UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

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

For the transition period from to .

Commission file number: 1-13105

Arch Coal, Inc.

(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 x 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 x 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 x		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 x

At July 31, 2012 there were 212,268,960 shares of the registrant’s common stock outstanding.

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Part I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Arch Coal, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
				(Unaudited)

Revenues	$	1,063,538		$	985,528		$	2,103,189		$	1,858,466

Costs, expenses and other
Cost of sales	881,259			715,590			1,732,130			1,369,274
Depreciation, depletion and amortization	132,868			97,236			272,834			180,773
Amortization of acquired sales contracts, net	(4,451		)	1,262			(18,468		)	7,206
Mine closure and asset impairment costs	525,762			—			525,762			—
Goodwill impairment	115,791			—			115,791			—
Selling, general and administrative expenses	35,178			29,040			66,039			59,474
Change in fair value of coal derivatives and coal trading activities, net	(32,054		)	2,672			(35,667		)	888
Acquisition and transition costs related to ICG	—			48,666			—			48,666
Other operating income, net	(1,831		)	(4,292		)	(20,329		)	(5,407		)
	1,652,522			890,174			2,638,092			1,660,874

Income (loss) from operations	(588,984		)	95,354			(534,903		)	197,592
Interest expense, net:
Interest expense	(78,728		)	(42,249		)	(153,500		)	(76,829		)
Interest income	1,088			755			2,109			1,501
	(77,640		)	(41,494		)	(151,391		)	(75,328		)
Other nonoperating expense
Bridge financing costs related to ICG	—			(49,490		)	—			(49,490		)
Net loss resulting from early retirement and refinancing of debt	(19,042		)	(250		)	(19,042		)	(250		)
	(19,042		)	(49,740		)	(19,042		)	(49,740		)
Income (loss) before income taxes	(685,666		)	4,120			(705,336		)	72,524
Provision for (benefit from) income taxes	(250,242		)	(2,510		)	(271,321		)	10,020
Net income (loss)	(435,424		)	6,630			(434,015		)	62,504
Less: Net income attributable to noncontrolling interest	(65		)	(318		)	(268		)	(591		)
Net income (loss) attributable to Arch Coal, Inc.	$	(435,489	)	$	6,312		$	(434,283	)	$	61,913

Earnings per common share
Basic earnings (loss) per common share	$	(2.05	)	$	0.04		$	(2.05	)	$	0.37
Diluted earnings (loss) per common share	$	(2.05	)	$	0.04		$	(2.05	)	$	0.37
Weighted average shares outstanding
Basic	212,048			174,244			211,868			168,442
Diluted	212,048			175,272			211,868			169,554

Dividends declared per common share	$	0.03		$	0.11		$	0.14		$	0.21

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 Comprehensive Income

(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
				(unaudited)

Net income (loss)	$	(435,424	)	$	6,630		$	(434,015	)	$	62,504
Other comprehensive income (loss), net of income taxes:
Pension, postretirement and other post-employment benefits	(3,584		)	293			(3,121		)	866
Unrealized gains (losses) on available-for-sale securities	62			(1,434		)	314			(687		)
Unrealized gains and losses on derivatives, net of reclassifications into net income:
Unrealized gains (losses) on derivatives	991			(3,127		)	2,751			6,374
Reclassifications of (gains) losses into net income	(518		)	(4,360		)	4,307			(6,484		)
Total other comprehensive income (loss)	(3,049		)	(8,628		)	4,251			69
Total comprehensive income (loss)	$	(438,473	)	$	(1,998	)	$	(429,764	)	$	62,573

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)

	June 30,			December 31,
	2012			2011
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	512,527		$	138,149
Restricted cash	5,740			10,322
Trade accounts receivable	327,402			380,595
Other receivables	70,103			88,584
Inventories	455,091			377,490
Prepaid royalties	11,214			21,944
Deferred income taxes	65,531			42,051
Coal derivative assets	53,351			13,335
Other	67,568			110,304
Total current assets	1,568,527			1,182,774

Property, plant and equipment, net	7,397,131			7,949,150

Other assets
Prepaid royalties	89,441			86,626
Goodwill	480,312			596,103
Equity investments	235,299			225,605
Other	183,228			173,701
Total other assets	988,280			1,082,035
Total assets	$	9,953,938		$	10,213,959

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	316,669		$	383,782
Coal derivative liabilities	7,090			7,828
Accrued expenses and other current liabilities	360,793			348,207
Current maturities of debt and short-term borrowings	111,260			280,851
Total current liabilities	795,812			1,020,668
Long-term debt	4,464,351			3,762,297
Asset retirement obligations	424,289			446,784
Accrued pension benefits	49,040			48,244
Accrued postretirement benefits other than pension	42,028			42,309
Accrued workers’ compensation	82,372			71,948
Deferred income taxes	730,495			976,753
Other noncurrent liabilities	223,131			255,382
Total liabilities	6,811,518			6,624,385

