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 March 31, 2014

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 April 30, 2014 there were 212,279,999 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 March 31,
	2014			2013
	(Unaudited)
Revenues	$	735,971		$	737,370
Costs, expenses and other operating
Cost of sales (exclusive of items shown separately below)	686,314			649,743
Depreciation, depletion and amortization	104,423			110,193
Amortization of acquired sales contracts, net	(3,696		)	(2,810		)
Change in fair value of coal derivatives and coal trading activities, net	914			1,308
Selling, general and administrative expenses	29,136			33,209
Other operating income, net	(7,998		)	(2,842		)
	809,093			788,801

Loss from operations	(73,122		)	(51,431		)
Interest expense, net
Interest expense	(96,471		)	(95,074		)
Interest and investment income	1,843			2,836
	(94,628		)	(92,238		)

Loss from continuing operations before income taxes	(167,750		)	(143,669		)
Benefit from income taxes	(43,611		)	(59,353		)
Loss from continuing operations	(124,139		)	(84,316		)
Income from discontinued operations, net of tax	—			14,267
Net loss	$	(124,139	)	$	(70,049	)

Loss from continuing operations
Basic and diluted loss per common share	$	(0.59	)	$	(0.40	)

Net loss
Basic and diluted loss per common share	$	(0.59	)	$	(0.33	)

Basic and diluted weighted average shares outstanding	212,171			212,062

Dividends declared per common share	$	0.01		$	0.03

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 (Loss)

(in thousands)

	Three Months Ended March 31,
	2014			2013

Net loss	$	(124,139	)	$	(70,049	)

Derivative instruments
Comprehensive loss before tax	(229		)	(1,179		)
Income tax benefit	82			425
	(147		)	(754		)
Pension, postretirement and other post-employment benefits
Comprehensive income (loss) before tax	(1,847		)	1,954
Income tax benefit (provision)	665			(703		)
	(1,182		)	1,251

Available-for-sale securities
Comprehensive income (loss) before tax	(2,033		)	1,553
Income tax benefit (provision)	732			(559		)
	(1,301		)	994
Total other comprehensive income (loss)	(2,630		)	1,491
Total comprehensive loss	$	(126,769	)	$	(68,558	)

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,
	2014			2013
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	865,761		$	911,099
Short term investments	248,572			248,414
Trade accounts receivable	230,002			198,020
Other receivables	44,810			31,553
Inventories	224,806			264,161
Prepaid royalties	6,896			8,083
Deferred income taxes	48,869			49,144
Coal derivative assets	12,316			14,851
Other current assets	55,296			56,746
Total current assets	1,737,328			1,782,071
Property, plant and equipment, net	6,616,144			6,734,286
Other assets
Prepaid royalties	87,552			87,577
Equity investments	223,235			221,456
Other noncurrent assets	158,925			164,803
Total other assets	469,712			473,836
Total assets	$	8,823,184		$	8,990,193
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	160,361		$	176,142
Accrued expenses and other current liabilities	328,561			278,587
Current maturities of debt	29,950			33,493
Total current liabilities	518,872			488,222
Long-term debt	5,112,995			5,118,002
Asset retirement obligations	390,408			402,713
Accrued pension benefits	10,484			7,111
Accrued postretirement benefits other than pension	37,995			39,255
Accrued workers’ compensation	75,817			78,062
Deferred income taxes	368,057			413,546
Other noncurrent liabilities	181,866			190,033
Total liabilities	6,696,494			6,736,944
Stockholders’ equity
Common stock, $0.01 par value, authorized 260,000 shares, issued 213,792 shares at both March 31, 2014 and December 31, 2013.	2,141			2,141
Paid-in capital	3,040,946			3,038,613
Treasury stock, at cost	(53,848		)	(53,848		)
Accumulated deficit	(897,611		)	(771,349		)
Accumulated other comprehensive income	35,062			37,692
Total stockholders’ equity	2,126,690			2,253,249
Total liabilities and stockholders’ equity	$	8,823,184		$	8,990,193

