UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

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

Commission file number: 1-13105

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		43-0921172 (I.R.S. Employer Identification Number)

One CityPlace Drive, Suite 300, St. Louis, Missouri (Address of principal executive offices)		63141 (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 þ 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 þ		Accelerated filer o		Non-accelerated filer   o (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 5, 2009 there were 162,440,949 shares of the registrant’s common stock outstanding.

 

 

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			26
Item 4. Controls and Procedures			26
Part II OTHER INFORMATION			27
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3. Defaults Upon Senior Securities			28
Item 4. Submission of Matters to a Vote of Security Holders			28
Item 5. Other Information			28
Item 6. Exhibits			29
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I
FINANCIAL INFORMATION

Item 1.		Financial Statements.

Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share data)

		Three Months Ended September 30								Nine Months Ended September 30
		2009				2008				2009				2008
		(unaudited)
REVENUES
Coal sales		$	614,957			$	769,458			$	1,850,609			$	2,253,925
COSTS, EXPENSES AND OTHER
Cost of coal sales			489,290				567,372				1,503,937				1,650,259
Depreciation, depletion and amortization			71,468				72,185				212,986				217,180
Selling, general and administrative expenses			24,029				22,235				70,770				80,937
Change in fair value of coal derivatives and coal trading activities, net			(3,342	)			18,382				(10,328	)			(65,336	)
Costs related to acquisition of Jacobs Ranch			791				—				7,166				—
Other operating expense (income), net			(15,617	)			1,354				(28,141	)			(2,993	)
			566,619				681,528				1,756,390				1,880,047
Income from operations			48,338				87,930				94,219				373,878
Interest expense, net:
Interest expense			(29,791	)			(17,019	)			(70,466	)			(56,228	)
Interest income			399				235				7,284				1,128
			(29,392	)			(16,784	)			(63,182	)			(55,100	)
Income before income taxes			18,946				71,146				31,037				318,778
Provision for (benefit from) income taxes			(6,270	)			(26,881	)			(9,590	)			26,059
Net income			25,216				98,027				40,627				292,719
Less: Net (income) loss attributable to noncontrolling interest			(31	)			(179	)			11				(727	)
Net income attributable to Arch Coal, Inc.		$	25,185			$	97,848			$	40,638			$	291,992
EARNINGS PER COMMON SHARE
Basic earnings per common share		$	0.16			$	0.68			$	0.28			$	2.03
Diluted earnings per common share		$	0.16			$	0.68			$	0.28			$	2.02
Basic weighted average shares outstanding			155,622				144,035				147,122				143,885
Diluted weighted average shares outstanding			156,005				144,898				147,332				144,848
Dividends declared per common share		$	0.09			$	0.09			$	0.27			$	0.25

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

Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)

		September 30,				December 31,
		2009				2008
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	840,293			$	70,649
Trade accounts receivable			173,994				215,053
Other receivables			20,662				43,419
Inventories			237,293				191,568
Prepaid royalties			25,711				43,780
Deferred income taxes			33,830				52,918
Coal derivative assets			23,721				43,173
Other			45,539				45,818
Total current assets			1,401,043				706,378
Property, plant and equipment, net			2,745,469				2,703,083
Other assets:
Prepaid royalties			83,722				66,918
Goodwill			46,832				46,832
Deferred income taxes			302,377				294,682
Equity investments			90,306				87,761
Other			124,189				73,310
Total other assets			647,426				569,503
Total assets		$	4,793,938			$	3,978,964
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	129,048			$	186,322
Coal derivative liabilities			5,640				10,757
Accrued expenses and other current liabilities			166,448				249,203
Current maturities of debt and short-term borrowings			195,333				213,465
Total current liabilities			496,469				659,747
Long-term debt			1,692,167				1,098,948
Asset retirement obligations			270,642				255,369
Accrued pension benefits			63,904				73,486
Accrued postretirement benefits other than pension			40,566				58,163
Accrued workers’ compensation			27,706				30,107
Other noncurrent liabilities			80,473				65,526
Total liabilities			2,671,927				2,241,346
Redeemable noncontrolling interest			8,940				8,885
Stockholders’ equity:
Common stock, $0.01 par value, authorized 260,000 shares, issued 163,953 and 144,345 shares, respectively			1,643				1,447
Paid-in capital			1,718,088				1,381,496
Treasury stock, 1,512 shares at September 30, 2009 and December 31, 2008, at cost			(53,848	)			(53,848	)
Retained earnings			479,025				478,734
Accumulated other comprehensive loss			(31,837	)			(79,096	)
Total stockholders’ equity			2,113,071				1,728,733
Total liabilities and stockholders’ equity		$	4,793,938			$	3,978,964

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

Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)

		Nine Months Ended September 30
		2009				2008
		(unaudited)
OPERATING ACTIVITIES
Net income		$	40,627			$	292,719
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization			212,986				217,180
Prepaid royalties expensed			24,140				27,161
Gain on dispositions of property, plant and equipment			(81	)			(178	)
Employee stock-based compensation			10,253				9,768
Changes in:
Receivables			63,785				(29,646	)
Inventories			(45,725	)			3,923
Coal derivative assets and liabilities			21,911				(57,929	)
Accounts payable, accrued expenses and other current liabilities			(74,607	)			28,821
Deferred income taxes			(15,165	)			8,067
Other			8,319				8,208
Cash provided by operating activities			246,443				508,094
INVESTING ACTIVITIES
Capital expenditures			(280,033	)			(414,125	)
Proceeds from dispositions of property, plant and equipment			806				1,069
Purchases of investments and advances to affiliates			(10,353	)			(4,359	)
Additions to prepaid royalties			(22,874	)			(19,429	)
Reimbursement of deposits on equipment			3,209				2,697
Cash used in investing activities			(309,245	)			(434,147	)
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt			584,784				—
Proceeds from the sale of common stock			326,452				—
Purchases of treasury stock			—				(47,932	)
Net increase in borrowings under lines of credit and commercial paper program			4,345				50,882
Net payments on other debt			(13,276	)			(10,995	)
Debt financing costs			(29,596	)			(233	)
Dividends paid			(40,347	)			(35,989	)
Issuance of common stock under incentive plans			84				6,306
Cash provided by (used in) financing activities			832,446				(37,961	)
Increase in cash and cash equivalents			769,644				35,986
Cash and cash equivalents, beginning of period			70,649				5,080
Cash and cash equivalents, end of period		$	840,293			$	41,066

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

Arch Coal, Inc. 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 Coal, Inc. and its subsidiaries and controlled entities (the “Company”). The Company’s primary business is the production of steam and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial and export markets. The Company’s mines are located in southern West Virginia, eastern Kentucky, Virginia, Wyoming, Colorado and Utah. All subsidiaries (except as noted below) are wholly-owned. 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. The Company’s management evaluated the period from October 1, 2009 to November 9, 2009 for items requiring recognition or disclosure in the financial statements. These notes include disclosures of subsequent events to the extent necessary to keep the accompanying condensed consolidated financial statements from being misleading. Results of operations for the three and nine month periods ended September 30, 2009 are not necessarily indicative of results to be expected for the year ending December 31, 2009. 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, 2008 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

     The Company owns a 99% membership interest in a joint venture named Arch Western Resources, LLC (“Arch Western”) which operates coal mines in Wyoming, Colorado and Utah. The Company also acts as the managing member of Arch Western.

