UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-11155

WESTMORELAND COAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware		23-1128670
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
2 North Cascade Avenue, 2nd Floor
Colorado Springs, CO		80903
(Address of principal executive offices)		(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company.)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 1, 2011: 13,297,031 shares of common stock, $2.50 par value.

 

 

TABLE OF CONTENTS

		PAGE
PART I - FINANCIAL INFORMATION			3
ITEM 1 - FINANCIAL STATEMENTS			3
ITEM 1 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			8
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			32
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			43
ITEM 4 - CONTROLS AND PROCEDURES			43
PART II - OTHER INFORMATION			44
ITEM 1 - LEGAL PROCEEDINGS			44
ITEM 1A - RISK FACTORS			44
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			45
ITEM 5 - OTHER INFORMATION			45
ITEM 6 - EXHIBITS			47
SIGNATURES			48
EXHIBIT INDEX			49
Exhibit 10.9
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1
FINANCIAL STATEMENTS

Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

		June 30,				December 31,
		2011				2010
		(In thousands)
Assets
Current assets:
Cash and cash equivalents		$	41,738			$	5,775
Receivables:
Trade			39,884				50,578
Contractual third-party reclamation receivables			7,533				7,743
Other			3,080				4,545
			50,497				62,866
Inventories			25,777				23,571
Restricted investments and bond collateral			5,000				—
Other current assets			5,159				5,335
Total current assets			128,171				97,547
Property, plant and equipment:
Land and mineral rights			83,999				83,824
Capitalized asset retirement cost			114,856				114,856
Plant and equipment			517,094				506,661
			715,949				705,341
Less accumulated depreciation, depletion and amortization			(309,383	)			(288,386	)
Net property, plant and equipment			406,566				416,955
Advanced coal royalties			3,270				3,695
Reclamation deposits			71,997				72,274
Restricted investments and bond collateral, less current portion			53,155				55,384
Contractual third-party reclamation receivables, less current portion			88,720				87,739
Deferred income taxes			2,984				2,458
Intangible assets, net of accumulated amortization of $9.9 million and $9.1 million at June 30, 2011, and December 31, 2010, respectively			5,718				6,555
Other assets			11,788				7,699
Total Assets		$	772,369			$	750,306

See accompanying Notes to Consolidated Financial Statements.

Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets (Continued)
(Unaudited)

		June 30,				December 31,
		2011				2010
		(In thousands)
Liabilities and Shareholders’ Deficit
Current liabilities:
Current installments of long-term debt		$	18,814			$	14,973
Accounts payable and accrued expenses:
Trade			38,612				46,247
Production taxes			24,247				26,317
Workers’ compensation			949				954
Postretirement medical benefits			13,581				13,581
SERP			304				304
Deferred revenue			11,321				10,209
Asset retirement obligations			15,956				14,514
Other current liabilities			13,028				6,241
Total current liabilities			136,812				133,340
Long-term debt, less current installments			271,855				208,731
Revolving lines of credit			—				18,400
Workers’ compensation, less current portion			9,324				9,424
Excess of pneumoconiosis benefit obligation over trust assets			3,008				2,246
Postretirement medical benefits, less current portion			196,462				197,279
Pension and SERP obligations, less current portion			18,542				20,462
Deferred revenue, less current portion			70,644				75,395
Asset retirement obligations, less current portion			227,568				227,129
Intangible liabilities, net of accumulated amortization $9.9 million at June 30, 2011, and $9.4 million at December 31, 2010, respectively			8,154				8,663
Other liabilities			10,207				11,592
Total liabilities			952,576				912,661
Shareholders’ deficit:
Preferred stock of $1.00 par value
Authorized 5,000,000 shares; Issued and outstanding 159,960 shares at June 30, 2011, and 160,129 shares at December 31, 2010, respectively			160				160
Common stock of $2.50 par value
Authorized 30,000,000 shares; Issued and outstanding 13,237,483 shares at June 30, 2011, and 11,160,798 shares at December 31, 2010			33,093				27,901
Other paid-in capital			122,422				98,466
Accumulated other comprehensive loss			(57,412	)			(57,680	)
Accumulated deficit			(272,378	)			(226,740	)
Total Westmoreland Coal Company shareholders’ deficit			(174,115	)			(157,893	)
Noncontrolling interest			(6,092	)			(4,462	)
Total deficit			(180,207	)			(162,355	)
Total Liabilities and Shareholders’ Deficit		$	772,369			$	750,306

See accompanying Notes to Consolidated Financial Statements.

Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands, except per share data)
Revenues		$	112,140			$	127,632			$	239,904			$	254,071
Cost, expenses and other:
Cost of sales			91,289				104,481				188,799				202,158
Depreciation, depletion and amortization			11,004				11,078				22,249				22,471
Selling and administrative			9,035				9,673				18,340				19,648
Heritage health benefit expenses			3,441				3,394				7,219				7,309
Loss (gain) on sales of assets			241				19				324				90
Other operating income			(1,870	)			(2,346	)			(3,467	)			(4,252	)
			113,140				126,299				233,464				247,424
Operating income (loss)			(1,000	)			1,333				6,440				6,647
Other income (expense):
Interest expense			(7,645	)			(5,767	)			(14,612	)			(11,490	)
Loss on extinguishment of debt			—				—				(17,030	)			—
Interest income			329				367				711				777
Other income (loss)			240				4,726				(2,777	)			891
			(7,076	)			(674	)			(33,708	)			(9,822	)
Income (loss) before income taxes			(8,076	)			659				(27,268	)			(3,175	)
Income tax benefit from operations			(161	)			(47	)			(621	)			(137	)
Net income (loss)			(7,915	)			706				(26,647	)			(3,038	)
Less net loss attributable to noncontrolling interest			(508	)			(553	)			(1,630	)			(1,443	)
Net income (loss) attributable to the Parent company			(7,407	)			1,259				(25,017	)			(1,595	)
Less preferred stock dividend requirements			340				340				680				680
Net income (loss) applicable to common shareholders		$	(7,747	)		$	919			$	(25,697	)		$	(2,275	)
Net income (loss) per share applicable to common shareholders:
Basic		$	(0.59	)		$	0.09			$	(2.01	)		$	(0.21	)
Diluted			(0.59	)			0.09				(2.01	)			(0.21	)
Weighted average number of common shares outstanding:
Basic			13,200				10,654				12,789				10,588
Diluted			13,200				10,704				12,789				10,588
Net income (loss) (from above)		$	(7,915	)		$	706			$	(26,647	)		$	(3,038	)
Other comprehensive income (loss):
Amortization of accumulated actuarial gains or losses, pension			385				436				770				664
Amortization of accumulated actuarial gains or losses and transition obligations and prior service costs, postretirement medical benefits			(72	)			(70	)			(144	)			(138	)
Tax effect of other comprehensive income gains			(57	)			—				(167	)			—
Unrealized and realized gains and losses on available-for-sale securities			(161	)			(108	)			(191	)			(607	)
Comprehensive income (loss)		$	(7,820	)		$	964			$	(26,379	)		$	(3,119	)

See accompanying Notes to Consolidated Financial Statements.

Westmoreland Coal Company and Subsidiaries
Consolidated Statement of Shareholders’ Deficit
Six Months Ended June 30, 2011
(Unaudited)

		Class A
		Convertible												Accumulated												Total
		Exchangeable												Other								Non-				Shareholders’
		Preferred				Common				Other Paid-				Compre-				Accumulated				controlling				Equity
		Stock				Stock				In Capital				hensive Loss				Deficit				Interest				(Deficit)
		(In thousands)
Balance at December 31, 2010 (160,129 preferred shares and 11,160,798 common shares outstanding)		$	160			$	27,901			$	98,466			$	(57,680	)		$	(226,740	)		$	(4,462	)		$	(162,355	)
Preferred dividends declared			—				—				—				—				(20,621	)			—				(20,621	)
Common stock issued as compensation (141,387 shares)			—				354				2,438				—				—				—				2,792
Common stock options exercised (31,200 shares)			—				78				344				—				—				—				422
Conversion of convertible notes and securities (1,879,098 shares)			—				4,698				20,787				—				—				—				25,485
Common stock issued to pension plan assets (25,000 shares)			—				62				387				—				—				—				449
Net loss			—				—				—				—				(25,017	)			(1,630	)			(26,647	)
Tax effect of other comprehensive income gains			—				—				—				(167	)			—				—				(167	)
Amortization of accumulated actuarial gains or losses, pension			—				—				—				770				—				—				770
Amortization of accumulated actuarial gains or losses and transition obligations and prior service costs, postretirement medical benefits			—				—				—				(144	)			—				—				(144	)
Unrealized and realized gains and losses on available-for-sale securities			—				—				—				(191	)			—				—				(191	)
Balance at June 30, 2011 (159,960 preferred shares and 13,237,483 common shares outstanding)		$	160			$	33,093			$	122,422			$	(57,412	)		$	(272,378	)		$	(6,092	)		$	(180,207	)

See accompanying Notes to Consolidated Financial Statements.

