UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 June 30, 2005

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 1-13105

ARCH COAL, INC.

Delaware (State or other jurisdiction of incorporation or organization)		43-0921172 (I.R.S. Employer Identification No.)

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

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

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

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

At August 1, 2005, there were 63,777,908 shares of registrant’s common stock outstanding.

 

 

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004			1
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2005 and 2004 and the Six Months Ended June 30, 2005 and 2004			2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			43
Item 2. Changes in Securities, Use of Proceeds and Issues Purchasers of Equity Securities			43
Item 3. Defaults Upon Senior Securities			43
Item 4. Submission of Matters to a Vote of Security Holders			43
Item 5. Other Information			43
Item 6. Exhibits			43
Certification of Principal Executive Officer Pursuant to Section 302
Certification of Principal Financial Officer Pursuant to Section 302
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARCH COAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
		2005				2004
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	259,382			$	323,167
Trade receivables			243,306				180,902
Other receivables			19,674				34,407
Inventories			135,782				119,893
Prepaid royalties			6,913				12,995
Deferred income taxes			24,789				33,933
Other			27,317				25,560
Total current assets			717,163				730,857
Property, plant and equipment, net			2,065,591				2,033,200
Other assets
Prepaid royalties			105,641				87,285
Goodwill			36,132				37,381
Deferred income taxes			252,934				241,226
Other			104,979				126,586
Total other assets			499,686				492,478
Total assets		$	3,282,440			$	3,256,535
Liabilities and stockholders’ equity
Current liabilities
Accounts payable		$	162,043			$	148,014
Accrued expenses			224,624				217,216
Current portion of debt			5,008				9,824
Total current liabilities			391,675				375,054
Long-term debt			974,045				1,001,323
Accrued postretirement benefits other than pension			395,500				380,424
Asset retirement obligations			182,103				179,965
Accrued workers’ compensation			76,242				82,446
Other noncurrent liabilities			142,090				157,497
Total liabilities			2,161,655				2,176,709
Stockholders’ equity
Preferred stock			29				29
Common stock			643				631
Paid-in capital			1,319,289				1,280,513
Retained deficit			(169,965	)			(166,273	)
Unearned compensation			(4,508	)			(1,830	)
Treasury stock, at cost			(5,047	)			(5,047	)
Accumulated other comprehensive loss			(19,656	)			(28,197	)
Total stockholders’ equity			1,120,785				1,079,826
Total liabilities and stockholders’ equity		$	3,282,440			$	3,256,535

See notes to condensed consolidated financial statements.

ARCH COAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues
Coal sales		$	633,797			$	422,778			$	1,234,262			$	826,268
Costs and expenses
Cost of coal sales			542,073				364,083				1,061,714				712,621
Depreciation, depletion and amortization			52,142				36,080				103,045				72,185
Selling, general and administrative expenses			17,979				11,717				40,255				26,630
Other expenses			12,498				6,853				25,545				12,497
			624,692				418,733				1,230,559				823,933
Other operating income
Income from equity investments			—				5,995				—				9,685
Gain on sale of units of Natural Resource Partners, LP			—				317				—				89,955
Other operating income			12,388				14,513				43,743				29,804
			12,388				20,825				43,743				129,444
Income from operations			21,493				24,870				47,446				131,779
Interest expense, net:
Interest expense			(19,389	)			(14,101	)			(37,460	)			(28,842	)
Interest income			1,681				903				3,526				1,613
			(17,708	)			(13,198	)			(33,934	)			(27,229	)
Other non-operating income (expense):
Expenses resulting from early debt extinguishment and termination of hedge accounting for interest rate swaps			(2,066	)			(2,066	)			(4,133	)			(4,132	)
Other non-operating income			455				202				70				373
			(1,611	)			(1,864	)			(4,063	)			(3,759	)
Income before income taxes			2,174				9,808				9,449				100,791
(Benefit from) provision for income taxes			(1,300	)			(1,300	)			(600	)			19,700
Net income			3,474				11,108				10,049				81,091
Preferred stock dividends			(1,797	)			(1,797	)			(3,594	)			(3,594	)
Net income available to common shareholders		$	1,677			$	9,311			$	6,455			$	77,497
Earnings per common share
Basic earnings per common share		$	0.03			$	0.17			$	0.10			$	1.43
Diluted earnings per common share		$	0.03			$	0.17			$	0.10			$	1.31
Basic weighted average shares outstanding			63,494				54,582				63,140				54,206
Diluted weighted average shares outstanding			64,520				55,550				64,158				62,021
Dividends declared per share		$	0.0800			$	0.0800			$	0.1600			$	0.1375

See notes to condensed consolidated financial statements.

ARCH COAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended
		June 30,
		2005				2004
Operating activities
Net income		$	10,049			$	81,091
Adjustments to reconcile to cash provided by operating activities:
Depreciation, depletion and amortization			103,045				72,185
Prepaid royalties expensed			10,687				7,853
Accretion on asset retirement obligations			7,475				5,893
Net gain on disposition of assets			(20,103	)			(607	)
Gain on sale of units of Natural Resource Partners, LP			—				(89,955	)
Income from equity investments			—				(9,685	)
Net distributions from equity investments			—				(2,739	)
Other nonoperating expense (income)			4,063				3,759
Changes in:
Receivables			(47,371	)			(40,495	)
Inventories			(15,889	)			(13,399	)
Accounts payable and accrued expenses			21,521				2,417
Income taxes			2,515				4,729
Accrued postretirement benefits other than pension			15,076				11,625
Asset retirement obligations			(5,338	)			(4,542	)
Accrued workers’ compensation benefits			(6,204	)			95
Federal income tax receipts			14,701				—
Other			34				(8,243	)
Cash provided by operating activities			94,261				19,982
Investing activities
Capital expenditures			(139,355	)			(69,132	)
Proceeds from sale of units of Natural Resource Partners, LP			—				105,365
Proceeds from dispositions of capital assets			20,395				1,010
Additions to prepaid royalties			(22,961	)			(22,663	)
Cash (used in) provided by investing activities			(141,921	)			14,580
Financing activities
Net payments on revolver and lines of credit			(25,000	)			—
Net payments on long-term debt			(6,411	)			(6,300	)
Deferred financing costs			(2,298	)			(1,160	)
Dividends paid			(13,741	)			(11,062	)
Proceeds from sale of common stock			31,325				25,719
Cash (used in) provided by financing activities			(16,125	)			7,197
(Decrease) increase in cash and cash equivalents			(63,785	)			41,759
Cash and cash equivalents, beginning of period			323,167				254,541
Cash and cash equivalents, end of period		$	259,382			$	296,300