2. Accounting Policies

     New Accounting Pronouncements

     The Financial Accounting Standards Board (“FASB”) has established the FASB Accounting Standards Codification ™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the United States for financial statements of interim and annual periods ending after September 15, 2009. References to authoritative accounting principles after the effective date will reference the Codification and not the previous accounting guidance.

     On January 1, 2009, the Company changed its presentation of noncontrolling interests in subsidiaries, pursuant to new guidance in the Consolidation topic of the Codification, which requires that a noncontrolling interest (previously referred to as minority interest) in a consolidated subsidiary be displayed in the consolidated balance sheet as a separate component of equity and the amount of net income attributable to the noncontrolling interest be included in consolidated net income on the face of the consolidated statement of income. Because the noncontrolling interest in Arch Western is redeemable, it is presented in the “mezzanine” between liabilities and equity. This change resulted in a decrease in other liabilities of $8.9 million as of December 31, 2008 from what was previously reported for the reclassification of the noncontrolling interest in Arch Western. This change also resulted in an increase in other operating income, net and net income of $0.2 million for the three months ended September 30, 2008 from what was previously reported for the amount of income attributable to the noncontrolling interest in Arch Western. For the nine months ended September 30, 2008 this change resulted in an increase in other operating income, net and in net income of $0.7 million from what was previously reported for the amount of income attributable to the noncontrolling interest in Arch Western.

     On January 1, 2009, the Company adopted the new disclosure requirements of the Derivatives and Hedging topic of the Codification. The new disclosures include qualitative disclosures about objectives for using derivatives, tabular disclosures about the gross fair value of derivative instruments, gains and losses from derivative instruments by type of contract, and the locations of these amounts in the interim and annual financial statements. See Note 7, “Derivatives” for the disclosures required.

     New authoritative guidance related to the accounting for assets acquired and liabilities assumed in business combinations was effective on January 1, 2009 for business combinations occurring after that date. The new provisions of the Business Combinations topic of the Codification clarify and amend the accounting guidance for the acquirer’s recognition and measurement of the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree in a

business combination. Also, assets acquired and liabilities assumed in a business combination that arise from pre-acquisition contingencies are to be recognized at fair value and new disclosures are required to include changes in the range of possible outcomes for both recognized and reasonably possible unrecognized pre-acquisition contingencies.

     On January 1, 2009, the Company adopted amendments to the Earnings Per Share topic of the Codification. The amendments clarify whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method. The amendments require retrospective adjustments to prior-period financial statements, however the amendments had no effect on basic or diluted earnings per share for the three and nine months ended September 30, 2009 and September 30, 2008.

     Beginning January 1, 2009, the provisions of the Fair Value Measurements and Disclosures topic of the Codification are applicable prospectively to fair value measurements other than those that are recognized or disclosed at fair value in the financial statements on a recurring basis. There was no transition impact upon initial adoption; however, the provisions of the Fair Value Measurements and Disclosures topic of the Codification are effective for all fair value measurements prescribed by generally accepted accounting principles for nonfinancial assets and nonfinancial liabilities after the date of adoption.

3. Business Combinations

     On October 1, 2009, the Company consummated its previously announced purchase of all of the issued and outstanding membership interests of Jacobs Ranch Holdings I LLC, the parent of the Jacobs Ranch mining operations, for a purchase price of $764.0 million, including approximately 352 million tons of coal reserves adjacent to the Company’s Black Thunder mining complex. Disclosures with respect to the acquisition are not included in these notes to the condensed consolidated financial statements due to ongoing valuation and purchase price allocation efforts.

     The Company recognized costs of $0.8 million and $7.2 million related to the acquisition in the accompanying condensed consolidated statement of income for the three and nine months ended September 30, 2009, respectively.

4. Equity and Debt Offerings

     On July 31, 2009, the Company sold 17 million shares of its common stock at a public offering price of $17.50 per share and issued $600.0 million in aggregate principal amount of 8.75% senior unsecured notes due 2016 at an initial issue price of 97.464% of the face amount. On August 6, 2009, the Company issued an additional 2.55 million shares of its common stock under the same terms and conditions to cover underwriters’ over-allotments. The net proceeds received from the issuance of common stock were $326.5 million and the net proceeds received from the issuance of the 8.75% senior unsecured notes were $570.3 million. The proceeds from these transactions were used primarily to finance the purchase of the Jacobs Ranch mining complex discussed in Note 3, “Business Combinations”.

5. Commercial Transactions

     During the three months ended September 30, 2009, approximately half of our other operating income was generated by financial settlements of physical forward contracts.

6. Fair Value Measurements

     The hierarchy of fair value measurements prioritizes the inputs to valuation techniques used to measure fair value. The levels of the hierarchy, as defined below, give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

•

Level 1 is defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities and coal futures that are submitted for clearing on the New York Mercantile Exchange.

•

Level 2 is defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s level 2 assets and liabilities include commodity contracts (coal and heating oil) with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.

•

Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. These include the Company’s commodity option contracts (primarily coal

and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are not observable.

     The table below sets forth, by level, the Company’s financial assets and liabilities that are accounted for at fair value:

		Fair Value at September 30, 2009
		Total				Level 1				Level 2				Level 3
						(In thousands)
Assets:
Investments in equity securities		$	2,636			$	2,269			$	—			$	367
Derivatives			25,283				—				22,368				2,915
Total assets		$	27,919			$	2,269			$	22,368			$	3,282
Liabilities:
Derivatives		$	11,846			$	1,869			$	11,877			$	(1,900	)

     The Company’s contracts with certain of its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. For classification purposes, the Company records the net fair value of all the positions with these counterparties as a net asset or liability. Each level in the table above displays the underlying contracts according to their classification in the accompanying condensed consolidated balance sheet, based on this counterparty netting.

     The following table summarizes the change in the fair values of financial instruments categorized as level 3.

		Three Months Ended				Nine Months Ended
		September 30, 2009				September 30, 2009
		(In thousands)
Beginning balance		$	5,684			$	1,050
Realized and unrealized losses recognized in earnings			(1,598	)			(2,998	)
Realized and unrealized gains (losses) recognized in other comprehensive income			(261	)			2,219
Settlements, purchases and issuances			1,357				4,911
Ending balance		$	5,182			$	5,182

     Net unrealized losses during the three and nine months ended September 30, 2009 related to level 3 financial instruments held on September 30, 2009 were $2.2 million and $0.5 million, respectively.

7. Derivatives

     The Company generally utilizes derivative financial instruments to manage exposures to commodity prices. Additionally, the Company may hold certain coal derivative financial instruments for trading purposes.

     All derivative financial instruments are recognized in the balance sheet at fair value. In a fair value hedge, the Company hedges the risk of changes in the fair value of a firm commitment, typically a fixed-price coal sales contract. Changes in both the hedged firm commitment and the fair value of a derivative used as a hedge instrument in a fair value hedge are recorded in earnings. In a cash flow hedge, the Company hedges the risk of changes in future cash flows related to a forecasted purchase or sale. Changes in the fair value of the derivative instrument used as a hedge instrument in a cash flow hedge are recorded in other comprehensive income. Amounts in other comprehensive income are reclassified to earnings when the hedged transaction affects earnings and are classified in a manner consistent with the transaction being hedged. The Company formally documents the relationships between hedging instruments and the respective hedged items, as well as its risk management objectives for hedge transactions.

