrusions similar to those we encountered previously. Despite the detrimental impact in 2009 on our per-ton realizations of selling coal with a higher ash content, our realizations increased only slightly in 2010, due to the soft steam coal market in the region and an unfavorable mix of customer contracts. Effective cost control in the region resulted in the higher per-ton operating margins in 2010, partially offset by the impact of the two outages at the Dugout Canyon mine in 2010.

Net interest expense. The following table summarizes our net interest expense for the nine months ended September 30, 2010 and compares it with the information for the nine months ended September 30, 2009:


							Increase (Decrease) in
	Nine Months Ended September 30						Net Income
	2010			2009			$			%
				(Amounts in thousands, except percentages)
Interest expense	$	(50,966	)	$	(50,264	)	$	(702	)		(1.4	)%
Interest income		39,732			34,684			5,048			14.6	%

	$	(11,234	)	$	(15,580	)	$	4,346			27.9	%

Our cash transactions are managed by Arch Coal. Cash paid to or from us that is not considered a distribution, a contribution, or a loan is recorded through a receivable from Arch Coal. The receivable balance earns interest from Arch Coal at the prime interest rate. The increase in interest income during 2010 when compared to 2009 resulted primarily from higher average receivable balance during 2010.

Other non-operating expense. The following table summarizes our other non-operating expense for the nine months ended September 30, 2010 and compares it with the information for the nine months ended September 30, 2009:


	Nine Months Ended September 30					Decrease in Net Income
	2010			2009		$			%
	(Amounts in thousands, except percentages)
Loss on early extinguishment of debt	$	(6,776	)	$	—	$	(6,776	)		(100	)%

Amounts reported as non-operating consist of income or expense resulting from our financing activities, other than interest costs. The loss on early extinguishment of debt relates to the redemption of $500 million in principal amount of the 6.75% senior notes. The loss includes the payment of $5.6 million of redemption premium and the write-off of $3.2 million of unamortized debt financing costs, partially offset by the write-off of $2.1 million of the original issue premium.

Liquidity and Capital Resources

Liquidity and capital resources

Our primary sources of cash are sales of our coal production to customers, borrowings under our commercial paper program and debt related to significant transactions. Excluding any significant business acquisitions, we generally satisfy our working capital requirements and fund capital expenditures and debt-service obligations with cash generated from operations, and if necessary, from Arch Coal. Arch Coal manages our cash transactions. Cash paid to or from us that is not considered a distribution or a contribution is recorded in an Arch Coal receivable account. The receivable balance earns interest from Arch Coal at the prime interest rate. We are also party to Arch Coal’s accounts receivable securitization program. Under the program, we sell our receivables to a subsidiary of Arch Coal without recourse at a discount based on the prime rate and days sales outstanding.

We believe that cash generated from operations will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled debt payments for at least the next several years. We manage our exposure to changing commodity prices for our long-term coal contract portfolio through the use of long-term coal supply agreements. We enter into fixed price, fixed volume supply contracts with terms generally greater than one year with customers with whom we have historically had limited collection issues. Our ability to satisfy debt service obligations, to fund planned capital expenditures and to make acquisitions will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry and financial, business and other factors, some of which are beyond our control.

On September 8, 2010, we redeemed $500.0 million aggregate principal amount of our outstanding 6.75% senior notes at a redemption price of 101.125%. We funded this redemption with cash transferred from Arch Coal in the form of a loan of $225.0 million and a repayment of a portion of the balance receivable from Arch Coal.

Arch Coal made the loan pursuant to an intercompany credit agreement. Under the intercompany credit agreement, we may borrow up to $675.0 million through July 1, 2013, or such later date as designated by Arch Coal. Interest on loans outstanding under the agreement is calculated at a per annum rate equal to the three month LIBOR rate plus 200 or 250 basis points, depending on a leverage ratio, as defined in the agreement, at the date the rate is determined. Interest is due on any outstanding loans on the first day of each calendar quarter. We may repay the balance of the loan at any time, in whole or in part, without penalty.

Under Arch Coal’s accounts receivable securitization program, we sold $442.3 million of trade accounts receivable to Arch Coal during the third quarter of 2010, at a total discount of $1.0 million. During the third quarter of 2009, we sold $315.8 million of trade accounts receivable to Arch Coal, at a total discount of $0.7 million. During the nine months ended September 30, 2010, we sold $1.3 billion of trade accounts receivable to Arch Coal, at a total discount of $3.0 million. During the nine month period ended September 30, 2009, we sold $1.0 billion of trade accounts receivable to Arch Coal, at a total discount of $2.5 million.

