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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
(Mark One)
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011
     
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
()
(Exact name of registrant as specified in its charter)
     
Delaware   43-0921172
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification Number)
     
One CityPlace Drive, Suite 300, St. Louis, Missouri   63141
(Address of principal executive offices)   (Zip code)
Registrant’s telephone number, including area code: (314) 994-2700
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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   Smaller reporting company o
 
      (Do not check if a smaller reporting company)    
     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 May 2, 2011 there were 164,346,773 shares of the registrant’s common stock outstanding.
 
 

 


 

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 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

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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 March 31  
    2011     2010  
    (unaudited)  
REVENUES
               
Coal sales
  $ 872,938     $ 711,874  
 
               
COSTS, EXPENSES AND OTHER
               
Cost of coal sales
    653,684       550,750  
Depreciation, depletion and amortization
    83,537       88,519  
Amortization of acquired sales contracts, net
    5,944       10,753  
Selling, general and administrative expenses
    30,435       27,166  
Change in fair value of coal derivatives and coal trading activities, net
    (1,784 )     5,877  
Other operating income, net
    (1,116 )     (3,391 )
 
           
 
    770,700       679,674  
 
           
 
               
Income from operations
    102,238       32,200  
 
               
Interest expense, net:
               
Interest expense
    (34,580 )     (35,083 )
Interest income
    746       338  
 
           
 
    (33,834 )     (34,745 )
 
               
Income (loss) before income taxes
    68,404       (2,545 )
Provision for (benefit from) income taxes
    12,530       (775 )
 
           
 
               
Net income (loss)
    55,874       (1,770 )
Less: Net income attributable to noncontrolling interest
    (273 )     (26 )
 
           
Net income (loss) attributable to Arch Coal, Inc.
  $ 55,601     $ (1,796 )
 
           
 
               
EARNINGS (LOSS) PER COMMON SHARE
               
Basic earnings (loss) per common share
  $ 0.34     $ (0.01 )
Diluted earnings (loss) per common share
  $ 0.34     $ (0.01 )
 
               
Basic weighted average shares outstanding
    162,576       162,372  
Diluted weighted average shares outstanding
    163,773       162,372  
 
               
Dividends declared per common share
  $ 0.10     $ 0.09  
The accompanying notes are an integral part of the condensed consolidated financial statements.

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Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
                 
    March 31,     December 31,  
    2011     2010  
    (unaudited)  
ASSETS
       
Current assets:
               
Cash and cash equivalents
  $ 69,220     $ 93,593  
Trade accounts receivable
    258,499       208,060  
Other receivables
    44,818       44,260  
Inventories
    247,908       235,616  
Prepaid royalties
    42,719       33,932  
Deferred income taxes
    18,673        
Coal derivative assets
    15,952       15,191  
Other
    101,153       104,262  
 
           
Total current assets
    798,942       734,914  
 
Property, plant and equipment, net
    3,263,555       3,308,892  
Other assets:
               
Prepaid royalties
    69,737       66,525  
Goodwill
    114,963       114,963  
Deferred income taxes
    331,242       361,556  
Equity investments
    204,424       177,451  
Other
    117,115       116,468  
 
           
Total other assets
    837,481       836,963  
 
           
 
Total assets
  $ 4,899,978     $ 4,880,769  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 183,866     $ 198,216  
Coal derivative liabilities
    4,178       4,947  
Deferred income taxes
          7,775  
Accrued expenses and other current liabilities
    228,165       245,411  
Current maturities of debt and short-term borrowings
    69,518       70,997  
 
           
Total current liabilities
    485,727       527,346  
 
Long-term debt
    1,539,028       1,538,744  
Asset retirement obligations
    336,975       334,257  
Accrued pension benefits
    38,808       49,154  
Accrued postretirement benefits other than pension
    36,920       37,793  
Accrued workers’ compensation
    35,964       35,290  
Other noncurrent liabilities
    124,243       110,234  
 
           
Total liabilities
    2,597,665       2,632,818  
 
               
Redeemable noncontrolling interest
    10,718       10,444  
 
               
Stockholders’ equity:
               
Common stock, $0.01 par value, authorized 260,000 shares, issued 164,310 shares and 164,117 shares, respectively
    1,647       1,645  
Paid-in capital
    1,740,765       1,734,709  
Treasury stock, 1,512 shares at March 31, 2011 and December 31, 2010, at cost
    (53,848 )     (53,848 )
Retained earnings
    600,751       561,418  
Accumulated other comprehensive income (loss)
    2,280       (6,417 )
 
           
Total stockholders’ equity
    2,291,595       2,237,507  
 
           
 
Total liabilities and stockholders’ equity
  $ 4,899,978     $ 4,880,769  
 
           
The accompanying notes are an integral part of the condensed consolidated financial statements.

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Arch Coal, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
                 
    Three Months Ended March 31  
    2011     2010  
    (unaudited)  
OPERATING ACTIVITIES
               
Net income (loss)
  $ 55,874     $ (1,770 )
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation, depletion and amortization
    83,537       88,519  
Amortization of acquired sales contracts, net
    5,944       10,753  
Prepaid royalties expensed
    8,916       6,599  
Employee stock-based compensation
    5,290       3,684  
Amortization of debt financing costs
    2,442       2,461  
Changes in:
               
Receivables
    (53,586 )     (37,013 )
Inventories
    (12,292 )     (2,382 )
Coal derivative assets and liabilities
    (1,087 )     5,547  
Accounts payable, accrued expenses and other current liabilities
    (31,596 )     (6,844 )
Deferred income taxes
    (1,026 )     150  
Other
    23,729       23,627  
 
           
 
Cash provided by operating activities
    86,145       93,331  
 
           
 
               
INVESTING ACTIVITIES
               
Capital expenditures
    (38,711 )     (31,975 )
Proceeds from dispositions of property, plant and equipment
    516       95  
Purchases of investments and advances to affiliates
    (34,419 )     (10,071 )
Additions to prepaid royalties
    (20,915 )     (23,340 )
 
           
Cash used in investing activities
    (93,529 )     (65,291 )
 
           
 
               
FINANCING ACTIVITIES
               
Net increase (decrease) in borrowings under lines of credit and commercial paper program
    3,681       (19,324 )
Net payments on other debt
    (5,161 )     (4,742 )
Debt financing costs
    (8 )     (200 )
Dividends paid
    (16,269 )     (14,623 )
Issuance of common stock under incentive plans
    768       85  
 
           
 
Cash used in financing activities
    (16,989 )     (38,804 )
 
           
 
Decrease in cash and cash equivalents
    (24,373 )     (10,764 )
Cash and cash equivalents, beginning of period
    93,593       61,138  
 
           
 
Cash and cash equivalents, end of period
  $ 69,220     $ 50,374  
 
           
The accompanying notes are an integral part of the condensed consolidated financial statements.

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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. Results of operations for the three months ended March 31, 2011 are not necessarily indicative of results to be expected for the year ending December 31, 2011. 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, 2010 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
     In January 2011, new fair value disclosure guidance regarding activity in Level 3 fair value measurements became effective. The new disclosure guidance requires entities to provide a gross basis rollforward of the Level 3 activity. The required disclosure is provided in Note 7, “Fair Value Measurements”. The new guidance did not have an impact on the Company’s condensed consolidated financial statements.
3. Investments
                                                 
    Knight Hawk     DKRW     DTA     Tenaska     Millennium     Total  
    (In thousands)  
Balance at December 31, 2010
  $ 131,250     $ 21,961     $ 14,472     $ 9,768     $     $ 177,451  
Investments in affiliates
                      5,500       25,000       30,500  
Advances to (distributions from) affiliates, net
    (7,533 )           1,312                   (6,221 )
Equity in comprehensive income (loss)
    4,661       (511 )     (1,130 )           (326 )     2,694  
 
                                   
Balance at March 31, 2011
  $ 128,378     $ 21,450     $ 14,654     $ 15,268     $ 24,674     $ 204,424  
 
                                   
     The Company holds a 49% ownership interest in Knight Hawk Holdings, LLC (“Knight Hawk”), a coal producer in the Illinois Basin. Of the distribution declared in the first quarter of 2011, the Company received $1.5 million in the first quarter and the remaining balance will be paid in the second quarter of 2011.
     The Company holds a 24% ownership interest in DKRW Advanced Fuels LLC (“DKRW”), a company engaged in developing coal-to-liquids facilities. Under a coal reserve purchase option, DKRW could purchase reserves from the Company, which the Company would then mine on a contract basis for DKRW. Under a convertible secured promissory note, the Company had advanced to DKRW $22.5 million and $18.1 million at March 31, 2011 and December 31, 2010, respectively, including unpaid interest. Amounts borrowed are due and payable in cash or in additional equity interests on the earlier of December 31, 2011 or upon the closing of DKRW’s next financing, bear interest at the rate of 1.25% per month, and are secured by DKRW’s equity interests in Medicine Bow Fuel & Power LLC. The note balances are reflected in other receivables on the condensed consolidated balance sheets. As of March 31, 2011, DKRW may borrow up to an additional $1.25 million in principal from the Company under the note.
     The Company holds a general partnership interest in Dominion Terminal Associates (“DTA”), of 21.875%. DTA operates a ground storage-to-vessel coal transloading facility in Newport News, Virginia for use by the partners. Under the terms of a throughput and handling agreement with DTA, each partner is charged its share of cash operating and debt-