     The Company evaluates the effectiveness of its hedging relationships both at the hedge’s inception and on an ongoing basis. Any ineffective portion of the change in fair value of a derivative instrument used as a hedge instrument in a fair value or cash flow hedge is recognized immediately in earnings. The ineffective portion is based on the extent to which exact offset is not achieved between the change in fair value of the hedge instrument and the cumulative change in expected future cash flows on the hedged transaction from inception of the hedge in a cash flow hedge or the change in the fair value of the firm commitment in a fair value hedge.

     Diesel fuel price risk management

     The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company

purchases approximately 50-60 million gallons of diesel fuel annually in its operations, including the effect of the acquisition of the Jacobs Ranch operations. To reduce the volatility in the price of diesel fuel for its operations, the Company uses forward physical diesel purchase contracts, as well as heating oil swaps and purchased call options. At September 30, 2009, the Company had protected the price of approximately 50% of its expected purchases for fiscal year 2009 and for fiscal year 2010. Since the changes in the price of heating oil highly correlate to changes in the price of the hedged diesel fuel purchases, the heating oil swaps and purchased call options qualify for cash flow hedge accounting. The Company held heating oil swaps and purchased call options for approximately 33.0 million gallons as of September 30, 2009.

     Coal risk management positions

     The Company may sell or purchase forward contracts and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.

     At September 30, 2009, the Company held derivatives for risk management purposes totaling 0.1 million tons of coal purchases that are expected to settle during the remainder of 2009 and 0.3 million tons of coal purchases that are expected to settle in 2010.

     Coal trading positions

     The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market for trading purposes. The Company may also include non-derivative contracts in its trading portfolio. The Company is exposed to the risk of changes in coal prices on its coal trading portfolio. The timing of the estimated future realization of the value of the trading portfolio is 47% in the remainder of 2009, 32% in 2010 and 21% in 2011.

     Tabular derivatives disclosures

     The Company’s contracts with certain of its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce our credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with these counterparties as a net asset or liability. The amounts shown in the table below represent the fair value position of individual contracts, regardless of the net position presented in the accompanying condensed consolidated balance sheet. The fair value and location of derivatives reflected in the accompanying condensed consolidated balance sheet are as follows:

Fair Value of Derivatives as of September 30, 2009
(in thousands)

		Asset				Liability
		Derivatives				Derivatives
Derivatives Designated as Hedging Instruments
Heating oil		$	9,032			$	(13,676	)
Coal			2,487				(12,770	)
Total			11,519				(26,446	)
Derivatives Not Designated as Hedging Instruments
Coal — held for trading purposes			78,259				(60,696	)
Coal			13,590				(2,789	)
Total			91,849				(63,485	)
Total derivatives			103,368				(89,931	)
Effect of counterparty netting			(78,085	)			78,085
Net derivatives as classified in the balance sheet		$	25,283			$	(11,846	)		$	13,437

Net derivatives as reflected on the balance sheet

Heating oil				Other Current Assets		$	1,562
				Accrued Expenses			(6,206	)
Coal				Coal Derivative Assets			23,721
				Coal Derivative Liabilities			(5,640	)
						$	13,437

     The Company had a current asset for the right to reclaim cash collateral of $11.3 million and $6.6 million at September 30, 2009 and December 31, 2008. These amounts are not included with the derivatives presented in the table above and are included in “other current assets” in the accompanying condensed consolidated balance sheet.

     The effects of derivatives on measures of financial performance are as follows:

Three Months Ended September 30, 2009
(in thousands)

		Gain on Derivatives				Hedged Items in				Loss on Hedged Items
Derivatives used in		Used in Fair Value				Fair Value Hedge				In Fair Value Hedge
Fair Value Hedging Relationships		Hedge Relationships				Relationships				Relationships
Coal		$	2,235 1			Firm commitments				$	(2,235) 1
										Gain (Loss)
										Recognized in
						Losses				Income (Ineffective
		Gain (Loss)				Reclassified from				Portion and Amount
Derivatives used in		Recognized in OCI				OCI into Income				Excluded from
Cash Flow Hedging Relationships		(Effective Portion)				(Effective Portion)				Effectiveness Testing)
Heating oil		$	(2,393	)		$	(11,854) 2			$	—
Coal sales			(4,739	)			— 1				—
Coal purchases			3,407				(5,652) 2				—
Totals		$	(3,725	)		$	(17,506)			$	—

Derivatives Not Designated as
Hedging Instruments		Gain
Coal		$	7,8813

Location in Statement of Income:

     The majority of the unrealized gain on derivatives not designated as hedging instruments for the three months ended September 30, 2009 related to a change in categorization of certain over-the-counter coal contracts as a result of certain commercial settlements discussed in Note 5, “Commercial Transactions.” These derivative contracts were previously not recorded at fair value, as allowed by an exemption for sales and purchases entered into for normal business purposes.

     During the three months ended September 30, 2009, the Company recognized net unrealized and realized losses related to its trading portfolio (including derivative and non-derivative contracts) of $4.5 million as included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying condensed consolidated statement of income. These gains are not included in the previous table.

Nine Months Ended September 30, 2009
(in thousands)

		Gain on Derivatives				Hedged Items in				Loss on Hedged Items
Derivatives used in		Used in Fair Value				Fair Value Hedge				In Fair Value Hedge
Fair Value Hedging Relationships		Hedge Relationships				Relationships				Relationships
Coal		$	651 1			Firm commitments				$	(651) 1
										Gain (Loss)
										Recognized in
						Losses				Income (Ineffective
		Gain (Loss)				Reclassified from				Portion and Amount
Derivatives used in		Recognized in OCI				OCI into Income				Excluded from
Cash Flow Hedging Relationships		(Effective Portion)				(Effective Portion)				Effectiveness Testing)
Heating oil		$	6,346			$	(38,438) 2			$	—
Coal sales			(6,055	)			(2,984) 1				—
Coal purchases			(1,095	)			(11,092) 2				—
Totals		$	(804	)		$	(52,514)			$	—

Derivatives Not Designated as
Hedging Instruments		Gain
Coal		$	8,569 3

Location in Statement of Income:

     During the nine months ended September 30, 2009, the Company recognized net unrealized and realized gains related to its trading portfolio (including derivative and non-derivative contracts) of $1.8 million as included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying condensed consolidated statement of income. These gains are not included in the above table.

     During the next twelve months, based on fair values at September 30, 2009, losses on derivative contracts designated as hedge instruments in cash flow hedges of approximately $16.0 million are expected to be reclassified from other comprehensive income into earnings.

8. Inventories

     Inventories consist of the following:

		September 30,				December 31,
		2009				2008
		(In thousands)
Coal		$	108,370			$	64,683
Repair parts and supplies, net of allowance			128,923				126,885
		$	237,293			$	191,568

     The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $13.0 million at September 30, 2009, and $12.7 million at December 31, 2008.