Redeemable noncontrolling interest	17,500			11,534

Stockholders’ Equity
Common stock, $0.01 par value, authorized 260,000 shares, issued 213,768 and 213,183 shares at June 30, 2012 and December 31, 2011, respectively	2,138			2,136
Paid-in capital	3,022,014			3,015,349
Treasury stock, at cost	(53,848		)	(53,848		)
Retained earnings	158,374			622,353
Accumulated other comprehensive loss	(3,758		)	(7,950		)
Total stockholders’ equity	3,124,920			3,578,040
Total liabilities and stockholders’ equity	$	9,953,938		$	10,213,959

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)

	Six Months Ended June 30,
	2012			2011
	(Unaudited)
Operating activities
Net income (loss)	$	(434,015	)	$	62,504
Adjustments to reconcile to cash provided by operating activities:
Depreciation, depletion and amortization	272,834			180,773
Amortization of acquired sales contracts, net	(18,468		)	7,206
Bridge financing costs related to ICG	—			49,490
Net loss resulting from early retirement of debt and refinancing activities	19,042			250
Noncash mine closure and asset impairment costs	501,942			7,316
Goodwill impairment	115,791			—
Prepaid royalties expensed	16,551			19,491
Employee stock-based compensation expense	7,014			7,071
Amortization relating to financing activities	8,948			5,093
Changes in:
Receivables	52,291			(25,329		)
Inventories	(80,199		)	(31,476		)
Coal derivative assets and liabilities	(37,985		)	4,902
Accounts payable, accrued expenses and other current liabilities	(64,965		)	8,912
Income taxes, net	22,869			(15,186		)
Deferred income taxes	(272,094		)	18,177
Other	(14,248		)	15,006

Cash provided by operating activities	95,308			314,200

Investing activities
Acquisition of ICG, net of cash acquired	—			(2,910,380		)
Change in restricted cash	4,582			(74,814		)
Capital expenditures	(202,073		)	(107,725		)
Proceeds from dispositions of property, plant and equipment	22,551			1,411
Purchases of investments and advances to affiliates	(9,292		)	(38,059		)
Additions to prepaid royalties	(8,634		)	(25,212		)

Cash used in investing activities	(192,866		)	(3,154,779		)

Financing activities
Proceeds from the issuance of senior notes	—			2,000,000
Proceeds from term note	1,386,000			—
Proceeds from the issuance of common stock, net	—			1,249,407
Payments to retire debt	(452,654		)	(307,984		)
Change in restricted cash	—			(260,663		)
Net increase (decrease) in borrowings under lines of credit and commercial paper program	(391,300		)	303,096
Net payments on other debt	(11,164		)	(8,845		)
Debt financing costs	(34,381		)	(112,334		)
Dividends paid	(29,696		)	(34,192		)
Issuance of common stock under incentive plans	5,131			846

Cash provided by financing activities	471,936			2,829,331

Increase (decrease) in cash and cash equivalents	374,378			(11,248		)
Cash and cash equivalents, beginning of period	138,149			93,593

Cash and cash equivalents, end of period	$	512,527		$	82,345

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. On June 15, 2011, the Company acquired International Coal Group, Inc. (“ICG”). The Company currently operates 18 mining complexes in West Virginia, Kentucky, Maryland, Virginia, Illinois, 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 and six month periods ended June 30, 2012 are not necessarily indicative of results to be expected for the year ending December 31, 2012. 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, 2011 included in the Company’s Annual Report on Form 10-K/A filed with the U.S. Securities and Exchange Commission.

The Company owned a 99% membership interest and acted as the managing member in Arch Western Resources, LLC (“Arch Western”) a joint venture with Delta Housing, Inc., a subsidiary of BP p.l.c, Arch Western operates coal mines in Wyoming, Colorado and Utah. On April 9, 2012, Delta Housing, Inc. exercised their contractual right to require us to purchase their membership interests in Arch Western. The negotiated purchase amount of $17.5 million was paid on July 2, 2012.

2. Accounting Policies

There is no new accounting guidance that is expected to have a significant impact on the Company’s financial statements.

3. Debt

	June 30,		December 31,
	2012		2011
	(In thousands)
Indebtedness to banks under credit facilities	90,000		481,300
Term loan ($1.4 billion face value) due 2018	1,386,292		—
6.75% senior notes ($450.0 million face value) due 2013	—		450,971
8.75% senior notes ($600.0 million face value) due 2016	589,963		588,974
7.00% senior notes due in 2019 at par	1,000,000		1,000,000
7.25% senior notes due 2020 at par	500,000		500,000
7.25% senior notes due 2021 at par	1,000,000		1,000,000
Other	9,356		21,903
	4,575,611		4,043,148
Less current maturities of debt and short-term borrowings	111,260		280,851
Long-term debt	$	4,464,351	$	3,762,297