Westmoreland Coal Company and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

		Six Months Ended June 30,
		2011				2010
		(In thousands)
Cash flows from operating activities:
Net loss		$	(26,647	)		$	(3,038	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization			22,249				22,471
Accretion of asset retirement obligation and receivable			5,400				5,840
Amortization of intangible assets and liabilities, net			327				236
Non-cash tax benefits			(167	)			—
Share-based compensation			2,792				2,329
Loss on sales of assets			324				90
Non-cash interest expense			—				785
Amortization of deferred financing costs			1,240				1,089
Loss on extinguishment of debt			17,030				—
Gain on sales of investment securities			(150	)			(659	)
Loss (gain) on derivative instruments			3,079				(132	)
Changes in operating assets and liabilities:
Receivables, net			12,159				(4,795	)
Inventories			(2,206	)			1,024
Excess of pneumoconiosis benefit obligation over trust assets			762				813
Accounts payable and accrued expenses			(3,683	)			3,889
Deferred revenue			(3,639	)			534
Accrual for workers’ compensation			(105	)			(123	)
Asset retirement obligation			(4,290	)			(2,594	)
Accrual for postretirement medical benefits			(961	)			(1,709	)
Pension and SERP obligations			(701	)			190
Other assets and liabilities			1,507				(6,392	)
Net cash provided by in operating activities			24,320				19,848
Cash flows from investing activities:
Additions to property, plant and equipment			(11,970	)			(9,543	)
Change in restricted investments and bond collateral and reclamation deposits			(4,685	)			251
Net proceeds from sales of assets			28				380
Proceeds from sale of restricted investments			2,150				1,119
Receivable from customer for property and equipment purchases			—				(103	)
Net cash used in investing activities			(14,477	)			(7,896	)
Cash flows from financing activities:
Change in book overdrafts			1,803				962
Borrowings from long-term debt, net of debt discount			142,500				—
Repayments of long-term debt			(64,765	)			(11,355	)
Borrowings on revolving lines of credit			73,700				75,800
Repayments of revolving lines of credit			(92,100	)			(77,200	)
Debt issuance and other refinancing costs			(14,819	)			—
Preferred dividends paid			(20,621	)
Exercise of stock options			422				8
Net cash provided by (used in) financing activities			26,120				(11,785	)
Net increase in cash and cash equivalents			35,963				167
Cash and cash equivalents, beginning of period			5,775				10,519
Cash and cash equivalents, end of period		$	41,738			$	10,686
Non-cash transactions:
Capital leases		$	507			$	866

See accompanying Notes to Consolidated Financial Statements.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

1.

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include accounts of Westmoreland Coal Company, or the Company, or Parent, and its subsidiaries and controlled entities. The Company’s current principal activities, all conducted within the United States, are the production and sale of coal from its mines in Montana, North Dakota and Texas, and the ownership of the Roanoke Valley power plants, or ROVA, in North Carolina. The Company’s activities are primarily conducted through wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.

The Company’s Absaloka Mine is owned by its subsidiary Westmoreland Resources, Inc., or WRI. The right to mine coal at the Absaloka Mine has been subleased to an affiliated entity whose operations the Company controls. The Beulah, Jewett, Rosebud, and Savage Mines are owned through the Company’s subsidiary Westmoreland Mining LLC, or WML.

The Company is subject to two major debt arrangements: (1) $125.0 million senior secured notes at WML that are collateralized by all assets of WML, Westmoreland Savage Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC, and (2) $150.0 million senior secured notes (issued February 4, 2011) at the Parent level that are largely collateralized by the assets of the Parent, WRI and ROVA, referred to herein as the Parent Notes.