9. Debt

		September 30, 2009				December 31, 2008
		(In thousands)
Commercial paper		$	43,612			$	65,671
Indebtedness to banks under credit facilities			300,000				273,597
6.75% senior notes ($950.0 million face value) due July 1, 2013			955,123				956,148
8.75% senior notes ($600.0 million face value) due August 1, 2016			585,044				—
Other			3,721				16,997
			1,887,500				1,312,413
Less current maturities of debt and short-term borrowings			195,333				213,465
Long-term debt		$	1,692,167			$	1,098,948

     The current maturities of debt include amounts borrowed that are supported by credit facilities that have a term of less than one year and amounts borrowed under credit facilities with terms longer than one year that the Company does not intend to refinance on a long-term basis, based on cash projections and management’s plans.

     8.75% senior notes

     On July 31, 2009, the Company entered into an indenture in connection with the issuance of the 8.75% senior notes as discussed in Note 4, “Equity and Debt Offerings.” Interest is payable on the notes on February 1 and August 1 of each year, commencing February 1, 2010. At any time on or after August 1, 2013, the Company may redeem some or all of the notes. The redemption price, reflected as a percentage of the principal amount, is: 104.375% for notes redeemed between August 1, 2013 and July 31, 2014; 102.188% for notes redeemed between August 1, 2014 and July 31, 2015; and 100% for notes redeemed on or after August 1, 2015.

     The notes are guaranteed by most of the Company’s subsidiaries, except for Arch Western and its subsidiaries and Arch Receivable Company, LLC. If the Company fails to meet a coverage ratio test as defined in the indenture, the ability of the Company and its subsidiaries to incur additional debt; pay dividends and make distributions or repurchase stock; make investments; create liens; issue and sell capital stock of subsidiaries; sell assets; enter into restrictions affecting the ability of restricted subsidiaries to make distributions, loans or advances to the Company; engage in transactions with affiliates; enter into sale and leasebacks; and merge or consolidate or transfer and sell assets would be limited.

     The Company and the guarantor subsidiaries entered into a registration rights agreement (the “Registration Rights Agreement”) in connection with the senior notes. Pursuant to the Registration Rights Agreement, the Company and the guarantor subsidiaries agreed to file a registration statement with the Securities and Exchange Commission to exchange a like aggregate principal amount of senior notes identical in all material respects to the 8.75% senior notes. Pursuant to the Registration Rights agreement, the Company must make reasonable best efforts to cause the registration statement to become effective by July 31, 2010 and complete the exchange by September 14, 2010. Should those events not occur within the specified time frame, the interest rate shall be increased by one-quarter or one percent per annum for the first 90 days following such period. Such interest rate will increase by an additional one-quarter of one percent per annum thereafter up to a maximum aggregate increase of one percent per annum. Once any of the required events occur, the interest rate will revert to the rate specified in the indenture.

     Amendments to Credit Facilities

     On August 27, 2009, the Company entered into an amendment (the “Credit Amendment”) to its $800.0 million secured revolving credit facility. The Credit Amendment extended the maturity of the credit facility from June 23, 2011 to March 31, 2013 and increased the Company’s borrowing capacity from $800.0 million to $860.0 million until June 23, 2011, when it will then decrease to $762.5 million. New banks may join the credit facility after June 23, 2011, subject to an aggregate maximum borrowing amount of $800.0 million. The Credit Amendment also increased the maximum leverage ratio, as defined, that the Company must maintain.

     On March 6, 2009, the Company entered into an amendment (the “Credit Amendment”) to its $800.0 million secured revolving credit facility. The Credit Amendment amended certain covenants to make them less restrictive, including those related to lien creation, restricted payments and subsidiary guarantees of debt, in addition to an increase in the maximum leverage ratio, as defined, that the Company must maintain.

     On March 31, 2009, the Company entered into an amendment to its accounts receivable securitization program revising certain terms to strengthen the credit quality of the pool of receivables and increasing the interest rate. The credit facility supporting the borrowings under the program was also renewed and now expires on March 31, 2010. The size of the program continues to allow for aggregate borrowings and letters of credit of up to $175.0 million, as limited by eligible accounts receivable.

     Availability

     As of September 30, 2009 and December 31, 2008, the Company had $300.0 million and $205.0 million of borrowings outstanding under the revolving credit facility, respectively. At September 30, 2009, the Company had availability of $560.0 million under the revolving credit facility. The Company had no borrowings under the accounts receivable securitization program at September 30, 2009 and $68.6 million borrowed at December 31, 2008. The Company also had letters of credit outstanding under the securitization program of $62.2 million as of September 30, 2009. At September 30, 2009, the Company had availability of $65.9 million under the accounts receivable securitization program.

     The Company’s ability to issue commercial paper up to the $100.0 million maximum aggregate principal amount of the program has been affected by economic conditions. The commercial paper placement program is supported by a line of credit that has been renewed and expires on April 30, 2010.

     Fair Value of Long-Term Debt

     At September 30, 2009 and December 31, 2008, the fair value of the Company’s senior notes and other long-term debt, including amounts classified as current, was $1,901.4 million and $1,178.0 million, respectively.

10. Taxes

     As part of the Emergency Economic Stabilization Act enacted on October 3, 2008, the Company filed for black lung excise tax refunds on taxes paid on export sales subsequent to October 1, 1990, along with interest computed at statutory rates. The Company recognized refunds of $11.0 million, plus interest of $10.3 million, in the fourth quarter of 2008. The Internal Revenue Service has approved the Company’s claim for refund and the Company recorded additional income of $6.8 million during the nine months ended September 30, 2009, to adjust the estimated amount to be received, of which $6.1 million is reflected in the caption interest income in the accompanying condensed consolidated income statement, with the remainder in cost of coal sales. As of September 30, 2009, the Company had received all of the refunds recognized.

     During the third quarter of 2008, the Company reached a settlement with the IRS regarding the Company’s treatment of the 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 settlement did not result in a net change in deferred tax assets, but involved a re-characterization of deferred tax assets, including an increase in net operating loss carryforwards of $145.1 million and other amortizable assets which will provide additional tax deductions through 2013. A portion of these future cash tax benefits accrue to ARCO pursuant to the original purchase agreement, including $6.8 million that was recorded as goodwill during the third quarter of 2008.

     This settlement and the related increase in net operating loss carryforwards and amortization deductions triggered a reassessment of the Company’s ability to realize its deferred tax assets. As a result of the reassessment, the Company reduced the valuation allowance related to alternative minimum tax credits and net operating loss carryforwards by $52.6 million in the third quarter of 2008.

11. Stock-Based Compensation

     During the nine months ended September 30, 2009, the Company granted options to purchase approximately 1.0 million shares of common stock with a weighted average exercise price of $14.08 per share and a weighted average grant-date fair value of $6.63 per share. The options’ fair value was determined using the Black-Scholes option pricing model, using a weighted average risk-free rate of 1.75%, a weighted average dividend yield of 2.56% and a weighted average volatility of 69.26%. The options vest ratably over four years. The options provide for the continuation of vesting for retirement-eligible recipients that meet certain criteria. The expense for these options will be recognized through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn part or all of the award. The Company also granted 35,000 shares of restricted stock during the nine months ended September 30, 2009 at a weighted average grant-date fair value of $14.05 per share. The restricted stock vests in three to four years.