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

On May 16, 2012, the Company entered into an amendment to its senior secured revolving credit facility that amended certain financial maintenance covenants, suspending the Company’s compliance with the debt-to-EBITDA ratio, easing other financial covenants through September 2014 and adding defined minimum EBITDA targets. The maximum borrowing capacity of the revolving credit facility was reduced from $2 billion to $600 million. In conjunction with the amendment, the Company borrowed $1.4 billion under a six-year secured term loan facility, issued at a 1% discount. The term loan contains no financial maintenance covenants, is prepayable and is secured by the same assets as borrowings under the revolving credit facility. Quarterly principal payments of $3.5 million are due beginning in September 2012, plus interest at a rate of the greater of Libor or 1.25%, plus 450 basis points. The

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proceeds of the term loan were used to retire all outstanding borrowings under the revolving credit facility and the outstanding $450.0 million principal amount of 6 ¾% Senior Notes due 2013 issued by Arch Western Finance, LLC (“Arch Western Finance”), the Company’s indirect subsidiary.

On May 16, 2012, Arch Western Finance accepted for purchase an aggregate of approximately $304.0 million principal amount of its 6 ¾% Senior Notes due 2013 in an initial settlement pursuant to the terms of its tender offer and consent solicitation, which commenced on May 1, 2012, and called for redemption all of the remaining notes outstanding after the completion of the tender offer. The consideration for each $1,000 of principal purchased under the tender offer and consent solicitation was $1,002.50, for a total purchase consideration of $304.8 million. On May 30, 2012, the remaining notes with an outstanding principal amount of $146.0 million were redeemed at par value.

The Company incurred financing costs of $27.4 million in conjunction with the term loan, which have been deferred on the balance sheet. The Company wrote off $17.3 million of the $24.8 million of financing costs that had previously been deferred relating to the reduction in capacity of the senior secured revolving credit facility and $1.1 million related to the redemption of the 6 ¾% Senior Notes due 2013, offset by the $0.8 million of unamortized issue premium on the notes. The write-off of deferred financing fees, along with other transaction fees associated with these transactions is reflected in “Loss on extinguishment and refinancing of debt” in the condensed consolidated statements of operations.

At June 30, 2012, cash on hand was $512.5 million and availability was $345.0 million under our lines of credit.

4. Mine Closure and Asset Impairment Costs

An extreme downturn in demand for thermal coal resulted in the Company announcing on June 21, 2012 the closing of four mining complexes and the temporary idling of a fifth complex, all acquired with ICG, as well as cutbacks in production at other Appalachia mines. These actions resulted in a total workforce reduction of approximately 750 positions. The operations had ceased production prior to June 30, 2012, and will incur minimal ongoing annual maintenance costs customary with idling operations. The terms of customer contracts will be fulfilled by other operations.

The following costs are reflected in the line “Mine closure and asset impairment costs” on the condensed consolidated statements of operations for the three and six months ended June 30, 2012:

Parts and supplies inventory writedown	$	2,598
Impairment of property, plant and equipment	95,641
Impairment of coal properties and deferred development costs	403,279
Royalty obligations	11,546
Employee termination benefits	12,274
Pension, postretirement and occupational disease curtailment charge, net (see notes 11 and 12)	424
	$	525,762

The fair value of the closed or idled operations’ property, plant and equipment of approximately $51 million was based on the analysis of the marketability of thermal coal properties in the current market environment and our ability to redeploy equipment to other facilities.

The majority of the employee termination benefits will be paid in the third quarter of 2012. The royalty obligations represent minimum payments on various leases and will be paid over the remaining term of the leases, through 2016.

The announcement of the closures triggered an actuarial curtailment under the Company’s sponsored pension, post-retirement medical and black lung benefit programs. Certain employees were informed that they would be terminated effective August 21, 2012, which will trigger the recognition of the remaining pension plan curtailment impact in the third quarter of 2012, a curtailment benefit of $2.2 million.

5. Goodwill

A significant drop in the Company’s stock price during the second quarter of 2012, combined with continuing weak demand for thermal coal during the quarter and the Company’s resulting production cuts, indicated that the fair value of the Company’s goodwill could be less than its carrying value. Accordingly, the Company has performed the first step of the two-step goodwill impairment test as of June 30, 2012. The fair values of the reporting units are determined using a discounted cash flow (“DCF”) technique. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate and projections of sales volumes, selling prices and costs to produce.

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The value of the Company’s Black Thunder reporting unit in the Powder River Basin, where $115.8 million of goodwill had been allocated, is sensitive to thermal market demand. The further weakening in thermal coal markets in the second quarter significantly impacted the projected demand for and pricing of coal produced at Black Thunder. In step one of the goodwill impairment testing, the fair value of the Black Thunder reporting unit did not exceed its carrying value, primarily due to the impact of lower demand on near term sales volumes and pricing. The second step of the test requires that we determine the fair value of Black Thunder’s goodwill. This will involve determining the value of Black Thunder’s assets and liabilities. Based on initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book values, we recorded a preliminary write-off of the entire $115.8 million of goodwill allocated to the Black Thunder reporting unit during the second quarter of 2012.