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – General

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations, but are subject to any year-end adjustments that may be necessary. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the period ended June 30, 2005 are not necessarily indicative of results to be expected for the year ending December 31, 2005. These financial statements should be read in conjunction with the audited financial statements and related notes thereto as of and for the year ended December 31, 2004 included in Arch Coal, Inc.’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

Arch Coal, Inc. (the “Company”) is engaged in 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 Powder River Basin, Central Appalachia and Western Bituminous regions of the United States. All subsidiaries (except as noted below) are wholly owned. Intercompany transactions and accounts have been eliminated in consolidation.

The Company’s Wyoming, Colorado and Utah coal operations are included in a joint venture named Arch Western Resources, LLC (“Arch Western”). Arch Western is 99% owned by the Company and 1% owned by BP Amoco. The Company also acts as the managing member of Arch Western.

On July 31, 2004, the Company acquired the remaining 35% of Canyon Fuel Company, LLC (“Canyon Fuel”) that it did not already own. See Note C – “Business Combinations” for further discussion. Income from Canyon Fuel through June 30, 2004 is reflected in the Condensed Consolidated Statements of Operations as income from equity investments (see additional discussion in Note E – “Equity Investments”).

Note B – Recent Accounting Pronouncements

On March 30, 2005, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on issue No. 04-6, Accounting for Stripping Costs in the Mining Industry. This issue applies to stripping costs incurred in the production phase of a mine for the removal of overburden or waste materials for the purpose of obtaining access to coal that will be extracted. Under the new rule, stripping costs incurred during the production phase of the mine are variable production costs that are included in the cost of inventory produced and extracted during the period the stripping costs are incurred. Historically, the coal industry has considered coal uncovered at a surface mining operation but not yet extracted to be coal inventory (pit inventory). This is a change in accounting practice. The guidance in this EITF consensus is effective for fiscal years beginning after December 15, 2005 for which the cumulative effect of adoption should be recognized as an adjustment to the beginning balance of retained earnings during the period. The Company is evaluating what impact this guidance will have on its consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation (FIN) 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143. This interpretation clarifies that the term “conditional asset retirement obligation”, as used in FASB Statement No. 143, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, construction, or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. SFAS No. 143 acknowledges that, in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. The Company does not expect this guidance to have a material impact on its financial statements.

Note C – Business Combinations

Canyon Fuel 35% Acquisition

On July 31, 2004, the Company purchased the 35% interest in Canyon Fuel that it did not own from ITOCHU Corporation. The purchase price, including related costs and fees, of $112.2 million was funded with cash of $90.2 million and a five-year, $22.0 million non-interest bearing note. Net of cash acquired, the fair value of the transaction totaled $97.4 million. As a result of the acquisition, the Company owns substantially all of the ownership interests of Canyon Fuel and no longer accounts for its investment in Canyon Fuel on the equity method but consolidates Canyon Fuel in its financial statements. The results of operations of the Canyon Fuel mines are included in the Company’s Western Bituminous segment.

The purchase accounting allocation related to the acquisition has been recorded in the accompanying consolidated financial statements as of, and for the period subsequent to, July 31, 2004. The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition (dollars in thousands):

Accounts receivable		$	7,432
Materials and supplies			3,751
Coal inventory			7,434
Other current assets			6,466
Property, plant, equipment and mine development			125,881
Accounts payable and accrued expenses			(10,379	)
Coal supply agreements			(33,378	)
Other noncurrent assets and liabilities, net			(9,823	)
Total purchase price, net of cash received of $11.0 million		$	97,384

Amounts allocated to coal supply agreements noted in the table above represent the liability established for the net below-market coal supply agreements to be amortized over the remaining terms of the contracts. The liability is classified as an other noncurrent liability on the accompanying Condensed Consolidated Balance Sheet. The remaining amortization period on these acquired coal supply agreements ranges from one to 42 months.

Triton Acquisition

On August 20, 2004, the Company acquired (1) Vulcan Coal Holdings, L.L.C., which owns all of the common equity of Triton Coal Company, LLC (“Triton”), and (2) all of the preferred units of Triton, for a purchase price of $382.1 million, including transaction costs and working capital adjustments. In 2003, Triton was the nation’s sixth largest coal producer and operated two mines in the Powder River Basin: North Rochelle and Buckskin. Following the consummation of the transaction, the Company completed an agreement to sell Buckskin to Kiewit Mining Acquisition Company. The net sales price for this second transaction was $73.1 million. The total purchase price, including related costs and fees, was funded with cash on hand, including the proceeds from the Buckskin sale, $22.0 million in borrowings under the Company’s existing revolving credit facility and a $100.0 million term loan at its Arch Western Resources subsidiary. Upon acquisition, the Company integrated the North Rochelle mine with its existing Black Thunder mine in the Powder River Basin.

The purchase accounting allocations related to the acquisition have been recorded in the accompanying consolidated financial statements as of, and for the periods subsequent to August 20, 2004. The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition (dollars in thousands):

Accounts receivable		$	14,233
Materials and supplies			4,161
Coal inventory			4,874
Other current assets			2,200
Property, plant, equipment and mine development			325,194
Coal supply agreements			8,486
Goodwill			36,132
Accounts payable and accrued expenses			(72,326	)
Other noncurrent assets and liabilities, net			(14,383	)
Total purchase price, net of cash received of $0.4 million		$	308,571

Amounts allocated to coal supply agreements noted in the table above represent the value attributed to the net above-market coal supply agreements to be amortized over the remaining terms of the contracts. The remaining amortization period on these acquired coal supply agreements ranges from six to 18 months.