     The Company recognized stock-based compensation expense from all plans of $3.4 million and $2.4 million for the three months ended September 30, 2009 and 2008, respectively, and $10.3 million and $10.4 million for the nine months ended September 30, 2009, and 2008, respectively. This expense is primarily included in selling, general and administrative

expenses in the accompanying condensed consolidated statements of income.

12. Workers’ Compensation Expense

     The following table details the components of workers’ compensation expense:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In thousands)
Self-insured occupational disease benefits:
Service cost		$	132			$	(289	)		$	398			$	361
Interest cost			139				(213	)			418				337
Net amortization			(719	)			(2,012	)			(2,159	)			(2,912	)
Total occupational disease			(448	)			(2,514	)			(1,343	)			(2,214	)
Traumatic injury claims and assessments			2,781				2,017				6,333				7,277
Total workers’ compensation expense		$	2,333			$	(497	)		$	4,990			$	5,063

13. Employee Benefit Plans

     The following table details the components of pension benefit costs:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In thousands)
Service cost		$	3,360			$	3,388			$	10,082			$	9,688
Interest cost			3,981				3,626				11,943				10,976
Expected return on plan assets			(4,429	)			(4,248	)			(13,289	)			(13,448	)
Amortization of prior service cost			48				(60	)			145				(160	)
Amortization of other actuarial gains and losses			992				1,160				2,975				2,410
Curtailments			—				—				586				—
		$	3,952			$	3,866			$	12,442			$	9,466

     The following table details the components of other postretirement benefit costs:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In thousands)
Service cost		$	815			$	736			$	2,446			$	2,204
Interest cost			1,009				929				3,026				2,787
Amortization of prior service cost			946				865				2,836				2,594
Amortization of other actuarial gains and losses			(853	)			(911	)			(2,559	)			(2,733	)
		$	1,917			$	1,619			$	5,749			$	4,852

     In the third quarter of 2009, the Company notified participants of the retiree medical plan of a plan change increasing the retirees’ responsibility for medical costs. This change resulted in a remeasurement of the postretirement benefit obligation, which included a decrease in the discount rate from 6.85% to 5.68%. The remeasurement resulted in a decrease in the liability of $21.0 million, with a corresponding increase to other comprehensive income, and will result in future reductions in costs under the plan.

14. Comprehensive Income

     Comprehensive income consists of net income and other comprehensive income. Other comprehensive income items are transactions recorded in stockholders’ equity during the year, excluding net income and transactions with stockholders.

     The following table presents the components of comprehensive income:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In thousands)
Net income		$	25,216			$	98,027			$	40,627			$	292,719
Other comprehensive income, net of income taxes:
Pension, postretirement and other post-employment benefits, net of reclassifications into net income			13,729				(613	)			14,631				(513	)
Available-for-sale securities, net of reclassifications into net income			(38	)			(287	)			(132	)			888
Unrealized gains and losses on derivatives:
Unrealized losses on derivatives			(2,456	)			(12,810	)			(586	)			(2,916	)
Reclassifications of losses into net income			10,892				(2,189	)			33,297				(1,556	)
Total comprehensive income		$	47,343			$	82,128			$	87,837			$	288,622

     The change in the third quarter of 2009 in other comprehensive income relating to pension, postretirement and other post-employment benefits resulted primarily from the postretirement medical plan amendment discussed in Note 13, “Employee Benefit Plans”, with an offsetting adjustment to the postretirement benefit obligation liability.

15. Earnings per Share

     The following table provides the basis for earnings per share calculations by presenting the income available to common stockholders of the Company and by reconciling basic and diluted weighted average shares outstanding:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In thousands)
Income for basic earnings per share calculation:
Net income allocated to common stockholders		$	25,162			$	97,745			$	40,597			$	291,684
Weighted average shares outstanding:
Basic weighted average shares outstanding			155,622				144,035				147,122				143,885
Effect of common stock equivalents under incentive plans			383				863				210				917
Effect of common stock equivalents arising from Preferred Stock			—				—				—				46
Diluted weighted average shares outstanding			156,005				144,898				147,332				144,848

     The effect of options to purchase 2.7 million and 2.1 million shares of common stock were excluded from the calculation of diluted weighted average shares outstanding for the three and nine months ended September 30, 2009, respectively, because the exercise price of these options exceeded the average market price of the Company’s common stock for these periods.

16. Guarantees

     The Company has agreed to continue to provide surety bonds and letters of credit for the reclamation and retiree healthcare obligations of Magnum Coal Company (“Magnum”) related to the properties the Company sold to Magnum on December 31, 2005. The purchase agreement requires Magnum to reimburse the Company for costs related to the surety bonds and letters of credit and to use commercially reasonable efforts to replace the obligations. If the surety bonds and letters of credit related to the reclamation obligations are not replaced by Magnum within a specified period of time, Magnum must post a letter of credit in favor of the Company in the amounts of the reclamation obligations. At September 30, 2009, the Company had approximately $91.6 million of surety bonds related to properties sold to Magnum. As a result of Magnum’s purchase by Patriot Coal Corporation, Magnum will be required to post letters of credit in the Company’s favor for the full amount of the reclamation obligation on or before February 2011.

     Magnum also acquired certain coal supply contracts with customers who have not consented to the contracts’ assignment from the Company to Magnum. The Company has committed to purchase coal from Magnum to sell to those customers at the same price it is charging the customers for the sale. In addition, certain contracts were assigned to Magnum, but the Company has guaranteed Magnum’s performance under the contracts. The longest of the coal supply contracts extends to the year 2017. If Magnum is unable to supply the coal for these coal sales contracts then the Company would be required to purchase coal on the open market or supply contracts from its existing operations. At market prices effective at September 30, 2009, the cost of purchasing 13.3 million tons of coal to supply the contracts that have not been assigned over their duration would exceed the sales price under the contracts by approximately $293.8 million, and the cost of purchasing 3.0 million tons of coal to supply the assigned and guaranteed contracts over their duration would exceed the sales price under the contracts by approximately $57.8 million. The Company has also guaranteed Magnum’s performance under certain operating leases, the longest of which extends through 2011. If the Company were required to perform under its guarantees of the operating lease agreements, it would be required to make $3.5 million of lease payments. As the Company does not believe that it is probable that it would have to purchase replacement coal or fulfill its obligations under the lease guarantees, no losses have been recorded in the condensed consolidated financial statements as of September 30, 2009. However, if the Company would have to perform under these guarantees, it could potentially have a material adverse effect on the business, results of operations and financial condition of the Company.

     In connection with the Company’s acquisition of the coal operations of 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 the other member of Arch Western against certain tax liabilities in the event that such liabilities arise prior to June 1, 2013 as a result of certain actions taken, 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. If the Company were to become liable, the maximum amount of potential future tax payments is $44.4 million at September 30, 2009, which is not recorded as a liability in the Company’s condensed consolidated financial statements. Since the indemnification is dependent upon the initiation of activities within the Company’s control and the Company does not intend to initiate such activities, it is remote that the Company will become liable for any obligation related to this indemnification. However, if such indemnification obligation were to arise, it could potentially have a material adverse effect on the business, results of operations and financial condition of the Company.

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

18. Segment Information

     The Company has three reportable business segments, which are based on the major low-sulfur coal basins in which the Company operates. Each of these reportable business segments includes 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; the Western Bituminous (WBIT) segment, with operations in Utah, Colorado and southern Wyoming; and the Central Appalachia (CAPP) segment, with operations in southern West Virginia, eastern Kentucky and

Virginia.