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,
	2014			2013
	(Unaudited)
Operating activities
Net loss	$	(124,139	)	$	(70,049	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation, depletion and amortization	104,423			118,868
Amortization of acquired sales contracts, net	(3,696		)	(2,810		)
Amortization relating to financing activities	3,236			6,167
Prepaid royalties expensed	1,803			3,537
Employee stock-based compensation expense	2,333			2,713
Gains on disposals and divestitures, net	(15,129		)	(595		)
Changes in:
Receivables	(27,245		)	(12,340		)
Inventories	7,441			(2,816		)
Accounts payable, accrued expenses and other current liabilities	43,989			38,249
Income taxes, net	(115		)	458
Deferred income taxes	(43,698		)	(54,993		)
Other	10,522			16,902
Cash provided by (used in) operating activities	(40,275		)	43,291
Investing activities
Capital expenditures	(14,454		)	(54,522		)
Additions to prepaid royalties	(591		)	(9,142		)
Proceeds from disposals and divestitures	28,195			714
Purchases of short term investments	(119,176		)	(26,787		)
Proceeds from sales of short term investments	117,681			11,534
Investments in and advances to affiliates	(3,242		)	(4,298		)
Change in restricted cash	—			1,163
Cash provided by (used in) investing activities	8,413			(81,338		)
Financing activities
Payments on term loan	(4,875		)	(4,125		)
Net payments on other debt	(4,521		)	(5,964		)
Debt financing costs	(1,957		)	—
Dividends paid	(2,123		)	(6,367		)
Cash used in financing activities	(13,476		)	(16,456		)
Decrease in cash and cash equivalents	(45,338		)	(54,503		)
Cash and cash equivalents, beginning of period	911,099			784,622
Cash and cash equivalents, end of period	$	865,761		$	730,119

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 thermal and metallurgical coal from surface and underground mines located throughout the United States, for sale to utility, industrial and steel producers both in the United States and around the world. The Company currently operates mining complexes in West Virginia, Kentucky, Maryland, Virginia, Illinois, Wyoming and Colorado. All subsidiaries are wholly-owned. Intercompany transactions and accounts have been eliminated in consolidation.

The Company completed the sale of Canyon Fuel Company, LLC (“Canyon Fuel”) on August 16, 2013. The results of Canyon Fuel have been segregated from continuing operations and are reflected, net of tax, as discontinued operations in the condensed consolidated statements of operations for the three months ended March 31, 2013.

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, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014. 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, 2013 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

2. Accounting Policies

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

3. Accumulated Other Comprehensive Income

The following items are included in accumulated other comprehensive income:

				Pension,
				Postretirement
				and Other						Accumulated
				Post-						Other
	Derivative			Employment			Available-for-			Comprehensive
	Instruments			Benefits			Sale Securities			Loss
	(In thousands)
Balance at December 31, 2013	$	565		$	31,112		$	6,015		$	37,692
Unrealized gains (losses)	47			—			(1,657		)	(1,610		)
Amounts reclassified from accumulated other comprehensive income	(194		)	(1,182		)	356			(1,020		)
Balance at March 31, 2014	$	418		$	29,930		$	4,714		$	35,062

The following amounts were reclassified out of accumulated other comprehensive income:

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	Amount Reclassified from
	Accumulated other comprehensive income						Line Item in the
Details about accumulated other	Three months ended March 31,						Condensed Consolidated
comprehensive income components	2014			2013			Statement of Operations
	(In thousands)
Derivative instruments	$	303		$	859		Revenues
	(109		)	(309		)	Benefit from income taxes
	$	194		$	550		Net of tax

Pension, postretirement and other post-employment benefits
Amortization of prior service credits	$	2,626		$	2,908	(1)
Amortization of actuarial gains (losses), net	(779		)	(4,862		)(1)
	1,847			(1,954		)	Total before tax
	(665		)	703			Benefit from income taxes
	$	1,182		$	(1,251	)	Net of tax

Available-for-sale securities	$	(556	)	$	(59	)(2)	Interest and investment income
	200			21			Benefit from income taxes
	$	(356	)	$	(38	)	Net of tax

(1) Production-related benefits and workers’ compensation costs are included in inventoriable production costs.

(2) The gains and losses on sales of available-for-sale-securities are determined on a specific identification basis.