Included in the amounts allocated to accounts payable and accrued expenses noted in the table above are $5.5 million of liabilities incurred in connection with terminating Vulcan employees upon acquisition. Upon acquisition, the Company identified 24 employees of Vulcan who were terminated as part of the integration of the North Rochelle mine into the Company’s Black Thunder mine. All amounts accrued for severance were paid as of December 31, 2004.

Pro Forma Financial Information

If Triton and Canyon Fuel had been included in the Company’s results of operations during the three months ended June 30, 2004, its unaudited pro forma revenues would have been $537.5 million, unaudited proforma net income available to common shareholders would have been $9.6 million and unaudited proforma basic and diluted earnings per share would have been $0.16 and $0.16, respectively. If Triton and Canyon Fuel had been included in the Company’s results of operations during the six months ended June 30, 2004, its unaudited pro forma revenues would have been $1,034.9 million, unaudited pro forma net income available to common shareholders would have been $69.1 million and unaudited pro forma basic and diluted earnings per share would have been $1.27 and $1.17, respectively.

Note D – Stock-Based Compensation

These interim financial statements include the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“FAS 123”), as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“FAS 148”). 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, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations. Had compensation expense for stock option grants been determined based on the fair value at the grant dates consistent with the method required by FAS 123, the Company’s net income available to common shareholders and earnings per common share would have been changed to the pro forma amounts as indicated in the following table:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(in thousands, except per share data)
Net income available to common shareholders, as reported		$	1,677			$	9,311			$	6,455			$	77,497
Add:
Stock-based employee compensation included in reported net income, net of related tax effects			753				348				8,617				714
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,774	)			(1,679	)			(10,644	)			(3,512	)
Pro forma net income available to common shareholders		$	656			$	7,980			$	4,428			$	74,699
Earnings per share:
Basic earnings per share – as reported			.03				.17				.10				1.43
Basic earnings per share – pro forma			.01				.14				.07				1.38
Diluted earnings per share – as reported			.03				.17				.10				1.31
Diluted earnings per share – pro forma			.01				.14				.07				1.26

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”), which requires all public companies to measure compensation cost in the income statement for all share-based payments (including employee stock options) at fair value for interim and annual periods. On April 14, 2005, the Securities and Exchange Commission (“SEC”) delayed the implementation of FAS 123R from its original implementation date by six months for most registrants, requiring all public companies to adopt FAS 123R no later than the beginning of the first fiscal year beginning after June 15, 2005. As such, the

Company intends to adopt FAS 123R on January 1, 2006 using the modified-prospective method. FAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company has not yet determined the impact of adoption on its financial statements.

On January 14, 2004, the Company granted an award of 220,766 shares of performance-contingent phantom stock that vested in the event the Company’s stock price reached an average pre-established price over a period of 20 consecutive trading days within five years following the date of grant. On March 3, 2005, the price contingency discussed above was met, and the award was paid in a combination of Company stock ($7.3 million) and cash ($2.6 million). As such, the Company recognized a $9.9 million charge as a component of selling, general and administrative expense ($9.1 million) and cost of coal sales ($0.8 million) in the accompanying Condensed Consolidated Statements of Operations in the first quarter of 2005.

Note E – Equity Investments

As of June 30, 2005, the Company no longer held equity investments. The Company purchased the remaining 35% interest in Canyon Fuel on July 31, 2004. Prior to July 31, 2004, the Company accounted for its investment in Canyon Fuel on the equity method. In addition, on March 10, 2004, the Company sold the majority of its interest in Natural Resource Partners, LP (“NRP”). Prior to March 10, 2004, the Company accounted for its investment in NRP on the equity method. Amounts recorded in the Condensed Consolidated Statements of Operations are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(in thousands)
Income from equity investments:
Income from investment in Canyon Fuel		$	—			$	5,995			$	—			$	7,267
Income from NRP			—				—				—				2,418
Income from equity investments as reported in the Condensed Consolidated Statements of Operations		$	—			$	5,995			$	—			$	9,685

Investment in Canyon Fuel

The following table presents unaudited summarized financial information for Canyon Fuel:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
Condensed Income Statement Information		2005				2004				2005				2004
		(in thousands)
Revenues		$	—			$	69,325			$	—			$	122,708
Total costs and expenses			—				61,947				—				114,756
Net income before cumulative effect of accounting change		$	—			$	7,378			$	—			$	7,952
65% of Canyon Fuel net income before cumulative effect of accounting change		$	—			$	4,796			$	—			$	5,169
Effect of purchase adjustments			—				1,199				—				2,098
Arch Coal’s income from its equity investment in Canyon Fuel		$	—			$	5,995			$	—			$	7,267

Through July 31, 2004, the Company’s income from its equity investment in Canyon Fuel represented 65% of Canyon Fuel’s net income after adjusting for the effect of purchase adjustments related to its investment in Canyon Fuel. The Company’s investment in Canyon Fuel reflected purchase adjustments primarily related to the reduction in amounts assigned to sales contracts, mineral reserves and other property, plant and equipment. The purchase adjustments were amortized consistent with the underlying assets of the joint venture.

Investment in NRP

During 2004, the Company sold its remaining limited partnership units of NRP in three separate transactions occurring in March, June and October. Specifically during the six months ended June 30, 2004, the Company sold the majority of its remaining limited partnership units of NRP for proceeds of approximately $105.4 million. The sale resulted in a gain of $90.0 million.

Note F – Employee Benefit Plans

Defined Benefit Pension and Other Postretirement Benefit Plans

The Company has non-contributory defined benefit pension plans covering certain of its salaried and non-union hourly employees. Benefits are generally based on the employee’s years of service and compensation. The Company funds the plans in an amount not less than the minimum statutory funding requirements nor more than the maximum amount that can be deducted for federal income tax purposes.