     Operating segment results for the three and nine months ended September 30, 2009 and 2008 are presented below. Results for the operating segments include all direct costs of mining. Corporate, Other and Eliminations includes the change in fair value of coal derivatives and coal trading activities, net; corporate overhead; land management; other support functions; and the elimination of intercompany transactions.

														Corporate,
														Other and
		PRB				WBIT				CAPP				Eliminations				Consolidated
										(In thousands)
Three months ended September 30, 2009
Coal sales		$	267,455			$	148,293			$	199,209			$	—			$	614,957
Income from operations			19,465				16,349				29,694				(17,170	)			48,338
Depreciation, depletion and amortization			27,267				22,203				21,451				547				71,468
Capital expenditures			7,518				13,871				10,864				1,218				33,471
Three months ended September 30, 2008
Coal sales		$	292,358			$	161,085			$	316,015			$	—			$	769,458
Income from operations			21,835				21,957				95,228				(51,090	)			87,930
Depreciation, depletion and amortization			29,773				18,888				23,145				379				72,185
Capital expenditures			29,433				30,016				17,221				1,375				78,045
Nine months ended September 30, 2009
Coal sales		$	847,255			$	382,931			$	620,423			$	—			$	1,850,609
Income from operations			68,772				4,238				85,527				(64,318	)			94,219
Total assets			1,896,245				2,074,320				1,164,377				(341,004	)			4,793,938
Depreciation, depletion and amortization			84,429				60,567				66,502				1,488				212,986
Capital expenditures			49,389				57,377				41,392				131,875				280,033
Nine months ended September 30, 2008
Coal sales		$	865,707			$	517,714			$	870,504			$	—			$	2,253,925
Income from operations			79,039				100,144				223,671				(28,976	)			373,878
Total assets			1,798,793				2,049,686				1,005,835				(912,747	)			3,941,567
Depreciation, depletion and amortization			87,594				60,189				68,097				1,300				217,180
Capital expenditures			105,994				124,835				57,790				125,506				414,125

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

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In thousands)
Income from operations		$	48,338			$	87,930			$	94,219			$	373,878
Interest expense			(29,791	)			(17,019	)			(70,466	)			(56,228	)
Interest income			399				235				7,284				1,128
Income before income taxes		$	18,946			$	71,146			$	31,037			$	318,778

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

     This document contains “forward-looking statements” — that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties arise from changes in the demand for our coal by the domestic electric generation industry; from legislation and regulations relating to the Clean Air Act and other environmental initiatives; from operational, geological, permit, labor and weather-related factors; from fluctuations in the amount of cash we generate from operations; from future integration of acquired businesses; and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. For a description of some of the risks and uncertainties that may affect our future results, see “Risk Factors” under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 and in the Quarterly Reports on Form 10-Q that we have filed during interim periods.

Overview

     We are one of the largest coal producers in the United States. We sell substantially all of our coal to power plants, steel mills and industrial facilities. The locations of our mines enable us to ship coal to most of the major coal-fueled power plants, steel mills and export facilities located in the United States.

     Our three reportable business segments are based on the low-sulfur U.S. coal producing regions in which we operate — the Powder River Basin, the Western Bituminous region and the Central Appalachia 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 has a very low sulfur content and a low heat value compared to the other regions 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 has a low sulfur content and varies in heat content. Central Appalachia includes eastern Kentucky, Tennessee, Virginia and southern West Virginia. Coal we mine from both surface and underground mines in this region generally has a high heat content and low sulfur content. In addition, we may sell a portion of the coal we produce in the Central Appalachia region as metallurgical coal, which has high heat content, low expansion pressure, low sulfur content and various other chemical attributes. As such, the prices at which we sell metallurgical coal to customers in the steel industry generally exceed the prices offered by power plants and industrial users for steam coal.

     We estimate that 2009 year-to-date U.S. power generation has declined approximately 4% through the third week of October in response to weak domestic and international economic conditions, as well as an unseasonably mild summer in most of the U.S. U.S. coal consumption has declined significantly, primarily as a result of weak industrial demand in geographic regions that traditionally rely more heavily on coal-fueled electricity generation. As a result of these market pressures, coupled with continued geological challenges in certain regions, cost pressures, regulatory hurdles and limited access to capital, coal production and capital spending across the domestic coal industry have been curtailed. While coal demand in Asia has begun to rebound, which we expect will eventually fuel increasing demand in the U.S., we do not expect near-term improvements in domestic coal demand due to high inventory levels at coal-fueled power generators.

     In response to weakened demand caused by challenging domestic and international economic conditions, we have curtailed production in all operating regions. In the Powder River Basin, we idled a second dragline and associated equipment in the second quarter of 2009. In the Western Bituminous region, we reduced production at our West Elk mine in response to declining demand from power generation and industrial customers for Western Bituminous coal and elevated levels of lower-quality, mid-ash coal currently being produced at the mine resulting from intermittent sandstone intrusions. As a result of the curtailment, we laid off 61 employees and discontinued the use of 38 contractors in the second quarter of

2009. In Central Appalachia, we reduced production by slowing the rate of advance of equipment, by shortening or eliminating shifts at several mining complexes, and by idling an underground mine and certain surface mining equipment at our Cumberland River mining complex, which included the layoff of 85 employees in the second quarter of 2009. In addition, we have decreased our expected capital expenditures for 2009 and are continuing other process improvement initiatives and cost containment programs.

     During the third quarter of 2009 we sold 19.55 million shares of our common stock at a price of $17.50 per share and issued $600.0 million in aggregate principal amount, 8.75% senior unsecured notes due 2016 at an initial issue price of 97.464%. The net proceeds received from the issuance of common stock were $326.5 million and the net proceeds received from the issuance of the 8.75% senior unsecured notes were $570.3 million. See further discussion of these transactions in “Liquidity and Capital Resources”. We used the net proceeds from these transactions primarily to finance the purchase of the Jacobs Ranch mining complex, as discussed below.

     On October 1, 2009, we consummated the previously announced purchase of the Jacobs Ranch mining operations, for a purchase price of $764.0 million, including approximately 352 million tons of coal reserves located adjacent to our Black Thunder mining complex. We expect to achieve significant operating efficiencies by combining the two operations. Roughly one half of our estimated synergies represent operational cost savings, while others relate to administrative cost reductions as well as enhanced coal-blending optimization opportunities. We also plan to use one of the idled Black Thunder draglines on the new property, subject to permit approval.

Results of Operations

     Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

     Summary. Our results during the third quarter of 2009, when compared to the third quarter of 2008, were influenced primarily by lower sales volumes due to weak market conditions and a reduction in the third quarter of 2008 in our valuation allowance against deferred tax assets and an increase in interest expense; these factors were partially offset by gains from our coal trading activities, compared to losses in the third quarter of 2008.