The goodwill amounts allocated to certain reporting units in the Company’s Appalachia segment are particularly sensitive to volatility in the demand for metallurgical coal. Should metallurgical coal markets weaken, affecting the volumes and pricing of metallurgical coal from the Company’s operations, it could cause the fair value of the reporting units to be less than their carrying value, requiring us to perform step 2 of the test for impairment.

6. Equity Investments and Membership Interests in Joint Ventures

The Company accounts for its investments and membership interests in joint ventures under the equity method of accounting if the Company has the ability to exercise significant influence, but not control, over the entity. Below are the equity method investments reflected in the condensed consolidated balance sheets:

	Knight Hawk			DKRW			Dominion			Tenaska		Millennium			Tongue
	Holdings,			Advanced			Terminal			Trailblazer		Bulk			River
In thousands	LLC			Fuels, LLC			Associates			Partners, LLC		Terminals, LLC			Railroad, LLC		Total

Balance at December 31, 2011	$	135,225		$	19,715		$	16,086		$	15,266	$	26,324		$	12,989	$	225,605
Investments in affiliates	—			—			—			—		—			—		—
Advances to (distributions from) affiliates, net	(1,801		)	—			2,150			—		4,842			675		5,866
Equity in comprehensive income (loss)	9,641			(1,551		)	(2,374		)	—		(1,888		)	—		3,828

Balance at June 30, 2012	$	143,065		$	18,164		$	15,862		$	15,266	$	29,278		$	13,664	$	235,299

Notes receivable from investees:
Balance at December 31, 2011	$	—		$	30,751		$	—		$	5,059	$	—		$	—	$	35,810
Balance at June 30, 2012	$	—		$	34,817		$	—		$	5,047	$	—		$	—	$	39,864

The Company may be required to make future contingent payments of up to $73.0 million related to development financing for certain of its equity investees. The Company’s 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 construction financing.

7. Derivatives

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 anticipates purchasing approximately 73 to 78 million gallons of diesel fuel for use in its operations during 2012. To protect the Company’s cash flows from increases 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 June 30, 2012, the Company had protected the price of approximately 80% of its expected purchases for the remainder of fiscal year 2012 and 50% of its 2013 purchases. At June 30, 2012, the Company had purchased heating oil call options for approximately 71 million gallons for the purpose of managing the price risk associated with future diesel purchases.

During the first quarter of 2012, the Company determined the effectiveness of the heating oil options could not be established as of December 31, 2011 and on an ongoing basis. As a result, the amount remaining in accumulated other comprehensive income of $8.2 million, or $5.2 net of income taxes, was recorded in earnings, in the “other income, net” line on the condensed consolidated statement of income.

The Company also purchased heating oil call options to hedge the fuel surcharges on its barge and rail shipments that cover increases in diesel fuel prices. These positions reduce the Company’s risk of cash flow fluctuations related to these surcharges but the

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positions are not accounted for as hedges. At June 30, 2012, the Company held purchased call options for approximately 18.0 million gallons for the purpose of managing the fluctuations in cash flows associated with fuel surcharges on future shipments.

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 June 30, 2012, the Company held derivatives for risk management purposes that are expected to settle in the following years :

(Tons in thousands)	2012	2013	2014	2015
Coal sales	3,821	3,517	3,240	720
Coal purchases	1,168	420	720	—

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 estimated future realization of the value of the trading portfolio is $0.6 million of gains in the remainder of 2012 and $2.1 million of losses 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 consolidated balance sheets. The amounts shown in the table below represent the fair value position of individual contracts, and not 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:

	June 30, 2012								December 31, 2011
Fair Value of Derivatives	Asset			Liability					Asset			Liability
(In thousands)	Derivative			Derivative					Derivative			Derivative
Derivatives Designated as Hedging Instruments
Heating oil — diesel purchases	$	—		$	—				$	8,997		$	—
Coal	5,156			(1,284		)			1,109			—
Total	5,156			(1,284		)			10,106			—
Derivatives Not Designated as Hedging Instruments
Heating oil — diesel purchases	5,534			—					—			—
Heating oil — fuel surcharges	1,310			—					1,797			—
Coal — held for trading purposes	37,492			(38,921		)			15,505			(19,927		)
Coal — risk management	56,125			(12,307		)			14,855			(6,035		)
Total	100,461			(51,228		)			32,157			(25,962		)
Total derivatives	105,617			(52,512		)			42,263			(25,962		)
Effect of counterparty netting	(45,422		)	45,422					(18,134		)	18,134
Net derivatives as classified in the balance sheets	$	60,195		$	(7,090	)	$	53,105	$	24,129		$	(7,828	)	$	16,301

		June 30,			December 31,
		2012			2011
Net derivatives as reflected on the balance sheets
Heating oil	Other current assets	$	6,844		$	10,794
Coal	Coal derivative assets	53,351			13,335
	Coal derivative liabilities	(7,090		)	(7,828		)
		$	53,105		$	16,301

The Company had a current liability for the obligation to post cash collateral of $25.2 million at June 30, 2012 and a current asset for the right to reclaim cash collateral of $12.4 million at December 31, 2011. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities” and “other current assets”, respectively, in the accompanying condensed consolidated balance sheets.