These quarterly consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, or the 2010 Form 10-K. The accounting principles followed by the Company are set forth in the Notes to the Company’s consolidated financial statements in its 2010 Form 10-K. Most of the descriptions of the accounting principles and other footnote disclosures previously made have been omitted in this report so long as the interim information presented is not misleading.

The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles and require use of management’s estimates. The financial information contained in this Form 10-Q is unaudited, but reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2011 are not necessarily indicative of results to be expected for the year ending December 31, 2011.

2.

ACCOUNTING POLICIES

Newly Adopted Accounting Pronouncements

In January 2010, accounting guidance was issued regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. This guidance requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers. This guidance also requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. See Note 10 for applicable disclosures.

Accounting Pronouncements Not Yet Implemented

In May 2011, accounting guidance was issued which generally aligns the principles for fair value measurements and the related disclosure requirements under Generally Accepted Accounting Principles and International Financial Reporting Standards. This guidance requires additional disclosures regarding details about Level 3 fair value measurements, including quantitative information about the significant unobservable inputs used in estimating fair value, a discussion of the sensitivity of the measurement to these inputs and a description of the entity’s valuation processes. Disclosures will also be needed concerning any transfers between Level 1 and 2 of the fair value hierarchy (not just significant transfers as previous guidance required) and the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes. This standard is effective for periods beginning after December 15, 2011. The Company has determined that the adoption of this standard will affect the Company’s disclosures but will not have a material effect on the Company’s financial position or results of operations.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

In June 2011, accounting guidance was issued which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. This standard is effective for periods beginning after December 15, 2011. The Company has determined that the adoption of this standard will affect the Company’s disclosures but will not have a material effect on the Company’s financial position or results of operations.

3.

INVENTORIES

Inventories consisted of the following:

		June 30,				December 31,
		2011				2010
		(In thousands)
Coal stockpiles		$	546			$	678
Coal fuel inventories			3,095				1,936
Materials and supplies			22,714				21,538
Reserve for obsolete inventory			(578	)			(581	)
Total		$	25,777			$	23,571

4.

RESTRICTED INVESTMENTS AND BOND COLLATERAL

The Company’s restricted investments and bond collateral consists of the following:

		June 30,				December 31,
		2011				2010
		(In thousands)
Coal Segment:
Westmoreland Mining — debt reserve account		$	14,965			$	7,514
Reclamation bond collateral:
Rosebud Mine			12,264				12,263
Absaloka Mine			11,009				10,956
Beulah Mine			1,270				1,270
Jewett Mine			—				3,001
Power Segment:
Letter of credit account			5,978				5,990
Debt protection account			—				905
Repairs and maintenance account			—				1,067
Ash reserve account			—				602
Corporate Segment:
Workers’ compensation bonds			6,419				6,350
Postretirement medical benefit bonds			6,250				5,466
Total restricted investments and bond collateral			58,155				55,384
Less current portion			(5,000	)			—
Total restricted investments and bond collateral, less current portion		$	53,155			$	55,384

For all of its restricted investments and bond collateral accounts, the Company can select from limited fixed-income investment options for the funds and receive the investment returns on these investments. Funds in the restricted investments and bond collateral accounts are not available to meet the Company’s cash needs, except for $5.0 million of the Westmoreland Mining debt reserve account which was withdrawn in July 2011.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

These accounts include held-to-maturity and available-for-sale securities. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts calculated on the effective interest method. Interest income is recognized when earned. Available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in Accumulated other comprehensive loss.

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at June 30, 2011 are as follows:

		Carrying Value				Fair Value
		(In thousands)
Cash and cash equivalents		$	46,186			$	46,186
Time deposits			7,698				7,698
Held-to-maturity securities			2,486				2,836
Available-for-sale securities			1,785				1,785
		$	58,155			$	58,505

The Company recorded a gain of $0.1 million on the sale of available-for-sale securities held as restricted investments and bond collateral in the six months ended June 30, 2011.

Following the Parent Notes offering in February 2011, discussed in Note 5, ROVA is no longer required to maintain its debt protection accounts, ash reserve account or the repairs and maintenance account.