     Revenues. The following table summarizes information about coal sales for the three months ended September 30, 2009 and compares it with the information for the three months ended September 30, 2008:

		Three Months Ended
		September 30								Decrease
		2009				2008				Amount				%
		(Amounts in thousands, except per ton data and percentages)
Coal sales		$	614,957			$	769,458			$	(154,501	)			(20.0	)%
Tons sold			29,338				35,239				(5,901	)			(16.7	)%
Coal sales realization per ton sold		$	20.96			$	21.84			$	(0.88	)			(4.0	)%

     Coal sales decreased in the third quarter of 2009 from the third quarter of 2008 primarily due to lower steam coal sales volumes in our western operations and lower volumes of metallurgical coal sales in our Central Appalachia region. Our coal sales realizations per ton were slightly lower in the 2009 quarter, as higher realizations per ton in our western operations were offset by a decrease in metallurgical coal prices, and the impact of lower metallurgical coal volumes on our average coal realizations per ton. 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” beginning on page 19.

     Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the three months ended September 30, 2009 and compares them with the information for the three months ended September 30, 2008:

										Increase (Decrease)
		Three Months Ended September 30								in Net Income
		2009				2008				$				%
		(Amounts in thousands, except percentages)
Cost of coal sales		$	489,290			$	567,372			$	78,082				13.8	%
Depreciation, depletion and amortization			71,468				72,185				717				1.0
Selling, general and administrative expenses			24,029				22,235				(1,794	)			(8.1	)
Change in fair value of coal derivatives and coal trading activities, net			(3,342	)			18,382				21,724				118.2
Costs related to acquisition of Jacobs Ranch			791				—				(791	)			N/A
Other operating expense (income), net			(15,617	)			1,354				16,971				1,253.4
		$	566,619			$	681,528			$	114,909				16.9	%

     Cost of coal sales. Our cost of coal sales decreased in the third quarter of 2009 from the third quarter of 2008 primarily due to the lower sales volumes in all operating segments, partially offset by the impact of higher per-ton costs due to lower production levels. We have provided more information about our operating segments under the heading “Operating segment results” beginning on page 19.

     Depreciation, depletion and amortization. When compared with the third quarter of 2008, lower depreciation and amortization costs in the third quarter of 2009 resulted from the impact of lower volume levels on depletion and amortization costs calculated on a units-of-production method, partially offset by the amortization of development costs related to the new seam at the West Elk mine where we commenced longwall production in the fourth quarter of 2008.

     Selling, general and administrative expenses. The increase in selling, general and administrative expenses from the third quarter of 2008 to the third quarter of 2009 is due primarily to the impact in the third quarter of 2008 of a decrease in our stock price of $42.14 per share on our deferred compensation plan obligation. Amounts recognized related to our deferred compensation plan are impacted by changes in the value of our common stock and changes in the value of the underlying investments. The dramatic drop in our stock price in 2008 caused our expense related to the plan to be lower in the third quarter of 2008 when compared with the third quarter of 2009 by $5.9 million, which was partially offset by a decrease in incentive compensation costs of $3.7 million.

     Change in fair value of coal derivatives and coal trading activities, net. Net (gains) losses relate to the net impact of our coal trading activities and the change in fair value of other coal derivatives that have not been designated as hedge instruments in a hedging relationship. In 2008, a portion of the unrealized gains generated in the first half of the year by our coal trading function were lost in the third quarter due to a downturn in the over-the-counter coal markets during the quarter.

     Costs related to acquisition of Jacobs Ranch. These costs represent costs we incurred during the third quarter of 2009 related to our announced acquisition of the Jacobs Ranch mine. Under accounting rules we adopted in the first quarter of 2009, the costs of acquiring a business are expensed as incurred.

     Other operating (income) expense, net. The net other operating income generated in the third quarter of 2009 compared to the losses in the third quarter of 2008 is primarily the result of an increase in net income from bookouts (the offsetting of coal sales and purchase contracts) and contract settlements in 2009.

     Operating segment results. The following table shows results by operating segment for the three months ended September 30, 2009 and compares it with information for the three months ended September 30, 2008:

		Three Months Ended September 30								Increase (Decrease)
		2009				2008				$				%
Powder River Basin
Tons sold (in thousands)			21,528				26,153				(4,625	)			(17.7	)%
Coal sales realization per ton sold (1)		$	12.26			$	11.21			$	1.05				9.4	%
Operating margin per ton sold (2)		$	0.95			$	0.81			$	0.14				17.3	%
Western Bituminous
Tons sold (in thousands)			4,560				5,135				(575	)			(11.2	)%
Coal sales realization per ton sold (1)		$	29.08			$	26.77			$	2.31				8.6	%
Operating margin per ton sold (2)		$	3.51			$	4.08			$	(0.57	)			(14.0	)%
Central Appalachia
Tons sold (in thousands)			3,250				3,951				(701	)			(17.7	)%
Coal sales realization per ton sold (1)		$	59.77			$	75.17			$	(15.40	)			(20.5	)%
Operating margin per ton sold (2)		$	5.47			$	22.22			$	(16.75	)			(75.4	)%

     Powder River Basin — The decrease in sales volume in the Powder River Basin in the third quarter of 2009 when compared with the third quarter of 2008 was due to weak market conditions. At the Black Thunder mining complex, in response to these conditions, we reduced production and idled one dragline in the fourth quarter of 2008 and another dragline in May 2009, along with the related support equipment. Increases in sales prices during the third quarter of 2009 when compared with the third quarter of 2008 primarily reflect higher pricing from contracts committed during 2008, when market conditions were more favorable, partially offset by the effect of lower pricing on market-index priced tons and the effect of lower sulfur dioxide allowance pricing. On a per-ton basis, operating margins in the third quarter of 2009 increased from the third quarter of 2008 due to the higher sales prices, partially offset by an increase in per-ton costs. The increase in per-ton costs, despite our cost containment efforts, resulted primarily from the effect of spreading fixed costs over lower volume.

     Western Bituminous — In the Western Bituminous region, we sold fewer tons in the third quarter of 2009 than in the third quarter of 2008 due to weak market conditions, as well as quality issues at the West Elk mining complex. We have encountered sandstone intrusions at the West Elk mining complex that have resulted in a higher ash content in the coal produced, and declining coal demand has had an impact on our efforts to market this coal. As a result of the weak market demand for this coal, we have reduced our production levels at the mine. To address any ongoing quality issues, we plan to build a preparation plant at the mine by mid-2010, with estimated capital costs of $25 million to $30 million. The beneficial impact of the roll-off of lower-priced legacy contracts in 2008 on our per-ton realizations was partially offset by the detrimental impact of selling coal with a higher ash content. Lower per-ton operating margins in the third quarter of 2009 were the result of the West Elk quality issues and lower production levels.

     Central Appalachia — The decrease in sales volumes in the third quarter of 2009, when compared with the third quarter of 2008, was due to weaker market demand. In response to the weakened demand, we reduced our production by slowing the rate of advance of equipment, by shortening or eliminating shifts at several mining complexes, and by idling an underground mine and certain surface mining equipment at our Cumberland River mining complex. Weak economic conditions have adversely impacted demand and pricing for metallurgical coal, and lower per-ton realizations in 2009 compared to 2008 resulted from a decrease in our metallurgical coal sales volumes and pricing. We sold 0.5 million tons into metallurgical markets in the third quarter of 2009 compared to 1.3 million tons in the third quarter of 2008. Because metallurgical coal generally commands a higher price than steam coal, the decrease had a detrimental impact on our average realizations. In addition to the lower per-ton realizations, our operating margins were impacted by a slight increase in operating costs per ton from the third quarter of 2008. Despite substantial cost reductions, our per-ton operating costs were higher due primarily to our lower production levels.