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The effects of derivatives on measures of financial performance are as follows for the three month periods ended June 30:

Derivatives used in Cash Flow Hedging Relationships (in thousands)

							Gains (Losses) Reclassified
	Gain (Loss) Recognized in OCI						from OCI into Income
	(Effective Portion)						(Effective Portion)
	2012			2011			2012		2011
Heating oil — diesel purchases	$	—		$	(6,337	)	$	—	$	6,654	(2)
Coal sales	2,231			1,344			809		237		(1)
Coal purchases	(742		)	97			—		—		(2)
Totals	$	1,489		$	(4,896	)	$	809	$	6,891

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended June 30, 2012 and 2011.

Derivatives Not Designated as Hedging Instruments (in thousands)

	Gain (Loss) Recognized
	2012			2011
Coal — unrealized	$	27,446		$	(374	)(3)
Coal — realized	8,671			147		(4)
Heating oil — diesel purchases	(22,509		)	—		(4)
Heating oil — fuel surcharges	$	(2,599	)	$	—	(4)

Location in Statement of Income:

(1) — Revenues

(2) — Cost of sales

(3) — Change in fair value of coal derivatives and coal trading activities, net

(4) — Other operating income, net

The effects of derivatives on measures of financial performance are as follows for the six month periods ended June 30:

Derivatives used in Cash Flow Hedging Relationships (in thousands)

							Gains (Losses) Reclassified from
	Gain (Loss) Recognized in OCI						OCI into Income
	(Effective Portion)						(Effective Portion)
	2012			2011			2012		2011
Heating oil — diesel purchases	$	—		$	7,921		$	—	$	9,824	(2)
Coal sales	4,724			2,750			1,010		324		(1)
Coal purchases	(944		)	(779		)	—		—		(2)
Totals	$	3,780		$	9,892		$	1,010	$	10,148

Derivatives Not Designated as Hedging Instruments (in thousands)

	Gain (Loss) Recognized
	2012			2011
Coal — unrealized	$	34,998		$	(1,419	)(3)
Coal — realized	11,829			147		(4)
Heating oil — diesel purchases	(22,086		)	—		(4)
Heating oil — fuel surcharges	$	(2,232	)	$	—	(4)

Location in Statement of Income:

(1) — Revenues

(2) — Cost of 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 4.6 million and $2.3 million during the three months ended June 30, 2012 and 2011, respectively, related to its trading portfolio. The Company recognized net unrealized and realized gains of $0.7 million $0.5 million during the six months ended June 30, 2012 and 2011, respectively, related to its trading portfolio, which are included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying condensed consolidated

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statements of operations, and are not included in the previous tables reflecting the effects of derivatives on measures of financial performance.

Based on fair values at June 30, 2012, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $4.0 million are expected to be reclassified from other comprehensive income into earnings during the next twelve months.

8. Inventories

Inventories consist of the following:

	June 30,		December 31,
	2012		2011
	(In thousands)
Coal	$	267,600	$	206,517
Repair parts and supplies	178,626		163,527
Work-in-process	8,865		7,446
	$	455,091	$	377,490

The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $11.3 million at June 30, 2012, and $13.1 million at December 31, 2011.

9. 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 (coal and heating oil) valued using modeling techniques, such as Black-Scholes, that require the use of inputs, particularly volatility, that are rarely observable. Changes in the unobservable inputs would not have a significant impact on the reported Level 3 fair values at June 30, 2012.

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 June 30, 2012
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Investments in equity securities	$	8,035	$	8,035	$	—	$	—
Derivatives	60,195		51,701		1,650		6,844
Total assets	$	68,230	$	59,736	$	1,650	$	6,844
Liabilities:
Derivatives	$	7,090	$	—	$	5,355	$	1,735

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

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

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	Three Months Ended			Six Months Ended
	June 30, 2012			June 30, 2012

Balance, beginning of period	$	13,241		6,211
Realized and unrealized losses recognized in earnings, net	(14,092		)	(11,596	)
Realized and unrealized losses recognized in other comprehensive income, net	—			—
Purchases	6,468			11,729
Issuances	—			—
Settlements	(508		)	(1,235	)

Ending balance	$	5,109		5,109

Net unrealized losses during the three and six month periods ended June 30, 2012 related to level 3 financial instruments held on June 30, 2012 were $12.4 million and $9.6 million, respectively.

Fair Value of Long-Term Debt

At both June 30, 2012 and December 31, 2011, the fair value of the Company’s debt, including amounts classified as current, was $4.2 billion. Fair values are based upon observed prices in an active market when available or from valuation models using market information.