Held-to-Maturity and Available-for-Sale Restricted Investments and Bond Collateral

The amortized cost, gross unrealized holding gains and fair value of held-to-maturity securities at June 30, 2011, is as follows (in thousands):

Amortized cost		$	2,486
Gross unrealized holding gains			350
Fair value		$	2,836

Maturities of held-to-maturity securities are as follows at June 30, 2011:

		Amortized Cost				Fair Value
		(In thousands)
Due in five years or less		$	667			$	748
Due after five years to ten years			782				893
Due in more than ten years			1,037				1,195
		$	2,486			$	2,836

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at June 30, 2011, is as follows (in thousands):

Cost basis		$	1,566
Gross unrealized holding gains			219
Fair value		$	1,785

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

5.

LINES OF CREDIT AND LONG-TERM DEBT

The amounts outstanding under the Company’s lines of credit and long-term debt consist of the following:

		Total Debt Outstanding
		June 30,				December 31,
		2011				2010
		(In thousands)
Corporate:
Senior secured notes		$	150,000			$	—
Convertible notes			—				18,495
Debt discount			(7,208	)			(4,823	)
Westmoreland Mining, LLC:
Revolving line of credit			—				1,500
Term debt			122,500				125,000
Capital lease obligations			16,373				18,407
Other term debt			2,270				2,556
Westmoreland Resources, Inc.:
Revolving line of credit			—				16,900
Term debt			—				9,600
Capital lease obligations			6,734				7,821
ROVA:
Term debt			—				46,220
Debt premiums			—				428
Total debt outstanding			290,669				242,104
Less current portion			(18,814	)			(14,973	)
Total debt outstanding, less current portion		$	271,855			$	227,131

The following table presents aggregate contractual debt maturities of all long-term debt and the lines of credit at June 30, 2011 (in thousands):

Remainder of 2011		$	8,760
2012			21,635
2013			24,939
2014			22,622
2015			21,910
Thereafter			198,011
Total			297,877
Less: debt discount			(7,208	)
Total debt		$	290,669

Corporate

On February 4, 2011 through a private placement offering, the Company issued $150.0 million of Parent Notes, which are senior secured notes. The Company’s subsidiary, Westmoreland Partners, was a co-issuer of the notes. The Parent Notes were issued at a 5% discount, mature February 18, 2018, and bear a fixed interest rate of 10.750%, payable semi-annually, in arrears, on February 1 and August 1 of each year beginning August 1, 2011. Substantially all of the assets of the Parent, ROVA and WRI constitute collateral for the Parent Notes as to which the holders of these notes have a first priority lien. Under the indenture governing the Parent Notes, the Company is required to offer a portion of its Excess Cash Flow (as defined by the indenture) for each fiscal year to purchase some of these notes at 100% of the principal amount.

As a result of this offering, the Company recorded a $17.0 million loss on extinguishment of debt in the six months ended June 30, 2011. The loss included a $9.1 million make-whole payment for ROVA’s debt and $7.9 million of non-cash write-offs of unamortized discount on debt and related capitalized debt costs and convertible debt conversion expense.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The indenture governing the Parent Notes contains, among other provisions, events of default and various affirmative and negative covenants. As of June 30, 2011, the Company was in compliance with all covenants.

Westmoreland Mining LLC

WML has outstanding $122.5 million in term debt as of June 30, 2011 and is party to a revolving credit facility with a maximum availability of $25.0 million. In the six months ended June 30, 2011, WML repaid $2.5 million on its term debt and $2.7 million of its capital lease obligations and other term debt. WML entered into capital lease agreements in the amount of $0.4 million during the six months ended June 30, 2011. The weighted average interest rate for WML’s capital leases and other term debt was 7.99% and 6.19%, respectively, at June 30, 2011.

The available balance on the $25.0 million revolving line of credit at June 30, 2011 was $23.1 million. The revolving line of credit supports a $1.9 million letter of credit, which reduces the available balance. The interest rate on the revolving line of credit was 3.75% at June 30, 2011.

WML’s lending arrangements contain, among other provisions, events of default and various affirmative and negative covenants. As of June 30, 2011, WML was in compliance with all covenants.

Westmoreland Resources, Inc.

In February 2011, proceeds from the Parent Note offering were used to pay off the outstanding balance of WRI’s term debt and revolving line of credit. In addition, WRI’s revolving line of credit was terminated in February 2011.