     Net interest expense. The following table summarizes our net interest expense for the three months ended September 30, 2009 and compares it with the information for the three months ended September 30, 2008:

										Increase (Decrease)
		Three Months Ended September 30								in Net Income
		2009				2008				$				%
		(Amounts in thousands, except percentages)
Interest expense		$	(29,791	)		$	(17,019	)		$	(12,772	)			(75.0	)%
Interest income			399				235				164				69.8
		$	(29,392	)		$	(16,784	)		$	(12,608	)			(75.1	)%

     The increase in net interest expense in the third quarter of 2009 compared to the third quarter of 2008 is primarily due to the issuance of the 8.75% senior notes as discussed in the “Overview” and a decrease in interest costs capitalized in the third quarter of 2009. Interest costs capitalized were $0.3 million during the third quarter of 2009, compared with $3.6 million during the third quarter of 2008.

     Income taxes. Our effective income tax rate is sensitive to changes in estimates of annual profitability and the deduction for percentage depletion. The following table summarizes our income taxes for the three months ended September 30, 2009 and compares it with information for the three months ended September 30, 2008:

		Three Months Ended September 30								Decrease in Net Income
		2009				2008				$				%
		(Amounts in thousands, except percentages)
Benefit from income taxes		$	6,270			$	26,881			$	(20,611	)			(76.7	)%

     The benefit from income taxes for the three months ended September 30, 2009 represents the adjustment needed to reflect the benefit for the nine months ended September 30, 2009 at the estimated annual effective tax rate for the year ended December 31, 2009. The benefit from income taxes for the three months ended September 30, 2008 includes a $52.6 million reduction in our valuation allowance against net operating loss and alternative minimum tax credit carryforwards.

     Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

     Summary. Our results during the first nine months of 2009 when compared to the first nine months of 2008 were influenced primarily by lower sales volumes due to weak market conditions, a decrease in gains from our coal trading activities, a reduction in 2008 in our valuation allowance against deferred tax assets and higher interest expense.

     Revenues. The following table summarizes information about coal sales for the nine months ended September 30, 2009 and compares it with the information for the nine months ended September 30, 2008:

		Nine Months Ended
		September 30								Decrease
		2009				2008				Amount				%
		(Amounts in thousands, except per ton data and percentages)
Coal sales		$	1,850,609			$	2,253,925			$	(403,316	)			(17.9	)%
Tons sold			87,888				104,887				(16,999	)			(16.2	)%
Coal sales realization per ton sold		$	21.06			$	21.49			$	(0.43	)			(2.0	)%

     Coal sales decreased in the nine months ended September 30, 2009 from the nine months ended September 30, 2008 primarily due to lower sales volumes in all operating regions. Average sales prices during the nine months ended September 30, 2009 were lower than during the nine months ended September 30, 2008 due primarily to a decrease in metallurgical sales volumes in our Central Appalachia region, which offset the impact of generally higher base pricing on steam coal. 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” beginning on page 22.

     Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the nine months ended September 30, 2009 and compares them with the information for the nine months ended September 30, 2008:

										Increase (Decrease)
		Nine Months Ended September 30								in Net Income
		2009				2008				$				%
		(Amounts in thousands, except percentages)
Cost of coal sales		$	1,503,937			$	1,650,259			$	146,322				8.9	%
Depreciation, depletion and amortization			212,986				217,180				4,194				1.9
Selling, general and administrative expenses			70,770				80,937				10,167				12.6
Change in fair value of coal derivatives and coal trading activities, net			(10,328	)			(65,336	)			(55,008	)			(84.2	)
Costs related to acquisition of Jacobs Ranch			7,166				—				(7,166	)			N/A
Other operating income, net			(28,141	)			(2,993	)			25,148				840.2
		$	1,756,390			$	1,880,047			$	123,657				6.6	%

     Cost of coal sales. Our cost of coal sales decreased in the nine months ended September 30, 2009 from the nine months ended September 30, 2008 due to the lower sales volumes across all operating segments, partially offset by the impact of higher per-ton costs due to lower production levels. We have provided more information about our operating segments under the heading “Operating segment results” beginning on page 22.

     Depreciation, depletion and amortization. When compared with the nine months ended September 30, 2008, lower depreciation and amortization costs in the nine months ended September 30, 2009 resulted from the impact of lower volume levels on depletion and amortization costs calculated on a units-of-production method, partially offset by the amortization of development costs related to the new seam at the West Elk mine where we commenced longwall production in the fourth quarter of 2008.

     Selling, general and administrative expenses. The decrease in selling, general and administrative expenses from the nine months ended September 30, 2008 to the nine months ended September 30, 2009 is due primarily to a decrease in incentive compensation costs of $8.9 million and a decrease of $4.4 million in costs associated with our deferred compensation plan, where amounts recognized are impacted by changes in the value of our common stock and changes in the value of the underlying investments. An increase in legal and other professional fees of $1.4 million and a $1.5 million contribution expense in 2009 to a company participating in the research and development of technologies for capturing carbon dioxide emissions partially offset the effect of the decrease in compensation-related costs.

     Change in fair value of coal derivatives and coal trading activities, net. Net gains relate to the net impact of our coal trading activities and the change in fair value of other coal derivatives that have not been designated as hedge instruments in a hedging relationship. Our coal trading function enabled us to take advantage of the significant price movements in the coal markets during 2008.

     Costs related to acquisition of Jacobs Ranch. These costs represent costs we incurred during the nine months ended September 30, 2009 related to our announced acquisition of the Jacobs Ranch mine. Under accounting rules we adopted in 2009, the costs of acquiring a business are expensed as incurred.

     Other operating income, net. The increase in net other operating income in 2009 from 2008 is primarily the result of an increase in net income from bookouts (the offsetting of coal sales and purchase contracts) and contract settlements. Income from equity investments also increased $3.7 million in 2009, when compared with 2008, primarily from our interest in Knight Hawk Holdings, LLC.

     Operating segment results. The following table shows results by operating segment for the nine months ended September 30, 2009 and compares it with information for the nine months ended September 30, 2008:

		Nine Months Ended September 30								Increase (Decrease)
		2009				2008				$				%
Powder River Basin
Tons sold (in thousands)			65,964				76,726				(10,762	)			(14.0	)%
Coal sales realization per ton sold (3)		$	12.70			$	11.25			$	1.45				12.9	%
Operating margin per ton sold (4)		$	1.00			$	0.99			$	0.01				1.0	%
Western Bituminous
Tons sold (in thousands)			11,987				15,909				(3,922	)			(24.7	)%
Coal sales realization per ton sold (3)		$	29.00			$	27.89			$	1.11				4.0	%
Operating margin per ton sold (4)		$	0.14			$	6.12			$	(5.98	)			(97.7	)%
Central Appalachia
Tons sold (in thousands)			9,937				12,253				(2,316	)			(18.9	)%
Coal sales realization per ton sold (3)		$	60.08			$	66.77			$	(6.69	)			(10.0	)%
Operating margin per ton sold (4)		$	6.77			$	17.55			$	(10.78	)			(61.4	)%