10. Stock-Based Compensation and Other Incentive Plans

During the six months ended June 30, 2012, the Company granted options to purchase approximately1.3 million shares of common stock with a weighted average exercise price of $13.46 per share and a weighted average grant-date fair value of $5.31 per share. The options’ fair value was determined using the Black-Scholes option pricing model, using a weighted average risk-free rate of .759%, a weighted average dividend yield of 2.95% and a weighted average volatility of 60.48%. The options’ expected life is 4.5 years and the options vest ratably over three years, and 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 has a long-term incentive program that allows for the award of performance units. 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 accrued and unpaid for all grants under the plan totaled $8.6 million and $9.6 million as of June 30, 2012 and December 31, 2011, respectively.

11. Workers’ Compensation Expense

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(In thousands)
Service cost	$	71		$	246		$	1,039		$	439
Interest cost	399			304			1,079			558
Net amortization	(851		)	(160		)	(574		)	(261		)
Curtailments	1,933			—			1,933			—
Total occupational disease	1,552			390			3,477			736
Traumatic injury claims and assessments	6,423			3,324			11,599			5,649
Total workers’ compensation expense	$	7,975		$	3,714		$	15,076		$	6,385

12. Employee Benefit Plans

The following table details the components of pension benefit costs:

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	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(In thousands)
Service cost	$	7,310		$	3,926		$	14,906		$	8,245
Interest cost	4,092			3,996			8,072			8,127
Curtailments	324			—			324			—
Expected return on plan assets	(5,477		)	(5,438		)	(11,015		)	(10,906		)
Amortization of prior service cost (credit)	(37		)	(142		)	(73		)	(95		)
Amortization of other actuarial losses	4,200			2,234			7,771			4,374
Net benefit cost	$	10,412		$	4,576		$	19,985		$	9,745

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(In thousands)
Service cost	$	539		$	518		$	1,088		$	923
Interest cost	520			529			1,011			1,027
Curtailments	(1,837		)	—			(1,837		)	—
Amortization of prior service credits	(2,876		)	(546		)	(5,871		)	(1,137		)
Amortization of other actuarial gains	(171		)	(952		)	(261		)	(1,550		)
Net benefit cost (credit)	$	(3,825	)	$	(450	)	$	(5,870	)	$	(737	)

13. Earnings per Common Share

The following table provides the basis for earnings per share calculations by reconciling basic and diluted weighted average shares outstanding:

	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
	(In thousands)
Weighted average shares outstanding:
Basic weighted average shares outstanding	212,048	174,244	211,868	168,442
Effect of common stock equivalents under incentive plans	—	1,028	—	1,112
Diluted weighted average shares outstanding	212,048	175,272	211,868	169,554

The weighted effect of restricted stock, restricted stock units and options for 5.3 million and 1.1 million shares of common stock for the three month periods ended June 30, 2012 and 2011, respectively, and 4.5 million and 1.7 million shares for the six month periods ending June 30, 2012 and 2011, respectively, were excluded from the calculation of diluted weighted average shares outstanding because the effect would have been antidilutive. An additional weighted effect of 40,000 and 130,000 shares for the three and six month periods ending June 30, 2012, respectively, were excluded from the calculation of diluted weighted average shares outstanding because the Company incurred a loss for those periods.

14. Guarantees

The Company has agreed to continue to provide surety bonds and letters of credit for obligations, primarily reclamation, of Magnum Coal Company (“Magnum”) related to the properties the Company sold to Magnum on December 31, 2005. Patriot Coal Corporation (“Patriot Coal”) acquired Magnum in July 2008. The surety bonding amounts are mandated by the state and are not directly related to the estimated cost to reclaim the properties. At June 30, 2012, the Company had $35.3 million of surety bonds remaining related to properties sold to Magnum, however Patriot Coal has posted letters of credit of $16.7 million in the Company’s favor.

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Magnum would have acquired a contract to supply coal through 2017 to a customer that had not consented to the contract’s assignment from the Company to Magnum. The Company has committed to purchase coal from Magnum to supply to the customer at the same price the customer is charged for the sale. Under the coal supply contract, as amended, Magnum has the ability to buy out of its monthly obligations under the contract at prices that are predetermined for the remainder of the agreement. Additionally, a predecessor of the Company entered into a guarantee for the delivery of coal under a contract assigned to Magnum. If Magnum is unable to supply the coal for these coal sales contracts or pay the buy out amount if elected, and if the guarantee is enforceable, then the Company may be required to fulfill Magnum’s delivery or payment obligations. The maximum financial impact to the Company if required to fulfill Magnum’s obligations over the term of these contracts would be approximately $70.0 million as of June 30, 2012.

On July 9, 2012 Patriot Coal filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code, in order to undertake a comprehensive financial restructuring. Patriot has the expectation of continuing to serve customers, after receiving a commitment of debtor-in-possession financing. At this time, the Company does not believe that it is probable that it would have to purchase replacement coal, and, accordingly, no losses have been recorded in the consolidated financial statements as of June 30, 2012.