4. Divestitures

During the first quarter of 2014, the Company entered into agreements to sell an operating thermal coal complex and an idled thermal coal mine in Kentucky and the Company’s ADDCAR subsidiary, which manufactures a patented highwall mining system. The sales closed during the quarter for total consideration of $45.5 million. The Company received $26.3 million in cash and the remaining $19.0 million is payable $8.0 million on June 30, 2014 and $11.0 million on December 31, 2014. The Company recognized a net pre-tax gain of $13.8 million from these divestitures, reflected in “other operating income, net” in the condensed consolidated statement of operations.

The following table summarizes the assets and liabilities of the divested operations reflected in the December 31, 2013 consolidated balance sheet:

	(In thousands)
Inventories	$	33,283
Other current assets	1,032
Net property, plant & equipment	104,587
Other noncurrent assets	139
Accounts payable and accrued expenses	13,005
Other noncurrent liabilities	24,276

The following table summarizes the results of Canyon Fuel, reflected as discontinued operations in the condensed consolidated statement of operations through the date of disposition:

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	Three Months Ended March 31, 2013
	(In thousands)
Total revenues	$	88,132
Income from discontinued operations before income taxes	$	18,989
Less: income tax expense	4,722
Income from discontinued operations	$	14,267
Basic and diluted earnings per common share from discontinued operations	$	0.07

5. Inventories

Inventories consist of the following:

	March 31,		December 31
	2014		2013
	(In thousands)
Coal	$	98,125	$	117,531
Repair parts and supplies	126,681		137,497
Work-in-process	—		9,133
	$	224,806	$	264,161

The repair parts and supplies are stated net of an allowance for slow-moving and obsolete inventories of $8.6 million at March 31, 2014 and $8.4 million at December 31, 2013.

6. Investments in Available-for-Sale Securities

The Company has invested in marketable debt securities, primarily highly liquid AA - rated corporate bonds and U.S. government and government agency securities. These investments are held in the custody of a major financial institution. These securities, along with the Company’s investments in marketable equity securities, are classified as available-for-sale securities and, accordingly, the unrealized gains and losses are recorded through other comprehensive income.

The Company’s investments in available-for-sale marketable securities are as follows:

	March 31, 2014
										Balance Sheet
			Gross		Gross					Classification
			Unrealized		Unrealized			Fair		Short-Term		Other
	Cost Basis		Gains		Losses			Value		Investments		Assets
	(In thousands)
Available-for-sale:
Corporate notes and bonds	$	250,723	$	4	$	(2,155	)	$	248,572	$	248,572	$	—
Equity securities	5,420		12,203		(2,698		)	14,925		—		14,925
Total Investments	$	256,143	$	12,207	$	(4,853	)	$	263,497	$	248,572	$	14,925

	December 31, 2013
										Balance Sheet
			Gross		Gross					Classification
			Unrealized		Unrealized			Fair		Short-Term		Other
	Cost Basis		Gains		Losses			Value		Investments		Assets
	(In thousands)
Available-for-sale:
U.S. government and agency securities	$	65,002	$	11	$	(75	)	$	64,938	$	64,938	$	—
Corporate notes and bonds	184,773		7		(1,304		)	183,476		183,476		—
Equity securities	5,271		13,660		(2,902		)	16,029		—		16,029
Total Investments	$	255,046	$	13,678	$	(4,281	)	$	264,443	$	248,414	$	16,029

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The aggregate fair value of investments with unrealized losses that have been owned for less than a year was $200.4 million and $164.3 million at March 31, 2014 and December 31, 2013, respectively. The aggregate fair value of investments with unrealized losses that were owned for over a year, and were also in a continuous unrealized loss position during that time, was $34.7 million and $48.7 million at March 31, 2014 and December 31, 2013, respectively.

The debt securities outstanding at March 31, 2014 have maturity dates ranging from the second quarter of 2014 through the third quarter of 2015. The Company classifies its investments as current based on the nature of the investments and their availability to provide cash for use in current operations.

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 57 to 67 million gallons of diesel fuel for use in its operations during 2014. 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 and purchased heating oil call options. At March 31, 2014, the Company had protected the price of approximately 87% of its expected purchases for the remainder of 2014 and 30% of its expected purchases during the first half of 2015. At March 31, 2014, the Company had purchased heating oil call options for approximately 61 million gallons for the purpose of managing the price risk associated with future diesel purchases.