The Company also currently provides certain postretirement medical/life insurance coverage for eligible employees. Generally, covered employees who terminate employment after meeting eligibility requirements are eligible for postretirement coverage for themselves and their dependents. The salaried employee postretirement medical/life plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance. The postretirement medical plan for retirees who were members of the United Mine Workers of America (“UMWA”) is not contributory. The Company’s current funding policy is to fund the cost of all postretirement medical/life insurance benefits as they are paid.

Components of Net Periodic Benefit Cost

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

										Other postretirement
		Pension benefits								benefits
Three Months Ended June 30,		2005				2004				2005				2004
		(In thousands)
Service cost		$	3,072			$	1,876			$	1,254			$	886
Interest cost			4,454				2,807				7,803				7,399
Expected return on plan assets*			(5,478	)			(3,724	)			—				—
Other amortization and deferral			1,197				915				6,456				4,407
		$	3,245			$	1,874			$	15,513			$	12,692

										Other postretirement
		Pension benefits								benefits
Six Months Ended June 30,		2005				2004				2005				2004
		(In thousands)
Service cost		$	5,999			$	3,915			$	2,542			$	1,900
Interest cost			6,696				5,607				15,696				14,724
Expected return on plan assets*			(8,245	)			(6,974	)			—				—
Other amortization and deferral			3,350				2,314				12,533				8,380
		$	7,800			$	4,862			$	30,771			$	25,004

Employer Contributions

While the Company did not make any contributions to the pension plan during the six months ended June 30, 2005, it is currently considering a contribution to the plan in 2005 but has not yet made a determination as to the timing and the amount of the potential contribution. The Company has no minimum contribution required.

Note G – Other Comprehensive Income

Other comprehensive income items under FAS 130, Reporting Comprehensive Income, are transactions recorded in stockholders’ equity during the year, excluding net income and transactions with stockholders. The following table presents comprehensive income:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
						(in thousands)
Net income		$	3,474			$	11,108			$	10,049			$	81,091
Other comprehensive income, net of income taxes			3,346				2,616				8,541				5,690
Total comprehensive income		$	6,820			$	13,724			$	18,590			$	86,781

Other comprehensive income for the three and six months ended June 30, 2005 and 2004 consists primarily of the reclassification of previously deferred mark-to-market adjustments from other comprehensive income to net income and mark-to-market adjustments related to the Company’s financial derivatives which still qualify as effective hedges.

Note H – Inventories

Inventories consist of the following:

		June 30,				December 31,
		2005				2004
		(in thousands)
Coal		$	83,158			$	76,009
Repair parts and supplies			52,624				43,884
		$	135,782			$	119,893

Note I – Debt

Debt consists of the following:

		June 30,				December 31,
		2005				2004
		(in thousands)
Indebtedness to banks under lines of credit		$	—			$	—
Indebtedness to banks under revolving credit agreement, expiring December 22, 2009			—				25,000
6.75% senior notes ($950.0 million face value) due July 1, 2013			960,930				961,613
Promissory note			16,124				17,523
Other			1,999				7,011
			979,053				1,011,147
Less current portion			5,008				9,824
Long-term debt		$	974,045			$	1,001,323

On December 22, 2004, the Company entered into a $700.0 million revolving credit facility that matures on December 22, 2009. The rate of interest on borrowings under the credit facility is a floating rate based on LIBOR. The Company’s credit facility is secured by substantially all of its assets as well as its ownership interests in substantially all of its subsidiaries, except its ownership interests in Arch Western and its subsidiaries. The credit facility replaced the Company’s existing $350.0 million revolving credit facility. At June 30, 2005, the Company had $103.5 million in letters of credit outstanding, resulting in $596.5 million of unused borrowings under the revolver. Financial covenant requirements may restrict the amount of unused capacity available to the Company for borrowings and letters of credit. As of June 30, 2005, the Company was not restricted by financial covenants.

On October 22, 2004, the Company issued $250.0 million of 6.75% Senior Notes due 2013 at a price of 104.75% of par. Interest on the notes is payable on January 1 and July 1 of each year, beginning on January 1, 2005. The senior notes were issued under an indenture dated June 25, 2003, under which the Company previously issued $700.0 million of 6.75% Senior Notes due 2013. The senior notes are guaranteed by Arch Western and certain of Arch Western’s subsidiaries and are secured by a security interest in loans made to Arch Coal by Arch Western. The terms of the senior notes contain restrictive covenants that limit Arch Western’s ability to, among other things, incur additional debt, sell or transfer assets, and make certain investments.

On July 31, 2004, the Company issued a five-year, $22.0 million non-interest bearing note to help fund the Canyon Fuel acquisition. At its issuance, the note was discounted to its present value using a rate of 7.0%. The promissory note is payable in quarterly installments of $1.0 million through July 2008 and $1.5 million from October 2008 through July 2009.

Note J – 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 determinable. After conferring with counsel, it is the opinion of management that the ultimate resolution of these claims, to the extent not previously provided for, will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.

Note K – Transactions or Events Affecting Comparability of Reported Results

During the second quarter of 2005, the Company participated in a settlement from its insurance broker related to certain types of commissions previously paid and recognized a gain of $1.0 million. The gain is reflected in other operating income in the Condensed Consolidated Statements of Operations.

During the second quarter of 2005, the Company assigned its rights and obligations to an unused loadout facility to a third party resulting in a gain of $1.7 million. Of the $1.7 million gain recognized, $1.2 million was recorded as an increase to other operating income in the Condensed Consolidated Statements of Operations while $0.5 million was reflected as a reduction in cost of coal sales in the Condensed Consolidated Statements of Operations representing the elimination of the reclamation obligation associated with this facility.