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service costs in exchange for the right to use the facility’s loading capacity and is required to make periodic cash advances to DTA to fund such costs.
     The Company holds a 35% ownership interest in Tenaska Trailblazer Partners, LLC (“Tenaska”), the developer of the Trailblazer Energy Center, a fossil-fuel-based electric power plant near Sweetwater, Texas. The plant, fueled by low sulfur coal, will capture and store carbon dioxide for enhanced oil recovery applications. Additional payments will be due under the investment agreement when certain project milestones are met The Company will also pay 35% of the future development costs of the project, not to exceed $12.5 million without prior approval from the Company. As of March 31, 2011 and December 31, 2010, the Company had advanced a total of $4.3 million and $4.1 million, respectively, for development costs. A receivable for these development costs is reflected in the condensed consolidated balance sheets in other noncurrent assets, as the development costs will either be reimbursed when the project receives construction financing, or they will be considered an additional capital contribution, with ownership percentages adjusted accordingly.
     In January 2011, the Company purchased a 38% ownership interest in Millennium Bulk Terminals-Longview, LLC (“Millennium”), the owner of a brownfield bulk commodity terminal on the Columbia River near Longview, Washington, for $25.0 million, plus additional future consideration upon the completion of certain project milestones. Millennium continues to work on obtaining the required approvals and necessary permits to complete dredging and other upgrades to enable coal, alumina and cementitious material shipments through the terminal. The Company will control 38% of the terminal’s throughput and storage capacity, in order to facilitate export shipments of coal off the west coast of the United States.
     Future contingent payments of up to $72.4 million related to development financing for certain of our equity investees. as noted above. Our obligation to make these payments, as well as the timing of any payments required, is contingent upon a number of factors, including project development progress, receipt of permits and the obtaining of construction financing.
4. 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 55 million to 65 million gallons of diesel fuel annually in its 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 March 31, 2011, the Company had protected the price of approximately 63% of its remaining expected purchases for fiscal year 2011 and 5% for fiscal year 2012.
     At March 31, 2011, the Company held heating oil swaps and purchased call options for approximately 31.7 million gallons for the purpose of managing the price risk associated with future diesel purchases. 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.

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     Coal risk management positions
     The Company may sell or purchase forward contracts, swaps 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 March 31, 2011, the Company held derivatives for risk management purposes totaling 1.3 million tons of coal sales and 0.3 million tons of coal purchases that are expected to settle during the remainder of 2011 and 2.6 million tons of coal sales and 0.1 million tons of coal purchases that are expected to settle in 2012 through 2014.
     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 is exposed to the risk of changes in coal prices on the value of its coal trading portfolio. The timing of the estimated future realization of the value of the trading portfolio is 47% for the remainder of 2011, 49% in 2012 and 4% in 2013.
     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 the Company’s credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the condensed consolidated balance sheets. 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 sheets. The fair value and location of derivatives reflected in the accompanying condensed consolidated balance sheets are as follows:
Fair Value of Derivatives
(in thousands)
                                                 
    March 31, 2011             December 31, 2010          
    Asset     Liability             Asset     Liability          
    Derivatives     Derivatives             Derivatives     Derivatives          
Derivatives Designated as Hedging Instruments
                                               
Heating oil
  $ 23,926     $             $ 13,475     $          
Coal
    2,193       (2,100 )             2,009       (2,350 )        
 
                                       
Total
    26,119       (2,100 )             15,484       (2,350 )        
Derivatives Not Designated as Hedging Instruments
                                               
Coal — held for trading purposes
    27,083       (14,584 )             34,445       (24,087 )        
Coal
    354       (1,172 )             1,139       (912 )        
 
                                       
Total
    27,437       (15,756 )             35,584       (24,999 )        
 
                                       
Total derivatives
    53,556       (17,856 )             51,068       (27,349 )        
Effect of counterparty netting
    (13,678 )     13,678               (22,402 )     22,402          
 
                                       
Net derivatives as classified in the balance sheets
  $ 39,878     $ (4,178 )   $ 35,700     $ 28,666     $ (4,947 )   $ 23,719  
 
                                   
Net derivatives as reflected on the balance sheets
                         
            March 31,     December 31,  
            2011     2010  
 
  Heating oil   Other current assets   $ 23,926     $ 13,475  
 
  Coal   Coal derivative assets     15,952       15,191  
 
     
Coal derivative liabilities
    (4,178 )     (4,947 )
 
                   
 
          $ 35,700     $ 23,719  
 
                   
     The Company had a current asset for the right to reclaim cash collateral of $9.2 million and $10.3 million at March 31,

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2011 and December 31, 2010, respectively. 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 sheets.
     The effects of derivatives on measures of financial performance are as follows:
Three Months Ended March 31
(in thousands)
                                                 
                                    Gain (Loss)  
                                    Recognized in  
                    Gains (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)  
    2011     2010     2011     2010     2011     2010  
Heating oil
  $ 14,258     $ 12     $ 3,170      2   $ (2,229 )    2   $     $  
Coal sales
    1,406       (401 )     87      1     (129 )    1            
Coal purchases
    (876 )     902            2     (336 )    2            
 
                                   
Totals
  $ 14,788     $ 513     $ 3,257     $ (2,694 )   $     $  
 
                                   
                 
Derivatives Not Designated as      
Hedging Instruments   Gain (Loss)  
    2011     2010  
Coal — unrealized
  $ (1,045 )    3   $ (4,922 )    3
 
           
Coal — realized
  $      4   $ 1,600      4
 
           
Location in Statement of Income:
 
1-   Coal sales
 
2-   Cost of coal sales
 
3-   Change in fair value of coal derivatives and coal trading activities, net
 
4-   Other operating income, net
     The Company recognized net unrealized and realized gains of $2.8 million during the three months ended March 31, 2011 and net unrealized and realized losses of $1.0 million during the three months ended March 31, 2010, related to its trading portfolio (including derivative and non-derivative contracts). These balances are included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying condensed consolidated statements of income and are not included in the previous table.
     During the next twelve months, based on fair values at March 31, 2011, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $23.5 million are expected to be reclassified from other comprehensive income into earnings.
5. Inventories
     Inventories consist of the following:
                 
    March 31,     December 31,  
    2011     2010  
    (In thousands)  
Coal
  $ 121,363     $ 115,647  
Repair parts and supplies, net of allowance
    126,545       119,969  
 
           
 
  $ 247,908     $ 235,616  
 
           
     The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $13.0 million at March 31, 2011, and $12.7 million at December 31, 2010.

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6. Debt
                 
    March 31,     December 31,  
    2011     2010  
    (In thousands)  
Commercial paper
  $ 60,585     $ 56,904  
6.75% senior notes ($450.0 million face value) due July 1, 2013
    451,456       451,618  
8.75% senior notes ($600.0 million face value) due August 1, 2016
    587,572       587,126  
7.25% senior notes ($500.0 million face value) due October 1, 2020
    500,000       500,000  
Other
    8,933       14,093  
 
           
 
    1,608,546       1,609,741  
Less current maturities of debt and short-term borrowings
    69,518       70,997  
 
           
Long-term debt
  $ 1,539,028     $ 1,538,744  
 
           
     Availability
     The Company had no borrowings outstanding under the revolving credit facility or under the accounts receivable securitization program as of March 31, 2011 and December 31, 2010. At March 31, 2011 the Company had availability of $860.0 million under the revolving credit facility and $71.4 million under the accounts receivable securitization program. The Company also had outstanding letters of credit under the accounts receivable securitization program of $76.2 million as of March 31, 2011.
7. 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 rarely observable.
     The table below sets forth, by level, the Company’s financial assets and liabilities that are recorded at fair value in the accompanying condensed consolidated balance sheet:
                                 
    Fair Value at March 31, 2011  
    Total     Level 1     Level 2     Level 3  
    (In thousands)  
Assets:
                               
Investments in equity securities
  $ 8,572     $ 8,482     $     $ 90  
Derivatives
    39,878       6,203       17,265       16,410  
 
                       
Total assets
  $ 48,450     $ 14,685     $ 17,265     $ 16,500  
 
                       
 
                               
Liabilities:
                               
Derivatives
  $ 4,178     $     $ 3,459     $ 719  
 
                       
     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

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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  
    March 31, 2011  
    (In thousands)  
Balance, beginning of period
  $ 9,183  
Realized and unrealized losses recognized in earnings
    (2,579 )
Realized and unrealized gains recognized in other comprehensive income
    8,928  
Purchases
    1,466  
Settlements
    (1,217 )
 
     
Balance, end of period
  $ 15,781  
 
     
     Net unrealized gains during the three month period ended March 31, 2011 related to level 3 financial instruments held on March 31, 2011 were $7.2 million.
     Fair Value of Long-Term Debt
     At March 31, 2011 and December 31, 2010, the fair value of the Company’s senior notes and other long-term debt, including amounts classified as current, was $1,734.6 million and $1,708.6 million, respectively. Fair values are based upon observed prices in an active market when available or from valuation models using market information.
8. Stock-Based Compensation and Other Incentive Plans
     During the three months ended March 31, 2011, the Company granted options to purchase approximately 0.7 million shares of common stock with a weighted average exercise price of $32.49 per share and a weighted average grant-date fair value of $14.37 per share. The options’ fair value was determined using the Black-Scholes option pricing model, using a weighted average risk-free rate of 1.95%, a weighted average dividend yield of 1.23% and a weighted average volatility of 57.61%. The options’ expected life is 4.5 years and the options vest ratably over three years. The options provide for the continuation of vesting after retirement for 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 all or part of the award. The Company also granted 107,700 shares of restricted stock during the three months ended March 31, 2011 at a weighted average grant-date fair value of $32.49 per share. The restricted stock vests after three years.
     During the three months ended March 31, 2011, the Company awarded 3.4 million performance units as part of its long-term incentive (“LTI”) plan. The total number of units earned by a participant is based on financial and operational performance measures, and may be paid out in cash or in shares of the Company’s common stock. The Company recognizes compensation expense over the three- year term of the grant. Amounts unpaid for all grants under the LTI plan totaled $7.9 million and $6.4 million as of March 31, 2011 and December 31, 2010, respectively.
     The Company recognized compensation expense from all stock-based and LTI plans of $6.8 million and $3.8 million for the three months ended March 31, 2011 and 2010, respectively. This expense is primarily included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
9. Workers’ Compensation Expense
     The following table details the components of workers’ compensation expense:
                 