The Company has also purchased heating oil call options to manage the price risk associated with fuel surcharges on its barge and rail shipments, which cover increases in diesel fuel prices for the respective carriers. At March 31, 2014, the Company held heating oil call options for 3.8 million gallons that will settle ratably in the remainder of 2014 for the purpose of managing the fluctuations in cash flows associated with fuel surcharges on future shipments.

These positions reduce the Company’s risk of cash flow fluctuations related to these surcharges but the positions are not accounted for as hedges.

Coal price 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, 2014, the Company held derivatives for risk management purposes that are expected to settle in the following years:

(Tons in thousands)	2014	2015	Total
Coal sales	3,991	1,380	5,371
Coal purchases	1,778	—	1,778

The Company has also entered into a nominal quantity of natural gas put options to protect the Company from decreases in natural gas prices, which could impact coal demand. These options are not accounted for as hedges.

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 $6.6 million of gains during the remainder of 2014 and $1.4 million of gains in 2015.

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Tabular derivatives disclosures

The Company has master netting agreements with all of its counterparties which 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, 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:

	March 31, 2014								December 31, 2013
Fair Value of Derivatives	Asset			Liability					Asset			Liability
(In thousands)	Derivative			Derivative					Derivative			Derivative
Derivatives Designated as Hedging Instruments
Coal	$	1,101		$	(215	)			$	909		$	(26	)

Derivatives Not Designated as Hedging Instruments
Heating oil — diesel purchases	2,683			—					4,681			—
Heating oil — fuel surcharges	152			—					422			—
Coal — held for trading purposes	75,886			(67,944		)			55,327			(45,763		)
Coal — risk management	4,543			(1,453		)			6,342			(1,950		)
Natural gas	398			—					—			—
Total	83,662			(69,397		)			66,772			(47,713		)
Total derivatives	84,763			(69,612		)			67,681			(47,739		)
Effect of counterparty netting	(69,612		)	69,612					(47,727		)	47,727
Net derivatives as classified in the balance sheets	$	15,151		$	—		$	15,151	$	19,954		$	(12	)	$	19,942

		March 31, 2014		December 31, 2013
Net derivatives as reflected on the balance sheets
Heating oil	Other current assets	$	2,835	$	5,103
Coal	Coal derivative assets	12,316		14,851
	Accrued expenses and other current liabilities	—		(12		)
		$	15,151	$	19,942

The Company had a current asset for the right to reclaim cash collateral of $6.5 million at March 31, 2014 and $2.2 million at December 31, 2013. 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:

Derivatives used in Cash Flow Hedging Relationships (in thousands)

For the Three Months Ended March 31,

		Gain (Loss) Recognized in Other Comprehensive Income(Effective Portion)						Gains (Losses) Reclassified from Other Comprehensive Income into Income (Effective Portion)
		2014			2013			2014			2013
Coal sales	(1)	$	(515	)	$	(176	)	$	706		$	1,221
Coal purchases	(2)	589			(182		)	(404		)	(362		)
Totals		$	74		$	(358	)	$	302		$	859

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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 March 31, 2014 and 2013.

Derivatives Not Designated as Hedging Instruments (in thousands)

For the Three Months Ended March 31,

		Gain (Loss) Recognized
		2014			2013
Coal — unrealized	(3)	$	(1,302	)	$	1,470
Coal — realized	(4)	$	2,879		$	9,217
Natural gas — unrealized	(3)	$	8		$	—
Heating oil — diesel purchases	(4)	$	(2,963	)	$	(4,261	)
Heating oil — fuel surcharges	(4)	$	(254	)	$	(565	)

Location in statement of operations:

(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 $0.4 million during the three months ended March 31, 2014 and net unrealized and realized losses of $2.8 million during the three months ended March 31, 2013 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 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 March 31, 2014, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $0.9 million are expected to be reclassified from other comprehensive income into earnings during the next twelve months.