15. Contingencies

Allegheny Energy Supply (“Allegheny”), the sole customer of coal produced at the Company’s subsidiary Wolf Run Mining Company’s (“Wolf Run”) Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter Ridge Holdings, Inc. (“Hunter Ridge”), and ICG in state court in Allegheny County, Pennsylvania on December 28, 2006, and amended its complaint on April 23, 2007. Allegheny claimed that Wolf Run breached a coal supply contract when it declared force majeure under the contract upon idling the Sycamore No. 2 mine in the third quarter of 2006, and that Wolf Run continued to breach the contract by failing to ship in volumes referenced in the contract. The Sycamore No. 2 mine was idled after encountering adverse geologic conditions and abandoned gas wells that were previously unidentified and unmapped. After extensive searching for gas wells and rehabilitation of the mine, it was re-opened in 2007, but with notice to Allegheny that it would necessarily operate at reduced volumes in order to safely and effectively avoid the many gas wells within the reserve. The amended complaint also alleged that the production stoppages constitute a breach of the guarantee agreement by Hunter Ridge and breach of certain representations made upon entering into the contract in early 2005. Allegheny voluntarily dropped the breach of representation claims later. Allegheny claimed that it would incur costs in excess of $100 million to purchase replacement coal over the life of the contract. ICG, Wolf Run and Hunter Ridge answered the amended complaint on August 13, 2007, disputing all of the remaining claims.

On November 3, 2008, ICG, Wolf Run and Hunter Ridge filed an amended answer and counterclaim against the plaintiffs seeking to void the coal supply agreement due to, among other things, fraudulent inducement and conspiracy. On September 23, 2009, Allegheny filed a second amended complaint alleging several alternative theories of liability in its effort to extend contractual liability to ICG, which was not a party to the original contract and did not exist at the time Wolf Run and Allegheny entered into the contract. No new substantive claims were asserted. ICG answered the second amended complaint on October 13, 2009, denying all of the new claims. ICG’s counterclaim was dismissed on motion for summary judgment entered on May 11, 2010. Allegheny’s claims against ICG were also dismissed by summary judgment, but the claims against Wolf Run and Hunter Ridge were not. The court conducted a non-jury trial of this matter beginning on January 10, 2011 and concluding on February 1, 2011. At the trial, Allegheny presented its evidence for breach of contract and claimed that it is entitled to past and future damages in the aggregate of between $228.0 million and $377.0 million. Wolf Run and Hunter Ridge presented their defense of the claims, including evidence with respect to the existence of force majeure conditions and excuse under the contract and applicable law. Wolf Run and Hunter Ridge presented evidence that Allegheny’s damages calculations were significantly inflated because it did not seek to determine damages as of the time of the breach and in some instances artificially assumed future non-delivery or did not take into account the apparent requirement to supply coal in the future. On May 2, 2011, the trial court entered a Memorandum and Verdict determining that Wolf Run had breached the coal supply contract and that the performance shortfall was not excused by force majeure. ICG and Allegheny filed post-verdict motions in the trial court and on August 23, 2011, the court denied the parties’ motions. The court entered a final judgment on August 25, 2011, in the amount of $104.1 million, which included pre-judgment interest. The parties appealed the lower court’s decision to the Superior Court of Pennsylvania. Wolf Run and Hunter Ridge have filed an appeal bond in the amount of $124.9 million. Briefing is complete and oral argument was held on May 16, 2012. The matter is pending a decision by the Court.

As of June 30, 2012 and December 31, 2011, the Company had accrued $111.4 million and $108.3 million, respectively, for this lawsuit, including interest. The ultimate resolution of this matter could result in an outcome which may be materially different than what the Company has accrued.

In addition, 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, other than as noted above, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

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									Other			Corporate,
									Operating			Other and
	PRB			APP			WBIT		Segments			Eliminations			Consolidated
	(in thousands)
Three months ended June 30, 2012
Revenues	$	322,512		$	504,309		$	199,552	$	37,165		$	—		$	1,063,538
Income (loss) from operations	22,747			(493,093		)	13,779		1,291			(133,708		)	(588,984		)
Depreciation, depletion and amortization	37,131			73,176			18,454		3,423			684			132,868
Amortization of acquired sales contracts, net	31			(4,859		)	—		377			—			(4,451		)
Mine closure and asset impairment costs	—			525,916			179		(227		)	(106		)	525,762
Capital expenditures	5,793			78,102			14,114		(1,131		)	11,924			108,802

Three months ended June 30, 2011
Revenues	$	391,413		$	400,795		$	189,154	$	4,169		$	(3	)	$	985,528
Income from operations	35,615			87,961			43,673		113			(72,008		)	95,354
Depreciation, depletion and amortization	41,165			33,091			22,099		536			345			97,236
Amortization of acquired sales contracts, net	5,603			(4,206		)	—		(135		)	—			1,262
Capital expenditures	15,647			29,288			10,115		4,373			9,591			69,014