    Three Months Ended March 31  
    2011     2010  
    (In thousands)  
Self-insured occupational disease benefits:
               
Service cost
  $ 193     $ 155  
Interest cost
    254       144  
Net amortization
    (101 )     (548 )
 
           
Total occupational disease
    346       (249 )
Traumatic injury claims and assessments
    2,325       1,676  
 
           
Total workers’ compensation expense
  $ 2,671     $ 1,427  
 
           

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10. Employee Benefit Plans
     The following table details the components of pension benefit costs:
                 
    Three Months Ended March 31  
    2011     2010  
    (In thousands)  
Service cost
  $ 4,319     $ 3,873  
Interest cost
    4,131       4,121  
Expected return on plan assets
    (5,468 )     (4,166 )
Amortization of prior service cost
    47       43  
Amortization of other actuarial losses
    2,139       2,405  
 
           
Net benefit cost
  $ 5,168     $ 6,276  
 
           
     The following table details the components of other postretirement benefit costs (credits):
                 
    Three Months Ended March 31  
    2011     2010  
    (In thousands)  
Service cost
  $ 405     $ 446  
Interest cost
    498       648  
Amortization of prior service credits
    (591 )     (503 )
Amortization of other actuarial gains
    (598 )     (470 )
 
           
Net benefit cost (credit)
  $ (286 )   $ 121  
 
           
11. 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 March 31  
    2011     2010  
    (In thousands)  
Net income (loss) attributable to Arch Coal, Inc.
  $ 55,601     $ (1,796 )
Other comprehensive income, net of income taxes:
               
Pension, postretirement and other post-employment benefits, reclassifications into net income
    573       592  
Unrealized gains on available-for-sale securities
    747       9  
Unrealized gains and losses on derivatives, net of reclassifications into net income:
               
Unrealized gains on derivatives
    9,501       362  
Reclassifications of (gains) losses into net income
    (2,124 )     1,723  
 
           
 
               
Total comprehensive income
  $ 64,298     $ 890  
 
           
12. Earnings (Loss) per Common Share
     The following table provides the basis for earnings (loss) per share calculations by reconciling basic and diluted weighted average shares outstanding:
                 
    Three Months Ended March 31  
    2011     2010  
    (In thousands)  
Weighted average shares outstanding:
               
Basic weighted average shares outstanding
    162,576       162,372  
Effect of common stock equivalents under incentive plans
    1,197        
 
           
 
               
Diluted weighted average shares outstanding
    163,773       162,372  
 
           

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     The effect of options to purchase 1.1 million and 2.4 million shares of common stock were excluded from the calculation of diluted weighted average shares outstanding for the three month period ended March 31, 2011 and 2010, respectively, because the exercise price of these options exceeded the average market price of the Company’s common stock for these periods. The additional dilutive effect of options, restricted stock and restricted stock units totaling 0.7 million shares of common stock were excluded from the calculation of diluted weighted average shares outstanding for the three months ended March 31, 2010 because of the net loss for the quarter.
13. 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 March 31, 2011, the Company had $86.6 million of surety bonds related to properties sold to Magnum. The surety bonding amounts are mandated by the state and are not directly related to the estimated cost to reclaim the properties. Patriot Coal Corporation (“Patriot”) acquired Magnum in July 2008, and has posted letters of credit in the Company’s favor for $32.7 million. In April, 2011, Patriot replaced $22.1 million of the surety bonds.
     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 March 31, 2011, the cost of purchasing 11.1 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 $429.3 million, and the cost of purchasing 1.3 million tons of coal to supply the assigned and guaranteed contracts over their duration would exceed the sales price under the contracts by approximately $28.1 million. As the Company does not believe that it is probable that it would have to purchase replacement coal, no losses have been recorded in the consolidated financial statements as of March 31, 2011. 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 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 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 $28.2 million at March 31, 2011, 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.
14. 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 pending claims will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.
15. 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

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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 months ended March 31, 2011 and 2010 are presented below. Results for the operating segments include all direct costs of mining, including all depreciation, depletion and amortization related to the mining operations, even if the assets are not recorded at the operating segment level. See discussion of segment assets below. 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.
     The asset amounts below represent an allocation of assets used in the segments’ cash-generating activities. The amounts in Corporate, Other and Eliminations represent primarily corporate assets (cash, receivables, investments, plant, property and equipment) as well as goodwill, unassigned coal reserves, above-market acquired sales contracts and other unassigned assets.
                                         
                            Corporate,    
                            Other and    
    PRB   WBIT   CAPP   Eliminations   Consolidated
    (In thousands)
Three months ended March 31, 2011
                                       
Coal sales
  $ 393,113     $ 155,439     $ 324,386     $     $ 872,938  
Income from operations
    46,874       26,892       54,394       (25,922 )     102,238  
Total assets
    2,244,173       683,949       710,324       1,261,532       4,899,978  
Depreciation, depletion and amortization
    41,691       20,529       21,016       301       83,537  
Amortization of acquired sales contracts, net
    5,944                         5,944  
Capital expenditures
    2,838       11,777       17,302       6,794       38,711  
 
                                       
Three months ended March 31, 2010
                                       
Coal sales
  $ 359,415     $ 132,713     $ 219,746     $     $ 711,874  
Income from operations
    16,561       12,430       37,593       (34,384 )     32,200  
Total assets
    2,358,957       683,124       740,401       1,030,804       4,813,286  
Depreciation, depletion and amortization
    44,621       20,370       23,174       354       88,519  
Amortization of acquired sales contracts, net
    10,753                         10,753  
Capital expenditures
    725       13,101       11,637       6,512       31,975  
     A reconciliation of segment income from operations to consolidated income (loss) before income taxes follows:
                 
    Three Months Ended March 31  
    2011     2010  
    (In thousands)  
Income from operations
  $ 102,238     $ 32,200  
Interest expense
    (34,580 )     (35,083 )
Interest income
    746       338  
 
           
Income (loss) before income taxes
  $ 68,404     $ (2,545 )
 
           

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Note 16. Subsequent Events
     On May 2, 2011, the Company and International Coal Group, Inc. (“ICG”) entered into a definitive Agreement and Plan of Merger (“Merger Agreement”), pursuant to which the Company will commence an offer to acquire all of the outstanding shares of ICG’s common stock for $14.60 per share in cash, for a total transaction price of $3.4 billion. Completion of the offer is subject to several conditions, including: (i) that a majority of the shares of common stock outstanding be validly tendered prior to the expiration of the offer; (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iii) the absence of a material adverse effect on ICG; (iv) the expiration of a 20 business day marketing period beginning 10 business days after delivery of certain required financial information to be provided to the Company by ICG; and (v) certain other customary conditions.
     The offer is not subject to a financing condition. In connection with the Merger Agreement, Arch entered into a debt commitment letter with Morgan Stanley Senior Funding, Inc., PNC Bank, National Association and PNC Capital Markets LLC (“Initial Lenders”). Pursuant to the commitment letter, the Initial Lenders have committed to provide to Arch unsecured bridge financing of up to $3.8 billion (“Bridge Facility”), the proceeds of which will be used (i) first, to repay or redeem ICG’s indebtedness outstanding on the date of consummation of the merger, other than certain existing indebtedness and (ii) second, to fund, in part, the cash consideration for the offer and pay certain fees and expenses in connection with the transactions. The Bridge Facility will mature on the first anniversary of the closing of the merger; however, Arch may, subject to certain conditions, elect to extend the maturity date of the Bridge Facility to the eighth anniversary of the closing of the merger. The Company expects to raise permanent financing comprised of a mix of debt and equity securities in amounts that enable the Company to maintain its current credit ratings.
17. Supplemental Condensed Consolidating Financial Information
     Pursuant to the indenture governing the Arch Coal, Inc. senior notes, certain wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes on a joint and several basis. The following tables present unaudited condensed consolidating financial information for (i) the Company, (ii) the issuer of the senior notes, (iii) the guarantors under the Notes, and (iv) the entities which are not guarantors under the Notes (Arch Western Resources, LLC and Arch Receivable Company, LLC):

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Condensed Consolidating Statements of Income
Three Months Ended March 31, 2011
(unaudited)
                                         
            Guarantor     Non-Guarantor              
    Parent/Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (In thousands)                  
Revenue
                                       
Coal sales
  $     $ 338,533     $ 534,405     $     $ 872,938  
 
                                       
Costs, expenses and other
                                       
Cost of coal sales
    3,279       251,884       423,323       (24,802 )     653,684  
Depreciation, depletion and amortization
    672       43,277       39,588             83,537  
Amortization of acquired sales contracts, net
                5,944             5,944  
Selling, general and administrative expenses
    20,336       1,883       9,913       (1,697 )     30,435  
Change in fair value of coal derivatives and coal trading activities, net
          (1,784 )                 (1,784 )
Other operating (income) expense, net
    (4,567 )     (27,456 )     4,408       26,499       (1,116 )
 
                             
 
    19,720       267,804       483,176             770,700  
Income from investment in subsidiaries
    125,003                   (125,003 )      
 