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

	March 31,		December 31,
	2014		2013
	(In thousands)
Payroll and employee benefits	$	58,220	$	67,621
Taxes other than income taxes	112,406		114,664
Interest	79,731		18,528
Acquired sales contracts	14,439		14,373
Workers’ compensation	16,470		12,434
Asset retirement obligations	22,682		24,940
Other	24,613		26,027
	$	328,561	$	278,587

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9. Debt and Financing Arrangements

	March 31,		December 31,
	2014		2013
	(In thousands)
Term loan due 2018 ($1.92 billion and $1.93 billion face value, respectively)	$	1,902,731	$	1,906,975
7.00% senior notes due 2019 at par	1,000,000		1,000,000
9.875% senior notes due 2019 ($375.0 million face value)	362,573		362,358
8.00% senior secured notes due 2019 at par	350,000		350,000
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	27,641		32,162
	5,142,945		5,151,495
Less current maturities of debt	29,950		33,493
Long-term debt	$	5,112,995	$	5,118,002

At March 31, 2014, the available borrowing capacity under the Company’s lines of credit was approximately $250.1 million.

10. Income taxes

During the three months ended March 31, 2014, the Company determined it was more likely than not that a portion of the federal and state net operating losses it expects to generate in 2014 will not be realized through future taxable income, and the estimated annual effective rate includes a valuation allowance for that portion. In applying the estimated annual effective rate to earnings for the three months ended March 31, 2014, the Company increased its valuation allowance by $21.6 million related to federal net operating losses and $2.2 million related to state net operating losses.

11. Fair Value Measurements

The hierarchy of fair value measurements assigns a level to fair value measurements based on the inputs used in the respective valuation techniques. 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, U.S. Treasury 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 U.S. government agency securities and 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, natural gas 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 March 31, 2014.

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:

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	March 31, 2014
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Investments in marketable securities	$	263,497	$	14,925	$	248,572	$	—
Derivatives	15,151		10,956		218		3,977
Total assets	$	278,648	$	25,881	$	248,790	$	3,977

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

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

	Three Months Ended March 31, 2014
	(In thousands)
Balance, beginning of period	$	4,946
Realized and unrealized losses recognized in earnings, net	(2,925		)
Purchases	1,956
Ending balance	$	3,977

Net unrealized losses of $2.6 million were recognized during the three months ended March 31, 2014 related to level 3 financial instruments held on March 31, 2014.

Fair Value of Long-Term Debt

At March 31, 2014 and December 31, 2013, the fair value of the Company’s debt, including amounts classified as current, was $4.5 billion and $4.6 billion, respectively. Fair values are based upon observed prices in an active market, when available, or from valuation models using market information, which fall into Level 2 in the fair value hierarchy.

12. Loss Per Common Share

The effect of options, restricted stock and restricted stock units equaling 6.9 million and 8.6 million shares of common stock were excluded from the calculation of diluted weighted average shares outstanding for the three month periods ended March 31, 2014 and 2013, respectively, because the exercise price or grant price of the securities exceeded the average market price of the Company’s common stock for these periods. The weighted average share impacts of options, restricted stock and restricted stock units that were excluded from the calculation of weighted average shares due to the Company’s incurring a net loss for the three months ended March 31, 2014 and 2013 were not significant.

13. Employee Benefit Plans

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

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Service cost	$	5,924		$	7,700
Interest cost	4,364			3,926
Expected return on plan assets	(5,978		)	(5,806		)
Amortization of prior service costs (credits)	(54		)	(158		)
Amortization of other actuarial losses	948			4,551
Net benefit cost	$	5,204		$	10,213

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

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Service cost	$	444		$	556
Interest cost	464			431
Amortization of prior service credits	(2,501		)	(2,750		)
Amortization of other actuarial losses (gains)	(170		)	77
Net benefit credit	$	(1,763	)	$	(1,686	)

14. Commitments and Contingencies

The Company accrues for cost related to contingencies when a loss is probable and the amount is reasonably determinable. Disclosure of contingencies is included in the financial statements when it is at least reasonably possible that a material loss or an additional material loss in excess of amounts already accrued may be incurred.

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. The Company’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 million and $377 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 nondelivery 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. The trial court awarded total damages and interest in the amount of $104.1 million, which consisted of $13.8 million for past damages, and $90.3 million for future damages. 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.