During the second quarter of 2005, the State of Wyoming completed an audit related to severance taxes for the period of 1999 through 2001. The audit resulted in the Company being assessed additional taxes. The Company is reviewing the assessment and has recorded a liability of $4.0 million on its books related to the audit. Of the $4.0 million recorded, $2.6 million was recorded in cost of coal sales in the accompanying Condensed Consolidated Statements of Operations, while $1.4 million, representing interest associated with the assessment, was recorded as interest expense in the accompanying Condensed Consolidated Statements of Operations.

During the first quarter of 2005, the Company assigned its rights and obligations on several parcels of land to a third party resulting in a gain of $9.3 million. The gain is reflected in other operating income in the accompanying Condensed Consolidated Statements of Operations.

During the first quarter of 2005, the Company recognized a gain of $9.5 million resulting from various equipment sales. The gain is reported as other operating income in the accompanying Condensed Consolidated Statements of Operations.

During the six months ended June 30, 2004, the Office of Surface Mining completed an audit of certain of the Company’s federal reclamation fee filings for the period from 1998 through 2003. The audit resulted in the Company being assessed additional fees of $1.3 million and interest of $0.2 million. The additional fees have been recorded as a component of cost of coal sales in the accompanying Condensed Consolidated Statements of Operations, while the interest portion has been reflected as interest expense.

During the first quarter of 2004, Canyon Fuel, while accounted for under the equity method, began the process of temporarily idling its Skyline Mine, and incurred severance costs of $1.3 million and $3.2 million for the three and six months ended June 30, 2004, respectively. The Company’s share of these costs totals $0.9 million and $2.1 million, respectively, and is reflected in income from equity investments in the Condensed Consolidated Statements of Operations.

During the second quarter of 2004, the Company finalized the negotiation of price adjustments on two long-term contracts. These price adjustments are retroactive to January 1, 2004. Adjustments for shipments completed prior to the second quarter of 2004 totaled $1.9 million, which has been recorded as other operating income in the accompanying Condensed Consolidated Statements of Operations

On June 25, 2003, the Company repaid the $675 million term loan of its Arch Western subsidiary with the proceeds from the offering of $700.0 million in senior notes. The Company had designated certain interest rate swaps as hedges of the variable rate interest payments due under the Arch Western term loans. Pursuant to the requirements of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”), historical mark-to-market adjustments related to these swaps through June 25, 2003 were deferred as a component of Accumulated Other Comprehensive Loss. Subsequent to the repayment of the term loans, these deferred amounts will be amortized as additional expense over the contractual terms of the swap agreements. For the three months ending June 30, 2005 and 2004, the Company recognized $2.1 million of expense for both periods related to the amortization of previously deferred mark-to-market adjustments. For the six months ending June 30, 2005 and 2004, the Company recognized $4.1 million of expense for both periods related to the amortization of previously deferred mark-to-market adjustments.

Note L — Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per common share from continuing operations.

		Three months ended June 30, 2005
		Numerator				Denominator				Per Share
		(Income)				(Shares)				Amount
Basic EPS:
Net income		$	3,474				63,494			$	0.06
Preferred stock dividends			(1,797	)							(0.03	)
Basic income available to common shareholders		$	1,677							$	0.03
Effect of dilutive securities:
Effect of common stock equivalents arising from stock options and restricted stock grants			—				1,026
Diluted EPS:
Diluted income available to common shareholders		$	1,677				64,520			$	0.03

		Three months ended June 30, 2004
		Numerator				Denominator				Per Share
		(Income)				(Shares)				Amount
Basic EPS:
Net income		$	11,108				54,582			$	0.20
Preferred stock dividends			(1,797	)							(0.03	)
Basic income available to common shareholders		$	9,311							$	0.17
Effect of dilutive securities:
Effect of common stock equivalents arising from stock options and restricted stock grants			—				968
Diluted EPS:
Diluted income available to common shareholders.		$	9,311				55,550			$	0.17

		Six months ended June 30, 2005
		Numerator				Denominator				Per Share
		(Income)				(Shares)				Amount
Basic EPS:
Net income		$	10,049				63,140			$	0.16
Preferred stock dividends			(3,594	)							(0.06	)
Basic income available to common shareholders		$	6,455							$	0.10
Effect of dilutive securities:
Effect of common stock equivalents arising from stock options and restricted stock grants			—				1,018
Diluted EPS:
Diluted income available to common shareholders.		$	6,455				64,158			$	0.10

		Six months ended June 30, 2004
		Numerator				Denominator				Per Share
		(Income)				(Shares)				Amount
Basic EPS:
Net income		$	81,091				54,206			$	1.50
Preferred stock dividends			(3,594	)							(0.07	)
Basic income available to common shareholders		$	77,497							$	1.43
Effect of dilutive securities:
Effect of common stock equivalents arising from stock options and restricted stock grants			—				919
Effect of common stock equivalents arising from convertible preferred stock			3,594				6,896
Diluted EPS:
Diluted income available to common shareholders		$	81,091				62,021			$	1.31

Note M – Guarantees

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) that 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 $14.7 million at June 30, 2005 (such amount is included in other noncurrent liabilities). Future payments for fixed operating costs and debt service are estimated to approximate $2.7 million annually through 2015 and $26.0 million in 2016.

In connection with the Company’s acquisition of the coal operations of Atlantic Richfield Company (“ARCO”) and the simultaneous combination of the acquired ARCO operations and the Company’s Wyoming operations into the Arch Western joint venture, 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 acquisition. Depending on the time at which any such indemnification obligation were to arise, it could have a material adverse effect on the business, results of operations and financial condition of the Company.

Note N – Segment Information

The Company produces steam and metallurgical coal from surface and deep mines for sale to utility, industrial and export markets. The Company operates only in the United States, with mines in the major low-sulfur coal basins. The Company has three reportable business segments, which are based on the coal basins in which the Company operates. Coal quality, coal seam height, transportation methods and regulatory issues are generally consistent within a basin. Accordingly, market and contract pricing have developed by coal basin. The Company manages its coal sales by coal basin, not by individual mine complex. Mine operations are evaluated based on their per-ton operating costs (defined as including all mining costs but excluding pass-through transportation expenses). The Company’s reportable segments are Powder River Basin (PRB), Central Appalachia (CAPP) and Western Bituminous (WBIT). The Company’s operations in the Powder River Basin are located in Wyoming and include one operating surface mine and one idle surface mine. The Company’s operations in Central Appalachia are located in southern West Virginia, eastern Kentucky, and Virginia and include 18 underground mines and nine surface mines. The Company’s Western Bituminous operations are located in southern Wyoming, Colorado and Utah and include four underground mines and two surface mines (the surface mines were both placed into reclamation mode in 2004).