                             
 
                                       
Income from operations
    105,283       70,729       51,229       (125,003 )     102,238  
 
Interest expense, net:
                                       
Interest expense
    (40,621 )     (714 )     (10,982 )     17,737       (34,580 )
Interest income
    3,742       296       14,445       (17,737 )     746  
 
                             
 
    (36,879 )     (418 )     3,463             (33,834 )
 
                             
 
                                       
Income before income taxes
    68,404       70,311       54,692       (125,003 )     68,404  
Provision for income taxes
    12,530                         12,530  
 
                             
 
                                       
Net income
    55,874       70,311       54,692       (125,003 )     55,874  
Less: Net income attributable to noncontrolling interest
    (273 )                       (273 )
 
                             
 
                                       
Net income attributable to Arch Coal
  $ 55,601     $ 70,311     $ 54,692     $ (125,003 )   $ 55,601  
 
                             

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Condensed Consolidating Statements of Income
Three Months Ended March 31, 2010
(unaudited)
                                         
            Guarantor     Non-Guarantor              
    Parent/Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (In thousands)                  
Revenue
                                       
Coal sales
  $     $ 239,027     $ 472,847     $     $ 711,874  
 
                                       
Costs, expenses and other
                                       
Cost of coal sales
    2,829       168,718       397,509       (18,306 )     550,750  
Depreciation, depletion and amortization
    752       43,717       44,050             88,519  
Amortization of acquired sales contracts, net
                10,753             10,753  
Selling, general and administrative expenses
    18,643       1,806       8,403       (1,686 )     27,166  
Change in fair value of coal derivatives and coal trading activities, net
          5,877                   5,877  
Other operating (income) expense, net
    (1,961 )     (22,722 )     1,300       19,992       (3,391 )
 
                             
 
                                       
 
    20,263       197,396       462,015             679,674  
 
                                       
Income from investment in subsidiaries
    47,267                   (47,267 )      
 
                             
 
                                       
Income from operations
    27,004       41,631       10,832       (47,267 )     32,200  
Interest expense, net:
                                       
Interest expense
    (31,432 )     (579 )     (18,115 )     15,043       (35,083 )
Interest income
    1,883       89       13,409       (15,043 )     338  
 
                             
 
    (29,549 )     (490 )     (4,706 )           (34,745 )
 
                             
 
                                       
Income (loss) before income taxes
    (2,545 )     41,141       6,126       (47,267 )     (2,545 )
Benefit from income taxes
    (775 )                       (775 )
 
                             
 
                                       
Net income (loss)
    (1,770 )     41,141       6,126       (47,267 )     (1,770 )
Less: Net income attributable to noncontrolling interest
    (26 )                       (26 )
 
                             
 
                                       
Net income (loss) attributable to Arch Coal
  $ (1,796 )   $ 41,141     $ 6,126     $ (47,267 )   $ (1,796 )
 
                             

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Condensed Consolidating Balance Sheets
March 31, 2011
(unaudited)
                                         
            Guarantor     Non-Guarantor              
    Parent/Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (In thousands)                  
Assets
                                       
Cash and cash equivalents
  $ 3,056     $ 49     $ 66,115     $     $ 69,220  
Receivables
    28,407       14,383       262,102       (1,575 )     303,317  
Inventories
          78,278       169,630             247,908  
Other
    57,279       101,506       19,712             178,497  
 
                             
Total current assets
    88,742       194,216       517,559       (1,575 )     798,942  
 
                             
 
                                       
Property, plant and equipment, net
    10,017       1,780,334       1,473,204             3,263,555  
 
                                       
Investment in subsidiaries
    4,686,231                   (4,686,231 )      
Intercompany receivables
    (1,898,150 )     584,740       1,313,410              
Note receivable from Arch Western
    225,000                   (225,000 )      
Other
    454,767       371,944       10,770             837,481  
 
                             
Total other assets
    3,467,848       956,684       1,324,180       (4,911,231 )     837,481  
 
                             
Total assets
  $ 3,566,607     $ 2,931,234     $ 3,314,943     $ (4,912,806 )   $ 4,899,978  
 
                             
 
                                       
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 10,915     $ 71,790     $ 101,161     $     $ 183,866  
Accrued expenses and other current liabilities
    61,757       31,951       140,210       (1,575 )     232,343  
Current maturities of debt and short-term borrowings
    8,933             60,585             69,518  
 
                             
Total current liabilities
    81,605       103,741       301,956       (1,575 )     485,727  
 
                             
Long-term debt
    1,087,572             451,456             1,539,028  
Note payable to Arch Coal
                225,000       (225,000 )      
Asset retirement obligations
    652       32,649       303,674             336,975  
Accrued pension benefits
    14,363       4,535       19,910             38,808  
Accrued postretirement benefits other than pension
    14,290             22,630             36,920  
Accrued workers’ compensation
    15,359       13,723       6,882             35,964  
Other noncurrent liabilities
    50,453       20,790       53,000             124,243  
 
                             
Total liabilities
    1,264,294       175,438       1,384,508       (226,575 )     2,597,665  
Redeemable noncontrolling interest
    10,718                         10,718  
Stockholders’ equity
    2,291,595       2,755,796       1,930,435       (4,686,231 )     2,291,595  
 
                             
Total liabilities and stockholders’ equity
  $ 3,566,607     $ 2,931,234     $ 3,314,943     $ (4,912,806 )   $ 4,899,978  
 
                             

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Condensed Consolidating Balance Sheets
December 31, 2010
(unaudited)
                                         
            Guarantor     Non-Guarantor              
    Parent/Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
                    (In thousands)                  
Assets
                                       
Cash and cash equivalents
  $ 13,713     $ 64     $ 79,816     $     $ 93,593  
Receivables
    31,458       12,740       210,075       (1,953 )     252,320  
Inventories
          85,196       150,420             235,616  
Other
    29,575       102,375       21,435             153,385  
 
                             
Total current assets
    74,746       200,375       461,746       (1,953 )     734,914  
 
                             
 
                                       
Property, plant and equipment, net
    9,817       1,800,578       1,498,497             3,308,892  
 
                                       
Investment in subsidiaries
    4,555,233                   (4,555,233 )      
Intercompany receivables
    (1,807,902 )     508,624       1,299,278              
Note receivable from Arch Western
    225,000                   (225,000 )      
Other
    481,345       344,698       10,920             836,963  
 
                             
Total other assets
    3,453,676       853,322       1,310,198       (4,780,233 )     836,963  
 
                             
Total assets
  $ 3,538,239     $ 2,854,275     $ 3,270,441     $ (4,782,186 )   $ 4,880,769  
 
                             
 
                                       
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 10,753     $ 65,793     $ 121,670     $     $ 198,216  
Accrued expenses and other current liabilities
    75,746       31,123       153,217       (1,953 )     258,133  
Current maturities of debt and short-term borrowings
    14,093             56,904             70,997  
 
                             
Total current liabilities
    100,592       96,916       331,791       (1,953 )     527,346  
 
                             
Long-term debt
    1,087,126             451,618             1,538,744  
Note payable to Arch Coal
                225,000       (225,000 )      
Asset retirement obligations
    873       32,029       301,355             334,257  
Accrued pension benefits
    20,843       4,407       23,904             49,154  
Accrued postretirement benefits other than pension
    14,284             23,509             37,793  
Accrued workers’ compensation
    15,383       13,805       6,102             35,290  
Other noncurrent liabilities
    51,187       22,135       36,912             110,234  
 
                             
Total liabilities
    1,290,288       169,292       1,400,191       (226,953 )     2,632,818  
Redeemable noncontrolling interest
    10,444                         10,444  
Stockholders’ equity
    2,237,507       2,684,983       1,870,250       (4,555,233 )     2,237,507  
 
                             
Total liabilities and stockholders’ equity
  $ 3,538,239     $ 2,854,275     $ 3,270,441     $ (4,782,186 )   $ 4,880,769  
 
                             

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Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2011
(unaudited)
                                 
            Guarantor     Non-Guarantor        
    Parent/Issuer     Subsidiaries     Subsidiaries     Consolidated  
    (In thousands)  
Cash provided by (used in) operating activities
  $ (75,477 )   $ 144,796     $ 16,826     $ 86,145  
 
Investing Activities
                               
Capital expenditures
    (900 )     (23,615 )     (14,196 )     (38,711 )
Proceeds from dispositions of property, plant and equipment
          502       14       516  
Purchases of investments and advances to affiliates
    (9,529 )     (24,890 )           (34,419 )
Additions to prepaid royalties
          (20,915 )           (20,915 )
 
                       
Cash used in investing activities
    (10,429 )     (68,918 )     (14,182 )     (93,529 )
 
Financing Activities
                               
Net increase in borrowings under lines of credit and commercial paper program
                3,681       3,681  
Net proceeds from other debt
    (5,161 )                 (5,161 )
Debt financing costs
                (8 )     (8 )
Dividends paid
    (16,269 )                 (16,269 )
Issuance of common stock under incentive plans
    768                   768  
Transactions with affiliates, net
    95,911       (75,893 )     (20,018 )      
 
                       
Cash provided by (used in) financing activities
    75,249       (75,893 )     (16,345 )     (16,989 )
 
                       
Decrease in cash and cash equivalents
    (10,657 )     (15 )     (13,701 )     (24,373 )
Cash and cash equivalents, beginning of period
    13,713       64       79,816       93,593  
 
                       
Cash and cash equivalents, end of period
  $ 3,056     $ 49     $ 66,115     $ 69,220  
 
                       

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Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2010
(unaudited)
                                 