In the six months ended June 30, 2011, WRI repaid $1.2 million of its capital lease obligations. WRI entered into capital lease agreements in the amount of $0.1 million during the six months ended June 30, 2011. The weighted average interest rate for WRI’s capital leases was 6.71% at June 30, 2011.

ROVA

In February 2011, proceeds from the Parent Note offering were used to repay all of ROVA’s outstanding fixed rate term debt. In addition, ROVA’s revolving line of credit was terminated in February 2011.

Convertible Debt

In February 2011, the outstanding balance of the Company’s convertible notes was eliminated, with $2.5 million paid to retire a portion of the convertible notes and the remainder of the notes being converted into 1,877,946 shares of Company common stock at a conversion price of $8.50 per share.

6.

PENSION AND POSTRETIREMENT MEDICAL BENEFITS

Pension

The Company provides pension benefits to qualified full-time employees pursuant to collective bargaining agreements. The Company froze its pension plan for non-union employees in 2009.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The Company incurred net periodic benefit costs of providing these pension benefits as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Components of net periodic benefit cost:
Service cost		$	237			$	115			$	390			$	311
Interest cost			1,250				731				2,369				2,337
Expected return on plan assets			(1,465	)			(886	)			(2,570	)			(2,185	)
Amortization of deferred items			385				436				770				664
Total net periodic benefit cost		$	407			$	396			$	959			$	1,127

The Company is required by a WML loan covenant to ensure that by 8.5 months after the end of the plan year, the value of its pension assets are at least 90% of the plan’s year end actuarially determined pension liability.

The Company contributed $1.5 million in cash and $0.5 million in company stock to its pension plans in the six months ended June 30, 2011. The Company expects to make approximately $5.4 million of pension plan contributions during the remainder of 2011 and expects a significant portion of these contributions to be made in Company stock.

Postretirement Medical Benefits

The Company provides postretirement medical benefits to retired employees and their dependents as mandated by the Coal Industry Retiree Health Benefit Act of 1992 and pursuant to collective bargaining agreements. The Company also provides these benefits to qualified full-time employees pursuant to collective bargaining agreements.

The Company incurred net periodic benefit costs of providing postretirement medical benefits during the three and six months ended June 30, 2011 and 2010, as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Components of net periodic benefit cost:
Service cost		$	123			$	129			$	246			$	270
Interest cost			2,627				2,497				5,254				5,249
Amortization of deferred items			(72	)			(70	)			(144	)			(138	)
Total net periodic benefit cost		$	2,678			$	2,556			$	5,356			$	5,381

The following table shows the net periodic medical benefit costs that relate to current operations and former mining operations:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Former mining operations		$	2,315			$	2,106			$	4,629			$	4,624
Current operations			363				450				727				757
Total net periodic benefit cost		$	2,678			$	2,556			$	5,356			$	5,381

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The costs for the former mining operations are included in Heritage health benefit expenses and the costs for current operations are included as operating expenses.

The Company expects to pay approximately $7.3 million for postretirement medical benefits during the remainder of 2011, net of Medicare Part D reimbursements. A total of $6.3 million was paid in the six months ended June 30, 2011 net of Medicare Part D reimbursements.

7.

HERITAGE HEALTH BENEFIT EXPENSES

The caption Heritage health benefit expenses used in the Consolidated Statements of Operations refers to costs of benefits the Company provides to its former mining operation employees. The components of these expenses are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Health care benefits		$	2,308			$	1,942			$	4,763			$	4,619
Combined benefit fund payments			686				756				1,371				1,512
Workers’ compensation benefits			165				230				323				365
Black lung benefits			282				466				762				813
Total		$	3,441			$	3,394			$	7,219			$	7,309

8.