Operating segment results for the three and six months ending June 30, 2005 and 2004 are presented below. Results for the operating segments include all direct costs of mining. Corporate, Other and Eliminations includes corporate overhead, land management, other support functions, and the elimination of intercompany transactions.

Three months ending June 30, 2005

														Corporate,
														Other and
(Amounts in thousands, except per ton amounts)		PRB				CAPP				WBIT				Eliminations				Consolidated
Coal sales		$	179,005			$	349,758			$	105,034			$	—			$	633,797
Income (loss) from operations			15,904				(5,050	)			26,746				(16,107	)			21,493

														Corporate,
														Other and
(Amounts in thousands, except per ton amounts)		PRB				CAPP				WBIT				Eliminations				Consolidated
Total assets			1,182,995				2,167,927				1,701,858				(1,770,340	)			3,282,440
Depreciation, depletion and amortization			25,970				17,192				8,690				290				52,142
Capital expenditures			8,507				58,345				11,541				2,726				81,119
Operating cost per ton			7.38				42.54				14.21				—				—

Three months ending June 30, 2004

														Corporate,
														Other and
(Amounts in thousands, except per ton amounts)		PRB				CAPP				WBIT				Eliminations				Consolidated
Coal sales		$	122,650			$	275,687			$	24,441			$	—			$	422,778
Income from equity investments			—				—				5,995				—				5,995
Income (loss) from operations			14,943				9,149				8,936				(8,158	)			24,870
Total assets			1,016,134				2,027,485				939,508				(1,484,778	)			2,498,349
Equity investments			—				—				158,042				—				158,042
Depreciation, depletion and amortization			16,053				15,735				3,847				445				36,080
Capital expenditures			11,342				21,186				2,319				2,631				37,478
Operating cost per ton			6.07				35.17				15.82				—				—

Six months ending June 30, 2005

														Corporate,
														Other and
(Amounts in thousands, except per ton amounts)		PRB				CAPP				WBIT				Eliminations				Consolidated
Coal sales		$	370,789			$	660,730			$	202,743			$	—			$	1,234,262
Income (loss) from operations			43,578				(2,440	)			39,106				(32,798	)			47,446
Depreciation, depletion and amortization			52,436				33,004				17,020				585				103,045
Capital expenditures			17,001				93,821				24,963				3,573				139,358
Operating cost per ton			6.93				42.48				14.71				—				—

Six months ending June 30, 2004

														Corporate,
														Other and
(Amounts in thousands, except per ton amounts)		PRB				CAPP				WBIT				Eliminations				Consolidated
Coal sales		$	237,456			$	534,769			$	54,043			$	—			$	826,268
Income from equity investments			—				—				7,267				2,418				9,685
Income from operations			30,761				19,779				11,457				69,782				131,779
Depreciation, depletion and amortization			31,505				31,866				7,932				882				72,185
Capital expenditures			27,582				34,166				3,029				4,355				69,132
Operating cost per ton			6.00				33.56				16.38				—				—

Reconciliation of segment income from operations to consolidated income before income taxes and cumulative effect of accounting change:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(in thousands)
Total segment income from operations		$	21,493			$	24,870			$	47,446			$	131,779
Interest expense			(19,389	)			(14,101	)			(37,460	)			(28,842	)
Interest income			1,681				903				3,526				1,613
Other non-operating expense			(1,611	)			(1,864	)			(4,063	)			(3,759	)
Income before income taxes		$	2,174			$	9,808			$	9,449			$	100,791

Note O — Reclassifications

Certain amounts in the 2004 financial statements have been reclassified to conform to the classifications in the 2005 financial statements with no effect on previously reported net income or members’ equity.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

In this quarterly report, statements that are not reported financial results or other historical information are “forward-looking statements.” Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. They are based on our management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements.

Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts. They use words such as “anticipate,” “estimate,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to:

	•		our expectation of continued growth in the demand for our coal by the domestic electric generation industry;
	•		our belief that legislation and regulations relating to the Clean Air Act and other proposed environmental initiatives and the relatively higher costs of competing fuels will increase demand for our compliance and low sulfur coal;
	•		our expectations regarding incentives to generators of electricity to minimize their fuel costs as a result of electric utility deregulation;
	•		our expectation that we will continue to have adequate liquidity from cash flow from operations;
	•		a variety of market, operational, geologic, permitting, labor, transportation and weather related factors;
	•		our expectations regarding any synergies to be derived from the Triton acquisition; and
	•		the other risks and uncertainties which are described below under “Contingencies” and “Certain Trends and Uncertainties,” including, but not limited to, the following:

	o		Due to the significant amount of our debt, a downturn in economic or industry conditions could materially affect our ability to meet our future financial and liquidity obligations.
	o		A reduction in consumption by the domestic electric generation industry may cause our profitability to decline.
	o		Extensive environmental laws and regulations could cause the volume of our sales to decline.
	o		The coal industry is highly regulated, which restricts our ability to conduct mining operations and may cause our profitability to decline.
	o		We may not be able to obtain or renew our surety bonds on acceptable terms.
	o		Unanticipated mining conditions may cause profitability to fluctuate.
	o		Intense competition and excess industry capacity in the coal producing regions has adversely affected our revenues and may continue to do so in the future.
	o		Deregulation of the electric utility industry may cause customers to be more price-sensitive, resulting in a potential decline in our profitability.
	o		Our profitability may be adversely affected by the status of our long-term coal supply contracts.
	o		Decreases in purchases of coal by our largest customers could adversely affect our revenues.