            Guarantor     Non-Guarantor        
    Parent/Issuer     Subsidiaries     Subsidiaries     Consolidated  
    (in thousands)  
Cash provided by (used in) operating activities
  $ (74,952 )   $ 112,334     $ 55,949     $ 93,331  
 
Investing Activities
                               
Capital expenditures
    (711 )     (17,438 )     (13,826 )     (31,975 )
Proceeds from dispositions of property, plant and equipment
          21       74       95  
Purchases of investments and advances to affiliates
    (8,856 )     (1,215 )           (10,071 )
Additions to prepaid royalties
          (20,831 )     (2,509 )     (23,340 )
 
                       
Cash used in investing activities
    (9,567 )     (39,463 )     (16,261 )     (65,291 )
Financing Activities
                               
Net increase (decrease) in borrowings under lines of credit and commercial paper program
    (30,000 )           10,676       (19,324 )
Net payments on other debt
    (4,742 )                 (4,742 )
Debt financing costs
                (200 )     (200 )
Dividends paid
    (14,623 )                 (14,623 )
Issuance of common stock under incentive plans
    85                   85  
Transactions with affiliates, net
    119,514       (72,871 )     (46,643 )      
 
                       
Cash provided by (used in) financing activities
    70,234       (72,871 )     (36,167 )     (38,804 )
 
                       
Increase (decrease) in cash and cash equivalents
    (14,285 )           3,521       (10,764 )
Cash and cash equivalents, beginning of period
    54,255       64       6,819       61,138  
 
                       
Cash and cash equivalents, end of period
  $ 39,970     $ 64     $ 10,340     $ 50,374  
 
                       

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
     We are one of the world’s largest coal producers by volume. We sell the majority of our coal as steam coal to power plants and industrial facilities. We also sell metallurgical coal used in steel production. The locations of our mines and access to export facilities enable us to ship coal to most of the major coal-fueled power plants, industrial facilities and steel mills located within the United States and on four continents worldwide. 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 distinctions have caused market and contract pricing environments to develop by coal region and form the basis for the segmentation of our operations.
     The Powder River Basin is located in northeastern Wyoming and southeastern Montana. The coal we mine from surface operations in this region is very low in sulfur content and has a low heat value compared to the other 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 Colorado, Utah and southern Wyoming. Coal we mine from underground and surface mines in this region typically is low in sulfur content and varies in heat content. 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 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 for steam coal offered by power plants and industrial users.
     Growth in domestic and global coal demand combined with coal supply constraints in many traditional coal exporting countries benefited coal markets during 2010. We expect global coal markets to remain tight throughout the remainder of 2011, and additional tightening in the domestic market as 2011 progresses. Through March, year-to-date global steel production increased more than 9%; and over 20% from recessionary levels. We expect metallurgical coal production to increase in coming years to meet the increasing steel demand for infrastructure in both developing economies, such as China and Brazil, and mature economies, particularly Japan, where significant rebuilding will be necessary after the earthquake and tsunami. As in metallurgical coal markets, markets for U.S. steam coal are also migrating offshore to meet the continuing growth in global coal demand.
     In response to the global steam coal demand, we have expanded our seaborne sales and have shipped steam coal to Europe, South America, and small volumes to Asia. Each of our operating segments is participating in the expansion of seaborne shipments utilizing ports on the East and West Coasts as well as on the Gulf of Mexico.
     Geologic issues at our Mountain Laurel mine in Central Appalachia caused the temporary idling of our longwall at the mine during the first quarter of 2011. The geologic challenges required us to perform additional work on the panel that had been in development, and we instead moved the longwall to a different panel after completing development work there. Despite the idling, we were still able to ship 1.4 million tons of metallurgical-quality coal during the first quarter, due to the operation of five continuous miner units operating at Mountain Laurel, shipments from inventories on hand and increased metallurgical-quality coal shipments from other operations. We resumed longwall production in mid-April and expect our shipments of metallurgical-quality coal to increase as the year progresses. We expect to ship approximately 7.5 million tons of metallurgical-quality coal in 2011, exclusive of the impact of the planned acquisition discussed below.
     On May 2, 2011, we entered into a definitive Agreement and Plan of Merger (“Merger Agreement”) with International Coal Group, Inc. (“ICG”), pursuant to which the Company will commence an offer to acquire all of the outstanding shares of ICG’s common stock for $14.60 per share in cash, for a total transaction value of $3.4 billion. Completion of the offer is subject to customary conditions. The offer is not subject to a financing condition.
     ICG’s assets include 13 active mining complexes located throughout West Virginia, Kentucky, Virginia, Maryland and Illinois and one major mining complex under development. Of ICG’s predominantly underground reserve base of 1.1 billion tons, nearly 30% is metallurgical-quality. After the acquisition, we will have assets in every major U.S. coal supply basin. In 2010, ICG sold 16.3 million tons of coal and reported coal sales revenues of $1.1 billion and net income of $30.1 million.

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Results of Operations
  Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
     Summary. Our improved results during the first quarter of 2011 when compared to the first quarter of 2010 were due primarily to higher average sales realizations as a result of improved market conditions. Higher per-ton production costs partially offset the benefit from the higher average realizations.
     Revenues. The following table summarizes information about coal sales during the three months ended March 31, 2011 and compares it with the information for the three months ended March 31, 2010:
                                 
    Three Months Ended March 31   Increase (Decrease)
    2011   2010   Amount   %
    (Amounts in thousands, except per ton data and percentages)
Coal sales
  $ 872,938     $ 711,874     $ 161,064       22.6 %
Tons sold
    36,608       37,806       (1,198 )     (3.2 )%
Coal sales realization per ton sold
  $ 23.85     $ 18.83     $ 5.02       26.7 %
     Coal sales increased in the first quarter of 2011 from the first quarter of 2010, due to an increase in the overall average price per ton sold, primarily from the effect of an increase in the volumes and pricing of metallurgical-quality coal sold, higher steam pricing in all regions and the impact of changes in regional mix on our average coal sales realization. Overall sales volume decreased slightly due to lower sales volumes in the Powder River Basin. We remain selective in committing tonnage by matching our production levels to our estimates of market demand, which we believe will provide for the best long-term results based on our outlook for the coal markets. We have provided more information about the tons sold and the coal sales realizations per ton by operating segment under the heading “Operating segment results”.
     Costs, expenses and other. The following table summarizes costs, expenses and other components of operating income for the three months ended March 31, 2011 and compares it with the information for the three months ended March 31, 2010:
                                 
                    Increase (Decrease)  
    Three Months Ended March 31     in Net Income  
    2011     2010     $     %  
    (Amounts in thousands, except percentages)  
Cost of coal sales
  $ 653,684     $ 550,750     $ (102,934 )     (18.7 )%
Depreciation, depletion and amortization
    83,537       88,519       4,982       5.6  
Amortization of acquired sales contracts, net
    5,944       10,753       4,809       44.7  
Selling, general and administrative expenses
    30,435       27,166       (3,269 )     (12.0 )
Change in fair value of coal derivatives and coal trading activities, net
    (1,784 )     5,877       7,661       130.4  
Other operating income, net
    (1,116 )     (3,391 )     (2,275 )     (67.1 )
 
                         
 
  $ 770,700     $ 679,674     $ (91,026 )     (13.4 )%
 
                         
     Cost of coal sales. Our cost of coal sales increased in 2011 from 2010 primarily due to higher per-ton production costs, an increase in sales-sensitive costs and an increase in transportation costs, as a result of the increase in export shipments. Higher per ton production-costs were affected by the longwall outage at Mountain Laurel during the quarter and the impact of changes in regional mix. We have provided more information about our operating segments under the heading “Operating segment results”.
     Depreciation, depletion and amortization. When compared with 2010, lower depreciation, depletion and amortization costs in 2011 resulted primarily from the impact of lower production and sales volumes on assets amortized or depleted on the basis of tons produced.
     Amortization of acquired sales contracts, net. We acquired both above- and below-market sales contracts with a net fair value of $58.4 million with the Jacobs Ranch mining operation. The fair values of acquired sales contracts are amortized over the tons of coal shipped during the term of the contracts.

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     Selling, general and administrative expenses. The increase in selling, general and administrative expenses in 2011 is due primarily to higher compensation-related costs and an increase in professional services fees.
     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 2010, rising coal prices resulted in unrealized losses on positions held to manage risk, but that were not designated in a hedge relationship.
     Other operating income, net. The decrease in net other operating income in 2011 from 2010 is primarily the result of a decrease in income from commercial activity.
     Operating segment results. The following table shows results by operating segment for the three months ended March 31, 2011 and compares it with the information for the three months ended March 31, 2010:
                                 
    Three Months Ended March 31   Increase (Decrease)
    2011   2010   $   %
Powder River Basin
                               
Tons sold (in thousands)
    28,830       30,645       (1,815 )     (5.9 )%
Coal sales realization per ton sold(1)
  $ 13.51     $ 11.64     $ 1.87       16.1 %
Operating margin per ton sold(2)
  $ 1.60     $ 0.51     $ 1.09       213.7 %
Adjusted EBITDA(3)
  $ 93,716     $ 69,403     $ 24,313       35.0 %
Western Bituminous
                               
Tons sold (in thousands)
    4,186       4,129       57       1.4 %
Coal sales realization per ton sold(1)
  $ 31.77     $ 28.97     $ 2.80       9.7 %
Operating margin per ton sold(2)
  $ 6.35     $ 2.59     $ 3.76       145.2 %
Adjusted EBITDA(3)
  $ 47,420     $ 32,799     $ 14,621       44.6 %
Central Appalachia
                               
Tons sold (in thousands)
    3,592       3,032       560       18.5 %
Coal sales realization per ton sold(1)
  $ 80.92     $ 66.29     $ 14.63       22.1 %
Operating margin per ton sold(2)
  $ 16.00     $ 11.74     $ 4.26       36.3 %
Adjusted EBITDA(3)
  $ 77,986     $ 57,421     $ 20,565       35.8 %
 
(1)   Coal sales prices per ton exclude certain transportation costs that we pass through to our customers. We use these financial measures because we believe the amounts as adjusted better represent the coal sales prices we achieved within our operating segments. Since other companies may calculate coal sales prices per ton differently, our calculation may not be comparable to similarly titled measures used by those companies. For the three months ended March 31, 2011, transportation costs per ton were $0.13 for the Powder River Basin, $5.36 for the Western Bituminous region and $9.39 for Central Appalachia. For the three months ended March 31, 2010, transportation costs per ton were $0.08 for the Powder River Basin, $3.17 for the Western Bituminous region and $6.19 for Central Appalachia.
 