On March 25, 2010, we entered into an amendment to our commercial paper program which decreased the maximum aggregate principal amount of the program to $75 million from $100 million. The commercial paper program is supported by a line of credit that expires on April 30, 2011. We had commercial paper outstanding of $55.7 million at September 30, 2010 and $49.5 million at December 31, 2009. Our commercial paper placement program provides short-term financing at rates that are generally lower than the rates available under our revolving credit facility.

Our subsidiary, Arch Western Finance LLC, has outstanding an aggregate principal amount of $450.0 million of 6.75% senior notes due on July 1, 2013, after the redemption discussed previously. The notes are guaranteed by AWR and certain of its subsidiaries and are secured by an intercompany note from Arch Coal to AWR. The indenture under which the notes were issued contains certain restrictive covenants that limit AWR’s ability to, among other things, incur additional debt, sell or transfer assets and make certain investments. The notes may be redeemed as follows: at 101.125% of par for notes redeemed between July 1, 2010 and June 30, 2011, and 100% for notes redeemed on or after July 1, 2011.

The following is a summary of cash provided by or used in each of the indicated types of activities:


	Nine Months Ended September 30
	2010			2009
	(in thousands)
Cash provided by (used in):
Operating activities	$	323,160		$	106,716
Investing activities		5,794			(84,126	)
Financing activities		(273,862	)		(22,199	)

Cash provided by operating activities increased in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 as a result of our increased profits during the year, driven primarily by higher sales volumes, as well as working capital changes.

Cash provided by investing activities for the nine months ended September 30, 2010 was $5.8 million, compared to cash used in investing activities of $84.1 million in the nine month period ended September 30, 2009, primarily due to an increase in amounts repaid on the intercompany note by Arch Coal, related to the redemption of the $6.75% senior notes discussed previously, and due to a decrease in capital expenditures.

Cash used in financing activities was $273.9 million during the nine months ended September 30, 2010, $251.7 million more than was used during the nine months ended September 30, 2009. As previously discussed, Arch Coal made a loan to us in the amount of $225.0 million, which proceeds, along with the repayment of the intercompany note mentioned above, were used to fund the redemption on September 8, 2010 of $500.0 million aggregate principal amount of our outstanding 6.75% senior notes due in 2013 at a redemption price of 101.125%. In 2009, we repaid a net $22.1 million under our commercial paper program. As a result of the poor credit markets, we had been unable to issue commercial paper up to the maximum amount allowed under the program. We have since reduced the maximum allowed under the program to $75 million from $100 million, as discussed previously, and during the nine months ended of 2010, we increased the amount of commercial paper issued by $6.3 million to $55.7 million.

Critical Accounting Policies

For a description of our critical accounting policies, see “Critical Accounting Policies” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no significant changes to our critical accounting policies during the nine months ended September 30, 2010.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We manage our commodity price risk for our long-term coal contract portfolio through the use of long-term coal supply agreements. The majority of our tonnage is sold under long-term contracts. We are also exposed to price risk related to the value of sulfur dioxide emission allowances that are a component of quality adjustment provisions in many of our coal supply contracts. We manage this risk through the use of long-term coal supply agreements.

We are also exposed to the risk of fluctuations in cash flows related to our purchase of diesel fuel. We use approximately 45 to 50 million gallons of diesel fuel annually in our operations. Arch Coal enters into heating oil swaps and options to reduce volatility in the price of diesel fuel for our operations. The swap agreements essentially fix the price paid for diesel fuel by requiring us to pay a fixed heating oil price and receive a floating heating oil price. The call options protect against increases in diesel fuel by granting us the right to participate in increases in heating oil prices. The cash settlements related to these swaps and options are allocated to us through the Arch Coal intercompany account.

We are exposed to market risk associated with interest rates due to our existing level of indebtedness. At September 30, 2010, with the exception of our outstanding commercial paper, all of our outstanding debt bore interest at fixed rates.

Item 4. Controls and Procedures.

We performed an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2010. Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were effective as of such date. There were no changes in internal control over financial reporting that occurred during our quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various claims and legal actions in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial results.