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	PRB			APP			Other Operating Segments		Corporate, Other and Eliminations			Consolidated
	(In thousands)
Three Months Ended March 31, 2014
Revenues	$	358,607		$	279,137		$	98,227	$	—		$	735,971
Income (loss) from operations	(4,898		)	(25,728		)	1,635		(44,131		)	(73,122		)
Depreciation, depletion and amortization	39,245			54,988			9,519		671			104,423
Amortization of acquired sales contracts, net	(789		)	(2,974		)	67		—			(3,696		)
Capital expenditures	2,094			8,156			1,801		2,403			14,454

Three Months Ended March 31, 2013
Revenues	$	361,946		$	282,618		$	92,806	$	—		$	737,370
Income (loss) from operations	15,516			(27,116		)	7,384		(47,215		)	(51,431		)
Depreciation, depletion and amortization	42,227			55,331			11,304		1,331			110,193
Amortization of acquired sales contracts, net	(1,199		)	(2,472		)	861		—			(2,810		)
Capital expenditures	2,157			49,297			763		2,305			54,522

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

	Three Months Ended March 31,
	2014			2013
	(In thousands)
Loss from operations	$	(73,122	)	$	(51,431	)
Interest expense	(96,471		)	(95,074		)
Interest and investment income	1,843			2,836
Loss from continuing operations before income taxes	$	(167,750	)	$	(143,669	)

16. Supplemental 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 Receivable Company, LLC and the Company’s subsidiaries outside the United States):

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Condensed Consolidating Statements of Operations

Three Months Ended March 31, 2014

	Parent/Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Revenues	$	—		$	735,971		$	—		$	—		$	735,971
Costs, expenses and other
Cost of sales (exclusive of items shown separately below)	3,389			683,775			—			(850		)	686,314
Depreciation, depletion and amortization	1,472			102,942			9			—			104,423
Amortization of acquired sales contracts, net	—			(3,696		)	—			—			(3,696		)
Change in fair value of coal derivatives and coal trading activities, net	—			914			—			—			914
Selling, general and administrative expenses	19,944			7,865			1,803			(476		)	29,136
Other operating income, net	1,593			(9,480		)	(1,437		)	1,326			(7,998		)
	26,398			782,320			375			—			809,093
Loss from investment in subsidiaries	(35,347		)	—			—			35,347			—
Loss from operations	(61,745		)	(46,349		)	(375		)	35,347			(73,122		)
Interest expense, net
Interest expense	(113,655		)	(6,324		)	(1,050		)	24,558			(96,471		)
Interest and investment income	7,601			17,651			1,149			(24,558		)	1,843
	(106,054		)	11,327			99			—			(94,628		)

Loss from continuing operations before income taxes	(167,799		)	(35,022		)	(276		)	35,347			(167,750		)
Provision for (benefit from) income taxes	(43,660		)	—			49			—			(43,611		)
Net loss	$	(124,139	)	$	(35,022	)	$	(325	)	$	35,347		$	(124,139	)
Total comprehensive loss	$	(126,769	)	$	(36,428	)	$	(325	)	$	36,753		$	(126,769	)

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Condensed Consolidating Statements of Operations

Three Months Ended March 31, 2013

	Parent/Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Revenues	$	—		$	737,370		$	—		$	—		$	737,370
Costs, expenses and other
Cost of sales (exclusive of items shown separately below)	2,883			646,860			—			—			649,743
Depreciation, depletion and amortization	1,406			108,778			9			—			110,193
Amortization of acquired sales contracts, net	—			(2,810		)	—			—			(2,810		)
Change in fair value of coal derivatives and coal trading activities, net	—			1,308			—			—			1,308
Selling, general and administrative expenses	21,698			10,035			1,476			—			33,209
Other operating income, net	(5,907		)	4,077			(1,012		)	—			(2,842		)
	20,080			768,248			473			—			788,801
Income from investment in subsidiaries	(2,871		)	—			—			2,871			—
Income (loss) from operations	(22,951		)	(30,878		)	(473		)	2,871			(51,431		)
Interest expense, net
Interest expense	(110,827		)	(6,442		)	(1,041		)	23,236			(95,074		)
Interest and investment income	9,098			15,443			1,531			(23,236		)	2,836
	(101,729		)	9,001			490			—			(92,238		)