	o		An unavailability of coal reserves would cause our profitability to decline.
	o		Disruption in, or increased costs of, transportation services could adversely affect our profitability.
	o		Numerous uncertainties exist in estimating our economically recoverable coal reserves, and inaccuracies in our estimates could result in lower revenues, higher costs or decreased profitability.
	o		Title defects or loss of leasehold interests in our properties could result in unanticipated costs or an inability to mine these properties.
	o		All acquisitions involve a number of inherent risks, any of which could cause us not to realize the benefits anticipated to result.
	o		Changes in our credit ratings could adversely affect our costs and expenses.
	o		Some of our agreements impose significant potential indemnification obligations on us.
	o		Our expenditures for postretirement medical and pension benefits have increased in recent periods and could further increase in the future.
	o		Pending litigation involving third parties may impact our cash balance pension plan and the retirement account formula used in its administration.
	o		Any inability to comply with restrictions imposed by our credit facilities and other debt arrangements could result in a default under these agreements.
	o		Our estimated financial results may prove to be inaccurate.

We cannot guarantee that any forward-looking statements will be realized, although we believe that we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove to be inaccurate, actual results could vary materially from those anticipated, estimated or projected.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. You are advised, however, to consider any additional disclosures that we may make on related subjects in future filings with the SEC. You should understand that it is not possible to predict or identify all factors that could cause our actual results to differ. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

RESULTS OF OPERATIONS

Items Affecting Comparability of Reported Results

The comparison of our operating results for the quarter-to-date and year-to-date periods ending June 30, 2005 and 2004 are affected by the following items:

(Dollar amounts in millions)		Quarter ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Operating Income
Gain on land sales		$	—			$	—			$	9.3			$	—
Gain on equipment sales			—				—				9.5				—
Gain on facility sales			1.7				—				1.7				—
Insurance broker settlement			1.0				—				1.0				—
Wyoming severance tax assessment			(4.0	)			—				(4.0	)			—
Long-term incentive compensation expense			—				—				(9.9	)			—

(Dollar amounts in millions)		Quarter ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Gain on sale of NRP units			—				0.3				—				90.0
Severance costs — Skyline Mine			—				(0.9	)			—				(2.1	)
Contract rate adjustments			—				1.9				—				1.9
Reclamation fee assessment			—				—				—				(1.3	)
Net impact on operating income and net interest expense			(1.3	)			1.3				7.6				88.5
Other
Expenses resulting from early debt extinguishment and termination of hedge accounting for interest rate swaps			(2.1	)			(2.1	)			(4.1	)			(4.1	)
Reclamation fee assessment – interest portion			—				—				—				(0.2	)
Net impact on pre-tax income		$	(3.4	)		$	(0.8	)		$	3.5			$	84.2

Gain from land sales

During the first quarter of 2005, we assigned our rights and obligations on several parcels of land to a third party resulting in a gain of $9.3 million. The gain is reflected in other operating income in the accompanying Condensed Consolidated Statements of Operations.

Gain from equipment sales

During the first quarter of 2005, we recognized a gain of $9.5 million resulting from various equipment sales. The gain is reported as other operating income in the accompanying Condensed Consolidated Statements of Operations.

Gain from facility sales

During the second quarter of 2005, we assigned our rights and obligations to an unused loadout facility to a third party resulting in a gain of $1.7 million. Of the $1.7 million gain recognized, $1.2 million was recorded as an increase to other revenues in the Condensed Consolidated Statements of Operations while $0.5 million was reflected as a reduction in cost of coal sales in the Condensed Consolidated Statements of Operations representing the elimination of the reclamation obligation associated with this facility.

Insurance broker settlement

During the second quarter of 2005, we participated in a settlement from our insurance broker related to certain types of commissions previously paid and recognized a gain of $1.0 million. The gain is reflected in other operating income in the Condensed Consolidated Statements of Operations.

Wyoming severance tax assessment

During the second quarter of 2005, the State of Wyoming completed an audit related to severance taxes for the period of 1999 through 2001. The audit resulted in additional taxes being assessed against us. We are reviewing the assessment and have recorded a liability of $4.0 million on our books related to the audit. Of the $4.0 million recognized, $2.6 million was recorded in cost of coal sales in the accompanying Condensed Consolidated Statements of Operations, while $1.4 million, representing interest associated with the assessment, was recorded as interest expense in the accompanying Condensed Consolidated Statements of Operations.

Long-term incentive compensation expense

During 2004, we granted an award of 220,766 shares of performance-contingent phantom stock that vested in the event the Company’s stock price reached an average pre-established price over a period of 20 consecutive trading days within five years following the date of grant. During the first quarter of 2005, the price contingency discussed above was met, and the award was paid in a combination of Company stock and cash. As such, we recognized a $9.9 million charge as a component of selling, general and administrative expense ($9.1 million) and cost of coal sales ($0.8 million) in the accompanying Condensed Consolidated Statements of Operations.

Gain on sale of NRP units

During the six months ended June 30, 2004, we sold the majority of our remaining limited partnership units of Natural Resource Partners, LP (“NRP”) for proceeds of approximately $105.4 million. The sales resulted in a gain of $90.0 million.

Severance costs — Skyline Mine

During the first quarter of 2004, Canyon Fuel, our equity method investment, began the process of idling its Skyline Mine (the idling process was completed in May 2004), and incurred severance costs of $1.3 million and $3.2 million for the three and six months ended June 30, 2004, respectively. Our 65% share of these costs totals $0.9 million and $2.1 million (which was prior to our purchase of the remaining 35% interest), respectively, and is reflected in income from equity investments in the accompanying Condensed Consolidated Statements of Operations.

Contract rate adjustments

During the second quarter of 2004, we finalized the negotiation of price adjustments on two long-term contracts. These price adjustments are retroactive to January 1, 2004. Adjustments for shipments prior to the second quarter of 2004 totaled $1.9 million, which has been recorded as other operating income in the accompanying Condensed Consolidated Statements of Operations.