(2)   Operating margin per ton sold is calculated as coal sales revenues less cost of coal sales and depreciation, depletion and amortization divided by tons sold.
 
(3)   Adjusted EBITDA is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization and the amortization of acquired sales contracts. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results. Segment Adjusted EBITDA is reconciled to net income at the end of this “Results of Operations” section.
     Powder River Basin — Segment Adjusted EBITDA was $93.7 million, or 35%, higher in 2011 than in 2010 due to higher average coal sales realizations, reflecting the improved coal markets. The decrease in sales volumes in the Powder River Basin in 2011 when compared with 2010 resulted primarily from our market-driven sales commitment approach, as discussed previously. Partially offsetting the increase in average realizations was an increase in labor and diesel costs and an increase in sales-sensitive costs, due to increased realizations.
     Western Bituminous — Segment EBITDA was $47.4 million in 2011, or 45% higher than 2010, reflecting improved pricing, despite the ongoing soft domestic demand in the region. Effective cost control in the region and slightly higher production levels reduced our per-ton operating costs, which contributed to the improved results in 2011.
     Central Appalachia — Segment EBITDA was $78.0 million in 2011, or 36% higher than in 2010, triggered primarily by an increase in the volumes and pricing of metallurgical-quality coal sold. We were able to increase the volumes of metallurgical quality coal sold, despite the temporary outage of Mountain Laurel’s longwall during the quarter, by operating

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five continuous miner units at Mountain Laurel, shipping from inventories on hand and increasing metallurgical-quality coal shipments from other complexes in the region. We sold approximately 1.4 million tons of metallurgical-quality coal in 2011 compared to 0.9 million tons in 2010. Because metallurgical coal generally commands a higher price than steam coal, the increase had a favorable impact on our average realizations compared to 2010. The benefit from higher per-ton realizations in 2011, net of sales sensitive costs, drove the improvement in our operating margins over 2010, partially offset by the impacts of the outage and increasing production at higher cost mines on our average per-ton production costs.
     Net interest expense. The following table summarizes our net interest expense for the three months ended March 31, 2011 and compares it with the information for the three months ended March 31, 2010:
                                 
                    Increase  
    Three Months Ended March 31     in Net Income  
    2011     2010     $     %  
    (Amounts in thousands, except percentages)  
Interest expense
  $ (34,580 )   $ (35,083 )   $ 503       1.4 %
Interest income
    746       338       408       120.7 %
 
                         
 
  $ (33,834 )   $ (34,745 )   $ 911       2.6 %
 
                         
     Income taxes. Our effective income tax rate is sensitive to changes in and the relationship between annual profitability and the deduction for percentage depletion. The following table summarizes our income taxes for three months ended March 31, 2011 and compares it with the information for the three months ended March 31, 2010:
                                 
                    Decrease
    Three Months Ended March 31   in Net Income
    2011   2010   $   %
    (Amounts in thousands, except percentages)
Provision for (benefit from) income taxes
  $ 12,530     $ (775 )   $ (13,305 )     N/A  
     The Company’s effective rate of 18% in the first quarter of 2011 reflects a more normalized effective rate as a result of the profits generated in the current quarter.
  Reconciliation of Segment Adjusted EBITDA to Net Income
     The discussion in “Results of Operations” includes references to our Adjusted EBITDA results. Adjusted EBITDA is defined as net income attributable to the Company before the effect of net interest expense, income taxes, depreciation, depletion and amortization and the amortization of acquired sales contracts. Adjusted EBITDA may also be adjusted for items that may not reflect the trend of future results. We believe that Adjusted EBITDA presents a useful measure of our ability to service and incur debt based on ongoing operations. Investors should be aware that our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. The table below shows how reconcile Adjusted EBITDA to net income attributable to Arch Coal.
                 
    Three Months Ended March 31  
    2011     2010  
Segment Adjusted EBITDA
  $ 219,122     $ 159,623  
Corporate and other Adjusted EBITDA (1)
    (27,676 )     (28,177 )
 
           
Adjusted EBITDA
    191,446       131,446  
Depreciation, depletion and amortization
    (83,537 )     (88,519 )
Amortization of acquired sales contracts, net
    (5,944 )     (10,753 )
Interest expense
    (34,580 )     (35,083 )
Interest income
    746       338  
(Provision for) benefit from income taxes
    (12,530 )     775  
 
           
Net income attributable to Arch Coal
  $ 55,601     $ (1,796 )
 
           
 
(1)   Corporate and other Adjusted EBITDA includes primarily selling, general and administrative expenses, income from our equity investments, change in fair value of coal derivatives and coal trading activities, net.
Liquidity and Capital Resources
          Liquidity and capital resources
     Our primary sources of cash are coal sales to customers, borrowings under our credit facilities and other financing arrangements, and debt and equity offerings related to significant transactions. Excluding any significant mineral reserve

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acquisitions, we generally satisfy our working capital requirements and fund capital expenditures and debt-service obligations with cash generated from operations or borrowings under our credit facility, accounts receivable securitization or commercial paper programs. The borrowings under these arrangements are classified as current if the underlying credit facilities expire within one year or if, based on cash projections and management plans, we do not have the intent to replace them on a long-term basis. Such plans are subject to change based on our cash needs.
     We believe that cash generated from operations and borrowings under our credit facilities or other financing arrangements will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled debt payments for at least the next several years. We manage our exposure to changing commodity prices for our non-trading, long-term coal contract portfolio through the use of long-term coal supply agreements. We enter into fixed price, fixed volume supply contracts with terms greater than one year with customers with whom we have historically had limited collection issues. Our ability to satisfy debt service obligations, to fund planned capital expenditures, to make acquisitions, to repurchase our common shares and to pay dividends will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry and financial, business and other factors, some of which are beyond our control.
               During the three months ended March 31, 2011, our borrowing levels remained flat, with no borrowings under the revolving credit facility and accounts receivable securitization program. At March 31, 2011, our debt-to-capitalization ratio (defined as total debt divided by the sum of total debt and equity) was 41% and our availability under lines of credit was $931.4 million.
     Our indebtedness consisted of the following:
                 
    March 31,     December 31,  
    2011     2010  
    (In thousands)  
Commercial paper
  $ 60,585     $ 56,904  
6.75% senior notes ($450.0 million face value) due July 1, 2013
    451,456       451,618  
8.75% senior notes ($600.0 million face value) due August 1, 2016
    587,572       587,126  
7.25% senior notes ($500.0 million face value) due October 1, 2020
    500,000       500,000  
Other
    8,933       14,093  
 
           
 
    1,608,546       1,609,741  
Less current maturities of debt and short-term borrowings
    69,518       70,997  
 
           
Long-term debt
  $ 1,539,028     $ 1,538,744  
 
           
          In connection with the Merger Agreement with ICG, we entered into a debt commitment letter with Morgan Stanley Senior Funding, Inc., PNC Bank, National Association and PNC Capital Markets LLC (“Initial Lenders”). Pursuant to the commitment letter, the Initial Lenders have committed to provide to us unsecured bridge financing of up to $3.8 billion (“Bridge Facility”), the proceeds of which will be used (i) first, to repay or redeem ICG’s indebtedness outstanding on the date of consummation of the merger, other than certain existing indebtedness and (ii) second, to fund, in part, the cash consideration for the offer and pay certain fees and expenses in connection with the transactions. The Bridge Facility will mature on the first anniversary of the closing of the merger; however, we may, subject to certain conditions, elect to extend the maturity date of the Bridge Facility to the eighth anniversary of the closing of the merger. We expect to raise permanent financing comprised of a mix of debt and equity securities in amounts that enable us to maintain its current credit ratings.
          The following is a summary of cash provided by or used in each of the indicated types of activities:
                 
    Three Months Ended March 31,
    2011   2010
    (Dollars in thousands)
Cash provided by (used in):
               
Operating activities
  $ 86,145     $ 93,331  
Investing activities
    (93,529 )     (65,291 )
Financing activities
    (16,989 )     (38,804 )
     Cash provided by operating activities decreased slightly in the first quarter of 2011 compared to the first quarter of 2010, due to an increased investment in working capital, primarily trade receivables. March 2011 was a record month for revenues for the Company, resulting in a higher quarter-end balance in trade receivables.
     Cash used in investing activities in the first quarter of 2011 was $28.2 million more than in the first quarter of 2010, due to investments in and advances to equity-method investees totaling approximately $34.4 million, compared to $10.1 million in 2010. This included approximately $25.0 million to purchase a 38% ownership interest in Millennium Bulk Terminals-Longview, LLC and a $5.5 million milestone payment made to Tenaska Trailblazer Partners, LLC, (“Tenaska”) the developer of the Trailblazer Energy Center. During the first quarter of 2011 our capital expenditures were $6.7 million higher than in the first quarter of 2010. Capital expenditures in the first quarter of 2010 were the lowest quarterly total in the previous six years.
     Cash used in financing activities was $21.8 million lower in the than in the first quarter of 2010. As mentioned previously, we did not borrow under our accounts receivable securitization program or revolving credit facility during the