ASSET RETIREMENT OBLIGATIONS, CONTRACTUAL THIRD-PARTY RECLAMATION RECEIVABLES, AND RECLAMATION DEPOSITS

The asset retirement obligations, contractual third-party reclamation receivables, and reclamation deposits for each of the Company’s mines and ROVA at June 30, 2011 are summarized below:

						Contractual Third-
		Asset Retirement				Party Reclamation				Reclamation
		Obligations				Receivables				Deposits
		(In thousands)
Rosebud		$	107,608			$	15,034			$	71,997
Jewett			80,692				80,692				—
Absaloka			33,150				527				—
Beulah			18,543				—				—
Savage			2,789				—				—
ROVA			742				—				—
Total		$	243,524			$	96,253			$	71,997

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Asset Retirement Obligations

Changes in the Company’s asset retirement obligations are as follows:

		Six Months Ended
		June 30,
		2011				2010
		(In thousands)
Asset retirement obligations, beginning of period		$	241,643			$	244,614
Accretion			10,039				9,584
Liabilities settled			(8,158	)			(6,628	)
Asset retirement obligations, end of period			243,524				247,570
Less current portion			(15,956	)			(16,201	)
Asset retirement obligations, less current portion		$	227,568			$	231,369

Contractual Third-Party Reclamation Receivables

The Company has recognized an asset of $96.3 million as contractual third-party reclamation receivables, representing the present value of customer obligations to reimburse the Company for reclamation expenditures at the Company’s Rosebud, Jewett and Absaloka Mines.

Reclamation Deposits

The Company’s reclamation deposits will be used to fund final reclamation activities. The Company’s carrying value and estimated fair value of its reclamation deposits at June 30, 2011 are as follows:

		Carrying Value				Fair Value
		(In thousands)
Cash and cash equivalents		$	36,353			$	36,353
Held-to-maturity securities			18,624				20,097
Time deposits			15,903				15,903
Available-for-sale securities			1,117				1,117
		$	71,997			$	73,470

The Company recorded a gain of $0.1 million on the sale of available-for-sale securities held as reclamation deposits in the six months ended June 30, 2011.

Held-to-maturity and Available-for-sale Reclamation Deposits

The amortized cost, gross unrealized holding gains and losses and fair value of held-to-maturity securities at June 30, 2011 are as follows (in thousands):

Amortized cost		$	18,624
Gross unrealized holding gains			1,493
Gross unrealized holding losses			(20	)
Fair value		$	20,097

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Maturities of held-to-maturity securities at June 30, 2011 are as follows:

		Amortized Cost				Fair Value
		(In thousands)
Due in five years or less		$	7,092			$	7,256
Due after five years to ten years			5,004				5,442
Due in more than ten years			6,528				7,399
		$	18,624			$	20,097

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at June 30, 2011 are as follows (in thousands):

Cost basis		$	1,000
Gross unrealized holding gains			117
Fair value		$	1,117

9.

DERIVATIVE INSTRUMENTS

Derivative Liabilities

The Company evaluates all of its financial instruments to determine if such instruments are derivatives, derivatives that qualify for the normal purchase normal sale exception, or contain features that qualify as embedded derivatives. All derivative financial instruments, except for derivatives that qualify for the normal purchase normal sale exception, are recognized on the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or in other comprehensive income if they qualify for cash flow hedge accounting.

The Company’s convertible notes were retired on February 4, 2011.

The fair value of outstanding derivative instruments not designated as hedging instruments on the accompanying Consolidated Balance Sheet are as follows:

		Balance Sheet		June 30,				December 31,
Derivative Instruments		Location		2011				2010
				(In thousands)
Convertible debt — conversion feature		Other liabilities		$	—			$	3,588

The effect of derivative instruments not designated as hedging instruments on the accompanying Consolidated Statements of Operations are as follows:

				Three Months Ended								Six Months Ended
		Statement of		June 30,								June 30,
Derivative Instruments		Operations Location		2011				2010				2011				2010
				(In thousands)
Convertible debt — conversion feature		Other income (loss)		$	—			$	4,623			$	(3,079	)		$	102
Warrant		Other income (loss)			—				24				—				30

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

10.

FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Notes 4, 8 and 9 for additional disclosures related to fair value measurements.

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

•

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets.

•

Level 2, 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.

•

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

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

		Fair Value at
		June 30, 2011
		Level 1
		(In thousands)
Assets:
Available-for-sale investments included in Restricted investments and bond collateral		$	1,785
Available-for-sale investments included in Reclamation deposits			1,117
Total assets		$	2,902

The following table summarizes the change in the fair values of the derivative instrument liabilities categorized as Level 3:

		Three Months Ended				Six Months Ended
		June 30, 2011				June 30, 2011
		(In thousands)
Beginning balance		$	—			$	3,588
Change in fair value			—				3,079
Settlements			—				(6,667	)
Ending balance		$	—			$	—

The Company calculates the fair value of its debt by using discount rate estimates based on interest rates as of June 30, 2011. The estimated fair values of the Company’s debt with fixed interest rates, excluding conversion feature values, are as follows:

		Carrying Value				Fair Value
		(In thousands)
December 31, 2010		$	185,320			$	196,483
June 30, 2011		$	265,292			$	282,252

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

11.