Reclamation fee assessment

During the six months ended June 30, 2004, the Office of Surface Mining completed an audit of certain of our federal reclamation fee filings for the period from 1998 through 2003. The audit resulted in an assessment of additional fees of $1.3 million and interest of $0.2 million. The additional fees have been recorded as a component of cost of coal sales in the accompanying Condensed Consolidated Statements of Operations, while the interest portion has been reflected as interest expense.

Expenses resulting from early debt extinguishment and termination of hedge accounting for interest rate swaps

On June 25, 2003, we repaid the $675 million term loan of our Arch Western subsidiary with the proceeds from the offering of $700 million in senior notes. Prior to the repayment, we had designated certain interest rate swaps as hedges of the variable rate interest payments due under the Arch Western term loans. Pursuant to the requirements of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”), historical mark-to-market adjustments related to these swaps through June 25, 2003 were deferred as a component of Accumulated Other Comprehensive Loss. Subsequent to the repayment of the term loans, these deferred amounts will be amortized as additional expense over the contractual terms of the swap agreements. For the three months ending June 30, 2005 and 2004, we recognized $2.1 million of expense for both periods related to the amortization of previously deferred mark-to-market adjustments. For the six months ending June 30, 2005 and 2004, we recognized $4.1 million of expense for both periods related to the amortization of previously deferred mark-to-market adjustments.

Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004

Revenues

		Three Months Ended
		June 30,								Increase (Decrease)
		2005				2004				$				%
		(Amounts in thousands, except per ton data)
Coal sales		$	633,797			$	422,778			$	211,019				49.9	%
Tons sold			34,630				26,424				8,206				31.1	%
Coal sales realization per ton sold		$	18.30			$	16.00			$	2.30				14.4	%

Tons sold by operating segment

		Tons Sold								% of Total
		June 30, 2005				June 30, 2004				June 30, 2005				June 30, 2004
						(Amounts in thousands)
Powder River Basin			21,995				17,643				63.5	%			66.8	%
Central Appalachia			7,957				7,334				23.0	%			27.8	%
Western Bituminous Region			4,678				1,447				13.5	%			5.4	%
Total operating regions			34,630				26,424				100.0	%			100.0	%

Coal sales. The increase in coal sales resulted from the combination of higher pricing, increased volumes and the acquisitions of Triton in the Powder River Basin and the remaining 35% interest in Canyon Fuel in the Western Bituminous region, both of which occurred during the third quarter of 2004.

Volumes increased dramatically in the Powder River Basin (an increase of 24.7%) and at our Western Bituminous operations (an increase of 223.3%), in addition to an 8.5% increase in volumes in Central Appalachia. Volumes in both the Powder River Basin and the Western Bituminous region benefited from the acquisitions that were completed in the third quarter of 2004. Volumes in Central Appalachia were higher primarily from increased brokered activity.

Per ton realizations increased due primarily to higher contract prices in all three regions. In the Powder River Basin, per ton realization increased 17.1%, as a result of increased base pricing and higher SO2 quality premiums resulting from higher SO2 emission allowance prices. The Central Appalachia Basin experienced an increase of 16.9%, as both contract and spot market prices were higher than in the second quarter of 2004. Additionally, we received higher sales prices on our metallurgical coal sales in the second quarter of 2005 as compared to the second quarter of 2004. The Western Bituminous region’s per ton realization increased 32.9%. In addition to higher contract pricing, per ton realizations in the Western Bituminous region were also affected by the acquisition of the remaining 35% interest in Canyon Fuel during the third quarter of 2004.

On a consolidated basis, the increase in per ton realizations was partially offset by the change in mix of sales volumes among our operating regions. As reflected in the table above, Central Appalachia volumes (which have the highest average realization) increased slightly while volumes from lower realization regions (the Powder River Basin and Western Bituminous Region) increased dramatically from the prior year’s comparable quarter.

Costs and Expenses

		Three Months Ended
		June 30,								Increase (Decrease)
		2005				2004				$				%
		(Amounts in thousands)
Cost of coal sales		$	542,073			$	364,083			$	177,990				48.9	%
Depreciation, depletion and amortization			52,142				36,080				16,062				44.5	%
Selling, general and administrative expenses			17,979				11,717				6,262				53.4	%
Other expenses			12,498				6,853				5,645				82.4	%
		$	624,692			$	418,733			$	205,959				49.2	%

Cost of coal sales. The increase in cost of coal sales is primarily due to the acquisitions of Triton in the Powder River Basin and the remaining 35% interest in Canyon Fuel in the Western Bituminous region, both of which occurred during the third quarter of 2004, along with the increase in sales sensitive costs resulting from the previously discussed increase in revenues. Specific factors contributing to the increase are as follows (note that specifically the increases discussed below for diesel fuel, explosives, utilities, operating supplies and repairs and maintenance costs are partially due to the acquisitions of Triton and Canyon Fuel during the third quarter of 2004):

	•		Production taxes and coal royalties (which are incurred as a percentage of coal sales realization) increased $32.4 million during the second quarter of 2005 compared to the same period in the prior year.
	•		Our Central Appalachia operations incurred higher costs related to additional processing necessary for coal sold in metallurgical markets as well as the difficult geologic conditions adversely affecting our Mingo Logan mine during the second quarter of 2005.
	•		The cost of purchased coal increased $49.9 million, reflecting a combination of increased purchase volumes and higher spot market prices that were prevalent during the second quarter of 2005 compared to the same

			period in 2004. During the second quarter of 2005, we utilized purchased coal to fulfill steam coal sales commitments in order to direct more of our produced coal into the metallurgical markets.
	•		Repairs and maintenance costs increased $17.7 million compared to the same period in the prior year.
	•		Costs for diesel fuel, explosives and utilities increased $8.3 million, $3.8 million and $2.3 million, respectively, compared to the same period in the prior year.
	•		Costs for operating supplies increased $11.0 million due partially to increased steel prices during the current quarter compared to the prior year’s comparable quarter.