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first quarter of 2011. In the first quarter of 2010, we repaid $19.3 million under our various lines of credit. We paid dividends of $16.3 million in the three months ended March 31, 2011 and $14.6 million in the three months ended March 31, 2010.
          Ratio of Earnings to Fixed Charges
          The following table sets forth our ratios of earnings to combined fixed charges and preference dividends for the periods indicated:
                 
    Three Months Ended March 31
    2011   2010
Ratio of earnings to combined fixed charges and preference dividends
    2.84x       0.92x  
Critical Accounting Policies
          For a description of our critical accounting policies, see “Critical Accounting Policies” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2011.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
     We manage our commodity price risk for our non-trading, long-term coal contract portfolio through the use of long-term coal supply agreements, and to a limited extent, through the use of derivative instruments. Our commitments for the full year 2011 and 2012 are as follows:
                                 
    2011   2012
(Tons in millions)   Tons   Price   Tons   Price
Powder River Basin
                               
Committed, priced
    109.8     $ 13.64       69.2     $ 14.25  
Committed, unpriced
    5.2               11.0          
Western Bituminous
                               
Committed, priced
    17.5     $ 32.22       9.9     $ 35.46  
Central Appalachia
                               
Committed, priced (Coking, PCI)
    5.8     $ 113.42       0.4     $ 120.88  
Committed, priced (Steam)
    6.8     $ 67.12       1.5     $ 74.08  
     We are exposed to commodity price risk in our coal trading activities, which represents the potential future loss that could be caused by an adverse change in the market value of coal. Our coal trading portfolio included forward, swap and put and call option contracts at March 31, 2011. The estimated future realization of the $11.8 million fair value of the trading portfolio is 47% for the remainder of 2011, 49% in 2012 and 4% in 2013.
     We monitor and manage market price risk for our trading activities with a variety of tools, including Value at Risk (VaR), position limits, management alerts for mark to market monitoring and loss limits, scenario analysis, sensitivity analysis and review of daily changes in market dynamics. Management believes that presenting high, low, end of year and average VaR is the best available method to give investors insight into the level of commodity risk of our trading positions. Illiquid positions, such as long-dated trades that are not quoted by brokers or exchanges, are not included in VaR.
     VaR is a statistical one-tail confidence interval and down side risk estimate that relies on recent history to estimate how the value of the portfolio of positions will change if markets behave in the same way as they have in the recent past. While presenting VaR will provide a similar framework for discussing risk across companies, VaR estimates from two independent sources are rarely calculated in the same way. Without a thorough understanding of how each VaR model was calculated, it would be difficult to compare two different VaR calculations from different sources. The level of confidence is 95%. The time across which these possible value changes are being estimated is through the end of the next business day. A closed-form delta-neutral method used throughout the finance and energy sectors is employed to calculate this VaR. VaR is back tested to verify usefulness.
     On average, portfolio value should not fall more than VaR on 95 out of 100 business days. Conversely, portfolio value declines of more than VaR should be expected, on average, 5 out of 100 business days. When more value than VaR is lost due to market price changes, VaR is not representative of how much value beyond VaR will be lost.

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     During the three months ended March 31, 2011, VaR ranged from $1.2 million to $1.9 million. The linear mean of each daily VaR was $1.5 million. The final VaR at March 31, 2011 was $1.9 million.
     We are also exposed to the risk of fluctuations in cash flows related to our purchase of diesel fuel. We use approximately 55 million to 65 million gallons of diesel fuel annually in our operations. We enter into forward physical purchase contracts, as well as heating oil swaps and options, to reduce volatility in the price of diesel fuel for our operations. At March 31, 2011, we had protected the price of approximately 63% of its remaining expected purchases for fiscal year 2011 and 5% for fiscal year 2012, mostly through the use of the derivative instruments noted above. Since the changes in the price of heating oil are highly correlated 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. Accordingly, changes in the fair value of the derivatives are recorded through other comprehensive income, with any ineffectiveness recognized immediately in income. At March 31, 2011, a $0.25 per gallon decrease in the price of heating oil would result in an approximate $2.1 million increase in our expense related to the heating oil derivatives, which, if realized, would be offset by a decrease in the cost of our physical diesel purchases.
     We are exposed to market risk associated with interest rates due to our existing level of indebtedness. At March 31, 2011, of our $1.6 billion principal amount of debt outstanding, $60.6 million of outstanding borrowings have interest rates that fluctuate based on changes in the market rates. A one percentage point increase in the interest rates related to these borrowings would result in an annualized increase in interest expense of $0.6 million.
Item 4. Controls and Procedures.
          We performed an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were effective as of such date. There were no changes in internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
     We are involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. After conferring with counsel, it is the opinion of management that the ultimate resolution of these claims, to the extent not previously provided for, will not have a material adverse effect on our consolidated financial condition, results of operations or liquidity.
Permit Litigation Matters
     As described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, surface mines at our Mingo Logan and Coal-Mac mining operations were identified in an existing lawsuit brought by the Ohio Valley Environmental Coalition (OVEC) in the U.S. District Court for the Southern District of West Virginia as having been granted Clean Water Act § 404 permits by the Army Corps of Engineers, allegedly in violation of the Clean Water Act and the National Environmental Policy Act.
     The lawsuit, brought by OVEC in September 2005, originally was filed against the Corps for permits it had issued to four subsidiaries of a company unrelated to us or our operating subsidiaries. The suit claimed that the Corps had issued permits to the subsidiaries of the unrelated company that did not comply with the National Environmental Policy Act and violated the Clean Water Act.
     The court ruled on the claims associated with those four permits in orders of March 23 and June 13, 2007. In the first of those orders, the court rescinded the four permits, finding that the Corps had inadequately assessed the likely impact of valley fills on headwater streams and had relied on inadequate or unproven mitigation to offset those impacts. In the second order, the court entered a declaratory judgment that discharges of sediment from the valley fills into sediment control ponds constructed in-stream to control that sediment must themselves be permitted under a different provision of the Clean Water

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Act, § 402, and meet the effluent limits imposed on discharges from these ponds. Both of the district court rulings were appealed to the U.S. Court of Appeals for the Fourth Circuit.
     Before the court entered its first order, the plaintiffs were permitted to amend their complaint to challenge the Coal-Mac and Mingo Logan permits. Plaintiffs sought preliminary injunctions against both operations, but later reached agreements with our operating subsidiaries that have allowed mining to progress in limited areas while the district court’s rulings were on appeal. The claims against Coal-Mac were thereafter dismissed.
     In February 2009, the Fourth Circuit reversed the District Court. The Fourth Circuit held that the Corps’ jurisdiction under Section 404 of the Clean Water Act is limited to the narrow issue of the filling of jurisdictional waters. The court also held that the Corps’ findings of no significant impact under the National Environmental Policy Act and no significant degradation under the Clean Water Act are entitled to deference. Such findings entitle the Corps to avoid preparing an environmental impact statement, the absence of which was one issue on appeal. These holdings also validated the type of mitigation projects proposed by our operations to minimize impacts and comply with the relevant statutes. Finally, the Fourth Circuit found that stream segments, together with the sediment ponds to which they connect, are unitary “waste treatment systems,” not “waters of the United States,” and that the Corps’ had not exceeded its authority in permitting them.
     The Ohio Valley Environmental Coalition sought rehearing before the entire appellate court, which was denied in May, 2009, and the decision was given legal effect in June 2009. An appeal to the U.S. Supreme Court was then filed in August 2009. On August 3, 2010 OVEC withdrew its appeal.
     Mingo Logan filed a motion for summary judgment with the district court in July 2009, asking that judgment be entered in its favor because no outstanding legal issues remained for decision as a result of the Fourth Circuit’s February 2009 decision. By a series of motions, the United States obtained extensions and stays of the obligation to respond to the motion in the wake of its letters to the Corps dated September 3 and October 16, 2009 (discussed below). By order dated April 22, 2010, the District Court stayed the case as to Mingo Logan for the shorter of either six months or the completion of the U.S. Environmental Protection Agency’s (the “EPA”) proposed action to deny Mingo Logan the right to use its Corps’ permit (as discussed below).
     On October 15, 2010, the United States moved to extend the existing stay for an additional 120 days (until February 22, 2011) while the EPA Administrator reviews the “Recommended Determination” issued by EPA Region 3. By Memorandum Opinion and Order dated November 2, 2010, the court granted the United States’ motion. On January 13, 2011, EPA issued its “Final Determination” to withdraw the specification of two of the three watersheds as a disposal site for dredged or fill material approved under the current Section 404 permit. The court has been notified of the Final Determination.
     Additional information can be obtained from the U.S. District Court for the Southern District of West Virginia.
EPA Actions related to water discharges from the Spruce Permit
     As described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, by letter of September 3, 2009, the EPA asked the Corps of Engineers to suspend, revoke or modify the existing permit it issued in January 2007 to Mingo Logan under Section 404 of the Clean Water Act, claiming that “new information and circumstances have arisen which justify reconsideration of the permit.” By letter of September 30, 2009, the Corps of Engineers advised the EPA that it would not reconsider its decision to issue the permit. By letter of October 16, 2009, the EPA advised the Corps that it has “reason to believe” that the Mingo Logan mine will have “unacceptable adverse impacts to fish and wildlife resources” and that it intends to issue a public notice of a proposed determination to restrict or prohibit discharges of fill material that already are approved by the Corps’ permit. By federal register publication dated April 2, 2010, EPA issued its “Proposed Determination to Prohibit, Restrict or Deny the Specification, or the Use for Specification of an Area as a Disposal Site: Spruce No. 1 Surface Mine, Logan County, WV” pursuant to Section 404 c of the Clean Water Act. EPA accepted written comments on its proposed action (sometimes known as a “veto proceeding”), through June 4, 2010 and conducted a public hearing, as well, on May 18, 2010. We submitted comments on the action during this period. On September 24, 2010, EPA Region 3 issued a “Recommended Determination” to the EPA Administrator recommending that EPA prohibit the placement of fill material in two of the three watersheds for which filling is approved under the current Section 404 permit. Mingo Logan, along with the Corps, West Virginia DEP and the mineral owner, engaged in a consultation with EPA as required by the regulations, to discuss “corrective action” to address the “unacceptable adverse effects” identified. On January 13, 2011, EPA issued its “Final Determination” pursuant to Section 404(c) of the Clean Water Act to withdraw the specification of two of the three watersheds approved in the current Section 404 permit as a disposal site for dredged or fill material. By separate action, Mingo Logan sued EPA on April 2, 2010 in federal court in Washington, D.C. seeking a ruling