Income (loss) from continuing operations before income taxes	(124,680		)	(21,877		)	17			2,871			(143,669		)
Benefit from income taxes	(59,353		)	—			—			—			(59,353		)
Income (loss) from continuing operations	(65,327		)	(21,877		)	17			2,871			(84,316		)
Income from discontinued operations, net of tax	(4,722		)	18,989			—			—			14,267
Net income (loss)	$	(70,049	)	$	(2,888	)	$	17		$	2,871		$	(70,049	)
Total comprehensive income (loss)	$	(68,558	)	$	(3,324	)	$	17		$	3,307		$	(68,558	)

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Condensed Consolidating Balance Sheets

March 31, 2014

	Parent/Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(In thousands)
Assets
Cash and cash equivalents	$	753,902	$	100,353	$	11,506	$	—		$	865,761
Short term investments	248,572		—		—		—			248,572
Receivables	33,115		16,594		229,737		(4,634		)	274,812
Inventories	—		224,806		—		—			224,806
Other	80,500		42,347		530		—			123,377
Total current assets	1,116,089		384,100		241,773		(4,634		)	1,737,328

Property, plant and equipment, net	23,765		6,592,317		28		34			6,616,144

Investment in subsidiaries	7,724,424		—		—		(7,724,424		)	—
Intercompany receivables	—		2,079,874		—		(2,079,874		)	—
Note receivable from Arch Western	675,000		—		—		(675,000		)	—
Other	157,663		311,976		73		—			469,712
Total other assets	8,557,087		2,391,850		73		(10,479,298		)	469,712
Total assets	$	9,696,941	$	9,368,267	$	241,874	$	(10,483,898	)	$	8,823,184

Liabilities and Stockholders’ Equity
Accounts payable	$	18,326	$	141,921	$	114	$	—		$	160,361
Accrued expenses and other current liabilities	105,706		226,757		732		(4,634		)	328,561
Current maturities of debt	25,481		4,469		—		—			29,950
Total current liabilities	149,513		373,147		846		(4,634		)	518,872
Long-term debt	5,095,777		17,218		—		—			5,112,995
Intercompany payables	1,865,706		—		214,168		(2,079,874		)	—
Note payable to Arch Coal	—		675,000		—		(675,000		)	—
Asset retirement obligations	1,018		389,390		—		—			390,408
Accrued pension benefits	2,873		7,611		—		—			10,484
Accrued postretirement benefits other than pension	4,213		33,782		—		—			37,995
Accrued workers’ compensation	27,606		48,211		—		—			75,817
Deferred income taxes	368,057		—		—		—			368,057
Other noncurrent liabilities	55,522		126,039		305		—			181,866
Total liabilities	7,570,285		1,670,398		215,319		(2,759,508		)	6,696,494
Stockholders’ equity	2,126,656		7,697,869		26,555		(7,724,390		)	2,126,690
Total liabilities and stockholders’ equity	$	9,696,941	$	9,368,267	$	241,874	$	(10,483,898	)	$	8,823,184

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Condensed Consolidating Balance Sheets

December 31, 2013

	Parent/Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Assets
Cash and cash equivalents	$	799,333	$	100,418	$	11,348		$	—		$	911,099
Short term investments	248,414		—		—			—			248,414
Receivables	14,177		23,018		197,015			(4,637		)	229,573
Inventories	—		264,161		—			—			264,161
Other	84,401		43,617		806			—			128,824
Total current assets	1,146,325		431,214		209,169			(4,637		)	1,782,071

Property, plant and equipment, net	24,851		6,709,398		37			—			6,734,286

Investment in subsidiaries	7,741,589		—		—			(7,741,589		)	—
Intercompany receivables			1,953,719		(181,095		)	(1,772,624		)	—
Note receivable from Arch Western	675,000		—		—			(675,000		)	—
Other	162,287		311,463		86			—			473,836
Total other assets	8,578,876		2,265,182		(181,009		)	(10,189,213		)	473,836
Total assets	$	9,750,052	$	9,405,794	$	28,197		$

		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	24
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4. Controls and Procedures	30
Part II OTHER INFORMATION
	Item 1. Legal Proceedings	31
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
	Item 4. Mine Safety Disclosures	34
	Item 6. Exhibits	35