Item 1A. Risk Factors.

Our business inherently involves certain risks and uncertainties. The risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Should one or more of any of these risks materialize, our business, financial condition, results of operations or liquidity could be materially adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Reserved

Item 5. Other Information.

We believe that our operations are some of the safest coal producers in the world. Safety is a core value at our parent company, Arch Coal, and at each of its subsidiary operations. We have in place a comprehensive safety program that includes extensive health & safety training for all employees, site inspections, emergency response preparedness, crisis

communications training, incident investigation, regulatory compliance training and process auditing, as well as an open dialogue between all levels of employees. The goals of our processes are to eliminate exposure to hazards in the workplace, ensure that we comply with all mine safety regulations, and support regulatory and industry efforts to improve the health and safety of our employees along with the industry as a whole.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, each operator of a coal or other mine is required to include certain mine safety results in its periodic reports filed with the Securities and Exchange Commission. The operation of our mines is subject to regulation by the federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). Below we present the following items regarding certain mining safety and health matters, broken down by mining complex owned and operated by Arch Western Resources, LLC or our subsidiaries, for the three-month period ended September 30, 2010:

•

Section 104 Citations: Total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Mine Act for which we have received a citation from MSHA;

•

Section 104(b) Orders: Total number of orders issued under section 104(b) of the Mine Act;

•

Section104(d) Citations/Orders: Total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under Section 104(d) of the Mine Act;

•

Section 107(a) Orders: Total number of imminent danger orders issued under section 107(a) of the Mine Act; and

•

Total Dollar Value of Proposed MSHA Assessments: Total dollar value of proposed assessments from MSHA under the Mine Act.


									Total Dollar Value of
									Proposed MSHA
	Section 104		Section 104(b)		Section 104(d)		Section 107(a)		Assessments
Mining complex(1)	Citations		Orders		Citations/Orders		Orders		(in thousands)(2)
Power River Basin:
Black Thunder		1		—		—		—	$	2
Coal Creek		—		—		—		—	$	—
Western Bituminous:
Arch of Wyoming		—		—		—		—	$	1
Dugout Canyon		8		—		—		—	$	2
Skyline		14		—		—		—	$	14
Sufco		5		—		4		1	$	1
West Elk		22		—		—		—	$	78


⁽¹⁾		MSHA assigns an identification number to each coal mine and may or may not assign separate identification numbers to related facilities such as preparation plants. We are providing the information in this table by mining complex rather than MSHA identification number because we believe this format will be more useful to investors than providing information based on MSHA identification numbers. For descriptions of each of these mining operations, please refer to the descriptions under Item 1. Business, in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

⁽²⁾		Amounts included under the heading “Total Dollar Value of Proposed MSHA Assessments” are the total dollar amounts for proposed assessments received from MSHA on or before October 25, 2010, for citations and orders occurring during the three-month period ended September 30, 2010.

For the three-month period ended September 30, 2010, none of our mining complexes received written notice from MSHA of (i) a flagrant violation under section 110(b)(2) of the Mine Act; (ii) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health or safety hazards under section 104(e) of the Mine Act; or (iii) the potential to have such a pattern. For the three-month period ended September 30, 2010, we experienced no fatalities.

As of September 30, 2010, we have a total of fifty matters pending before the Federal Mine Safety and Health Review Commission. This includes legal actions that were initiated prior to the three-month period ended September 30, 2010 and

which do not necessarily relate to the citations, orders or proposed assessments issued by MSHA during such three month period.

In evaluating the above information regarding mine safety and health, investors should take into account factors such as: (i) the number of citations and orders will vary depending on the size of a coal mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed, and during that process are often reduced in severity and amount, and are sometimes dismissed.

Item 6. Exhibits.

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q:


Exhibit		Description
31.1		Rule 13a-14(a)/15d-14(a) Certification of Paul A. Lang.

31.2		Rule 13a-14(a)/15d-14(a) Certification of John T. Drexler.

32.1		Section 1350 Certification of Paul A. Lang.

32.2		Section 1350 Certification of John T. Drexler.

Signatures

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


	Arch Western Resources, LLC
	By:	/s/ John T. Drexler
		John T. Drexler
		Vice President November 15, 2010

ARCH WESTERN RESOURCES LLC 10-Q