SHAREHOLDERS’ EQUITY

Preferred Stock

The Company has outstanding Series A Convertible Exchangeable Preferred Stock on which cumulative dividends of $2.125 per share are payable quarterly. In February 2011, the Company paid $19.9 million of dividends that had accumulated as of January 1, 2011. In June 2011, approximately 169 shares of preferred stock were converted into 1,152 shares of common stock.

12.

RESTRICTED STOCK UNITS, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS (SARs)

The Company recognized compensation expense from share-based arrangements shown in the following table:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Recognition of fair value of restricted stock units, stock options, and stock appreciation rights over vesting period; and issuance of common stock		$	532			$	359			$	1,102			$	584
Contributions of stock to the Company’s 401(k) plan			606				607				1,690				1,745
Total share-based compensation expense		$	1,138			$	966			$	2,792			$	2,329

Restricted Stock Units

A summary of restricted stock unit activity for the six months ended June 30, 2011 is as follows:

										Unamortized
						Weighted Average				Compensation
						Grant-Date Fair				Expense
		Units				Value				(In thousands)
Non-vested at December 31, 2010			192,697			$	8.13
Granted			189,721			$	15.15
Forfeited			(1,056	)		$	8.11
Non-vested at June 30, 2011			381,362			$	11.62			$	3,593	(1)

In April 2011, 172,081 restricted stock units were granted, of which 86,052 units will vest ratably over a three-year period. The remaining 86,029 units are performance based, which will vest and pay out at the end of a three-year period if performance goals are met.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Stock Options

Information with respect to stock option activity for the six months ended June 30, 2011 is as follows:

										Weighted Average								Unamortized
						Weighted				Remaining				Aggregate				Compensation
		Stock				Average				Contractual Life				Intrinsic Value				Expense
		Options				Exercise Price				(in years)				(In thousands)				(In thousands)
Outstanding at December 31, 2010			318,590			$	18.99
Exercised			(31,200	)		$	13.53							$	86
Expired or forfeited			(66,967	)		$	16.49
Outstanding at June 30, 2011			220,423			$	20.53				5.5			$	78
Options exercisable at June 30, 2011			175,667			$	20.31				5.1			$	78			$	—

Stock Appreciation Rights

Information with respect to stock appreciation rights, or SARs, activity for the six months ended June 30, 2011 is as follows:

										Weighted Average				Aggregate				Unamortized
						Weighted				Remaining				Intrinsic				Compensation
						Average				Contractual Life				Value				Expense
		SARs				Base Price				(in years)				(In thousands)				(In thousands)
Outstanding at December 31, 2010			118,934			$	22.13
Expired			(7,200	)		$	21.14
Outstanding and exercisable at June 30, 2011			111,734			$	22.20				4.2			$	—			$	—

13.

EARNINGS PER SHARE

Basic earnings (loss) per share has been computed by dividing the net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding during each period. Net income (loss) applicable to common shareholders includes the adjustment for net income or loss attributable to noncontrolling interest. Diluted earnings (loss) per share is computed by including the dilutive effect of common stock that would be issued assuming conversion or exercise of outstanding convertible notes and securities, stock options, stock appreciation rights, restricted stock units and warrants. No such items were included in the computation of diluted loss per share in the three and six months ended June 30, 2011 and the six months ended June 30, 2010 because the Company incurred a loss from operations in each of these periods and the effect of inclusion would have been anti-dilutive.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Income (loss) for basic earnings per share calculation:
Net income (loss) allocated to common shareholders		$	(7,747	)		$	919			$	(25,697	)		$	(2,275	)
Weighted average shares outstanding:
Basic weighted average shares outstanding			13,200				10,654				12,789				10,588
Effect of restricted stock units, stock options, SARs and warrants shares			—				50				—				—
Effect of convertible notes and securities			—				—				—				—
Diluted weighted average shares outstanding			13,200				10,704				12,789				10,588