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that EPA has no authority under the Clean Water Act to veto a previously issued permit (Mingo Logan Coal Company, Inc. v. USEPA, No. 1:10-cv-00541(D.D.C.)). EPA moved to dismiss that action, and we responded to that motion. The court has been notified of the “Final Determination” and on February 23, 2011 entered a scheduling order for summary disposition of the case.
Clean Water Act Request for Information
     As described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, in January 2008, we received a request from the EPA for certain information related to compliance with effluent limitations and water quality standards under Section 308 of the Clean Water Act applicable to our eastern mining complexes located in West Virginia, Virginia and Kentucky. The request focuses on our compliance with water quality standards and effluent limitations at numerous outfalls as identified in the various NPDES permits applicable to our eastern mining complexes for the period beginning on January 1, 2003 through January 1, 2008. The compliance reporting mechanism is contained in Discharge Monitoring Reports which are required to be prepared and submitted quarterly to state environmental agencies and contain detailed monthly compliance data. In July 2008, the EPA referred the request to the U.S. Department of Justice. We negotiated a compromise with the Department of Justice, the EPA, the West Virginia Department of Environmental Protection and Kentucky Energy and Environment Cabinet to fully and finally resolve the issues identified in the EPA’s Section 308 Request for Information. The compromise is contained in a consent decree which includes certain elements of injunctive relief and a penalty in the amount of $4 million. The consent decree must be approved by the U.S. District Court for the Southern District of West Virginia before it becomes effective.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
          In September 2006, our board of directors authorized a share repurchase program for the purchase of up to 14,000,000 shares of our common stock. There is no expiration date on the current authorization, and we have not made any decisions to suspend or cancel purchases under the program. As of March 31, 2011, there were 10,925,800 shares of our common stock available for purchase under this program. We did not purchase any shares of our common stock under this program during the quarter ended March 31, 2011. Based on the closing price of our common stock as reported on the New York Stock Exchange on May 2, 2011, the approximate dollar value of our common stock that may yet be purchased under this program was $366.3 million.
Item 3. Defaults Upon Senior Securities.
          None
Item 4. Reserved.
Item 5. Other Information.
Mine Safety and Health Administration Safety Data
          We believe that Arch Coal is one of the safest coal mining companies in the world. Safety is a core value at Arch Coal and at our subsidiary operations. We have in place a comprehensive safety program that includes extensive health & safety training for all employees, site inspections, emergency response preparedness, crisis communications training, incident investigation, regulatory compliance training and process auditing, as well as an open dialogue between all levels of employees. The goals of our processes are to eliminate exposure to hazards in the workplace, ensure that we comply with all mine safety regulations, and support regulatory and industry efforts to improve the health and safety of our employees along with the industry as a whole.
          Under the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, each operator of a coal or other mine is required to include certain mine safety results in its periodic reports filed with the Securities and Exchange Commission. The operation of our mines is subject to regulation by the federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). Below we present the following items regarding certain mine safety and health matters, broken down by mining complex owned and operated by Arch Coal or our subsidiaries, for the three-month period ended March 31, 2011:
    Section 104 Citations: Total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Mine Act for which we have received a citation from MSHA;
 
    Section 104(b) Orders: Total number of orders issued under section 104(b) of the Mine Act;

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    Section 104(d) Citations/Orders: Total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under Section 104(d) of the Mine Act;
 
    Section 107(a) Orders: Total number of imminent danger orders issued under section 107(a) of the Mine Act; and
 
    Total Dollar Value of Proposed MSHA Assessments: Total dollar value of proposed assessments from MSHA under the Mine Act.
                                         
                                    Total Dollar Value of
                                    Proposed MSHA
    Section 104   Section 104(b)   Section 104(d)   Section 107(a)   Assessments
Mining complex(1)   Citations   Orders   Citations/Orders   Orders   (in thousands)(2)
 
Power River Basin:
                                       
Black Thunder
    4                       $ 4.6  
Coal Creek
    1                       $ 1.1  
Western Bituminous:
                                       
Arch of Wyoming
    2                       $ 0  
Dugout Canyon
    3             1           $ 0  
Skyline
    7                       $ 5.5  
Sufco
    3                       $ 4.5  
West Elk
    7                       $ 7.3  
Central Appalachia:
                                       
Coal-Mac
    10                       $ 1.6  
Cumberland River
    23                       $ 23.2  
Lone Mountain
    37             3           $ 39.7  
Mountain Laurel
    47             3           $ 70.0  
Arch Coal Terminal
                          $ 0.2  
 
(1)   MSHA assigns an identification number to each coal mine and may or may not assign separate identification numbers to related facilities such as preparation plants. We are providing the information in this table by mining complex rather than MSHA identification number because we believe this format will be more useful to investors than providing information based on MSHA identification numbers. For descriptions of each of these mining operations please refer to the descriptions under Item 1. Business, in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
 
(2)   Amounts included under the heading “Total Dollar Value of Proposed MSHA Assessments” are the total dollar amounts for proposed assessments received from MSHA on or before April 15, 2011, for citations and orders occurring during the three-month period ended March 31, 2011.
     For the three-month period ended March 31, 2011, none of our mining complexes received written notice from MSHA of (i) a flagrant violation under section 110(b)(2) of the Mine Act; (ii) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health or safety hazards under section 104(e) of the Mine Act; or (iii) the potential to have such a pattern. For the three-month period ended March 31, 2011, none of our mining complexes experienced a mining-related fatality.
     As of March 31, 2011, we had a total of ninety-eight matters pending before the Federal Mine Safety and Health Review Commission. This includes legal actions that were initiated prior to the three-month period ended March 31, 2011 and which do not necessarily relate to the citations, orders or proposed assessments issued by MSHA during such three-month period.
     In evaluating the above information regarding mine safety and health, investors should take into account factors such as: (i) the number of citations and orders will vary depending on the size of a coal mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed, and in that process are often reduced in severity and amount, and are sometimes dismissed.

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Item 6. Exhibits.
     The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q:
         
Exhibit   Description
       
 
  2.1    
Agreement and Plan of Merger, dated as of May 2, 2011, by and among Arch Coal, Inc., Atlas Acquisition Corp. and International Coal Group, Inc. (incorporated herein by reference to Exhibit 2.1 to the registrant’s Current Report on Form
8-K filed on May 3, 2011).
       
 
  10.1    
First Amendment to Amended and Restated Receivables Purchase Agreement, dated January 31, 2011, among Arch Receivable Company, LLC, Arch Coal Sales Company, Inc., and the other parties thereto (incorporated herein by reference to Exhibit 10.41 to the registrant’s Annual Report on Form 10-K for the period ended December 31, 2010).
       
 
  10.2    
Tender and Voting Agreement by and among Arch Coal, Inc., Atlas Acquisition Corp. and certain stockholders of International Coal Group, Inc. (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on May 3, 2011).
       
 
  10.3    
Tender and Voting Agreement by and among Arch Coal, Inc., Atlas Acquisition Corp. and certain stockholders of International Coal Group, Inc. (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on May 3, 2011).
       
 
  10.4    
Debt Commitment Letter, dated as of May 2, 2011, by and among Morgan Stanley Senior Funding, Inc., PNC Bank, National Association, PNC Capital Markets LLC and Arch Coal, Inc. (incorporated herein by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on May 3, 2011).
       
 
  12.1    
Computation of ratio of earnings to combined fixed charges and preference dividends.
       
 
  31.1    
Rule 13a-14(a)/15d-14(a) Certification of Steven F. Leer.
       
 
  31.2    
Rule 13a-14(a)/15d-14(a) Certification of John T. Drexler.
       
 
  32.1    
Section 1350 Certification of Steven F. Leer.
       
 
  32.2    
Section 1350 Certification of John T. Drexler.
       
 
  101    
Interactive Data File (Form 10-Q for the quarter ended March 31, 2011 furnished in XBRL). The financial information contained in the XBRL-related documents is “unaudited” and “unreviewed” and, in accordance with Rule 406T of Regulation S-T, is not deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under these sections.

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Signatures
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  Arch Coal, Inc.
 
 
  By:   /s/ John T. Drexler    
    John T. Drexler   
    Senior Vice President and Chief Financial Officer 

May 4, 2011
 

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