Six months ended June 30, 2012
Revenues	$	723,689		$	973,367		$	344,111	$	62,022		$	—		$	2,103,189
Income (loss) from operations	55,290			(477,258		)	45,020		(2,459		)	(155,496		)	(534,903		)
Depreciation, depletion and amortization	78,354			149,193			37,054		7,110			1,123			272,834
Amortization of acquired sales contracts, net	(785		)	(17,947		)	—		264			—			(18,468		)
Mine closure and asset impairment costs	—			525,916			179		(227		)	(106		)	525,762
Total assets	2,044,743			3,870,734			715,362		580,272			2,742,827			9,953,938
Capital expenditures	9,779			144,405			29,251		4,513			14,125			202,073

Six months ended June 30, 2011
Revenues	$	784,526		$	725,181		$	344,593	$	4,166		$	—		$	1,858,466
Income from operations	82,489			142,356			70,564		705			(98,522		)	197,592
Depreciation, depletion and amortization	82,856			54,107			42,628		357			825			180,773
Amortization of acquired sales contracts, net	11,547			(4,206		)	—		(135		)	—			7,206
Total assets	2,231,636			4,694,368			674,765		562,291			2,093,488			10,256,548
Capital expenditures	18,485			46,590			21,892		4,373			16,385			107,725

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A reconciliation of segment income from operations to consolidated income before income taxes follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(in thousands)
Income (loss) from operations	$	(588,984	)	$	95,354		$	(534,903	)	$	197,592
Interest expense	(78,728		)	(42,249		)	(153,500		)	(76,829		)
Interest income	1,088			755			2,109			1,501
Other nonoperating expenses	(19,042		)	(49,740		)	(19,042		)	(49,740		)
Income (loss) before income taxes	$	(685,666	)	$	4,120		$	(705,336	)	$	72,524

17. Supplemental Condensed Consolidating Financial Information

Pursuant to the indentures governing Arch Coal, Inc.’s senior notes, certain wholly-owned subsidiaries of the Company have fully and unconditionally guaranteed the senior notes on a joint and several basis. The following tables present condensed consolidating financial information for (i) the Company, (ii) the issuer of the senior notes, (iii) the guarantors under the senior notes, and (iv) the entities which are not guarantors under the senior notes (Arch Western Resources, LLC and its subsidiaries, Arch Receivable Company, LLC and the Company’s subsidiaries outside the U.S.):

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Condensed Consolidating Statements of Operations

Three Months Ended June 30, 2012

				Guarantor			Non- Guarantor
	Parent/Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Revenues	$	—		$	558,400		$	505,138		$	—		$	1,063,538

Costs, expenses and other
Cost of sales	2,288			458,214			442,387			(21,630		)	881,259
Depreciation, depletion and amortization	1,345			93,254			38,270			(1		)	132,868
Amortization of acquired sales contracts, net	—			(4,482		)	31			—			(4,451		)
Mine closure and asset impairment costs	—			525,690			72			—			525,762
Goodwill impairment	—			115,791			—			—			115,791
Selling, general and administrative expenses	21,774			2,700			12,392			(1,688		)	35,178
Change in fair value of coal derivatives and coal trading activities, net	—			(32,054		)	—			—			(32,054		)
Other operating (income) expense, net	6,472			(35,930		)	4,308			23,319			(1,831		)

	31,879			1,123,183			497,460			—			1,652,522

Income from investment in subsidiaries	(553,007		)	—			—			553,007			—

Income (loss) from operations	(584,886		)	(564,783		)	7,678			553,007			(588,984		)
Interest expense, net:
Interest expense	(89,740		)	(1,198		)	(8,809		)	21,019			(78,728		)
Interest income	6,309			159			15,639			(21,019		)	1,088
	(83,431		)	(1,039		)	6,830			—			(77,640		)

Other non-operating expense
Bridge financing costs related to ICG	—			—			—			—			—
Net loss resulting from early retirement of ICG debt	(17,349		)	—			(1,693		)	—			(19,042		)
	(17,349		)	—			(1,693		)	—			(19,042		)

Income (loss) before income taxes	(685,666		)	(565,822		)	12,815			553,007			(685,666		)
Benefit from income taxes	(250,242		)	—			—			—			(250,242		)

Net income (loss)	(435,424		)	(565,822		)	12,815			553,007			(435,424		)
Less: Net income attributable to noncontrolling interest	(65		)	—			—			—			(65		)

Net income (loss) attributable to Arch Coal, Inc.	$	(435,489	)	$	(565,822	)	$

		Page
Part I FINANCIAL INFORMATION		3
	Item 1. Financial Statements	3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	36
	Item 4. Controls and Procedures	38
Part II OTHER INFORMATION		38
	Item 1. Legal Proceedings	38
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
	Item 4. Mine Safety Disclosures	41
	Item 6. Exhibits	42