WESTMORELAND COAL Co - FORM 10-Q

File	Filename
Attached files
EX-32 - EXHIBIT 32 - WESTMORELAND COAL Co	c16702exv32.htm
EX-10.1 - EXHIBIT 10.1 - WESTMORELAND COAL Co	c16702exv10w1.htm
EX-31.1 - EXHIBIT 31.1 - WESTMORELAND COAL Co	c16702exv31w1.htm
EX-31.2 - EXHIBIT 31.2 - WESTMORELAND COAL Co	c16702exv31w2.htm

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

For the quarterly period ended March 31, 2011


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

For the transition period from to

Commission File 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)

Registrant’s telephone number, including area code: (719) 442-2600

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 o 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 May 1, 2011: 13,173,513 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			29

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			38

ITEM 4 — CONTROLS AND PROCEDURES			38

PART II — OTHER INFORMATION			39

ITEM 1 — LEGAL PROCEEDINGS			39

ITEM 1A — RISK FACTORS			39

ITEM 5 — OTHER INFORMATION			39

ITEM 6 — EXHIBITS			41

SIGNATURES			42

EXHIBIT INDEX			43

Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
(Unaudited)


	March 31,			December 31,
	2011			2010
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	44,984		$	5,775
Receivables:
Trade		49,776			50,578
Contractual third-party reclamation receivables		7,638			7,743
Other		3,620			4,545

		61,034			62,866

Inventories		26,180			23,571
Other current assets		5,461			5,335

Total current assets		137,659			97,547


Property, plant and equipment:
Land and mineral rights		83,893			83,824
Capitalized asset retirement cost		114,856			114,856
Plant and equipment		509,013			506,661

		707,762			705,341
Less accumulated depreciation, depletion and amortization		(299,381	)		(288,386	)

Net property, plant and equipment		408,381			416,955

Advanced coal royalties		3,532			3,695
Reclamation deposits		73,007			72,274
Restricted investments and bond collateral		55,701			55,384
Contractual third-party reclamation receivables, less current portion		88,514			87,739
Deferred income taxes		2,900			2,458
Intangible assets, net of accumulated amortization of $9.5 million and $9.1 million at March 31, 2011, and December 31, 2010, respectively		6,137			6,555
Other assets		12,156			7,699

Total Assets	$	787,987		$	750,306

See accompanying Notes to Consolidated Financial Statements.

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


	March 31,			December 31,
	2011			2010
	(In thousands)
Liabilities and Shareholders’ Deficit
Current liabilities:
Current installments of long-term debt	$	17,673		$	14,973
Accounts payable and accrued expenses:
Trade		44,354			46,247
Production taxes		28,467			26,317
Workers’ compensation		951			954
Postretirement medical benefits		13,581			13,581
SERP		304			304
Deferred revenue		10,594			10,209
Asset retirement obligations		15,235			14,514
Other current liabilities		7,524			6,241

Total current liabilities		138,683			133,340


Long-term debt, less current installments		276,689			208,731
Revolving lines of credit		—			18,400
Workers’ compensation, less current portion		9,360			9,424
Excess of pneumoconiosis benefit obligation over trust assets		2,726			2,246
Postretirement medical benefits, less current portion		196,726			197,279
Pension and SERP obligations, less current portion		19,683			20,462
Deferred revenue, less current portion		73,025			75,395
Asset retirement obligations, less current portion		227,117			227,129
Intangible liabilities, net of accumulated amortization $9.6 million at March 31, 2011, and $9.4 million at December 31, 2010, respectively		8,409			8,663
Other liabilities		9,496			11,592

Total liabilities		961,914			912,661


Shareholders’ deficit:
Preferred stock of $1.00 par value Authorized 5,000,000 shares; Issued and outstanding 160,129 shares at March 31, 2011, and December 31, 2010		160			160
Common stock of $2.50 par value Authorized 30,000,000 shares; Issued and outstanding 13,155,263 shares at March 31, 2011, and 11,160,798 shares at December 31, 2010		32,887			27,901
Other paid-in capital		120,748			98,466
Accumulated other comprehensive loss		(57,507	)		(57,680	)
Accumulated deficit		(264,632	)		(226,740	)

Total Westmoreland Coal Company shareholders’ deficit		(168,344	)		(157,893	)
Noncontrolling interest		(5,583	)		(4,462	)

Total deficit		(173,927	)		(162,355	)

Total Liabilities and Shareholders’ Deficit	$	787,987		$	750,306

See accompanying Notes to Consolidated Financial Statements.

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


	Three Months Ended
	March 31,
	2011			2010
	(In thousands, except
	per share data)
Revenues	$	127,764		$	126,439

Cost, expenses and other:
Cost of sales		97,510			97,677
Depreciation, depletion and amortization		11,245			11,392
Selling and administrative		9,305			9,976
Heritage health benefit expenses		3,778			3,915
Loss on sales of assets		83			71
Other operating income		(1,597	)		(1,906	)

		120,324			121,125

Operating income		7,440			5,314

Other income (expense):
Interest expense		(6,967	)		(5,723	)
Loss on extinguishment of debt		(17,030	)		—
Interest income		382			410
Other loss		(3,017	)		(3,836	)

		(26,632	)		(9,149	)

Loss before income taxes		(19,192	)		(3,835	)
Income tax benefit from operations		(460	)		(90	)

Net loss		(18,732	)		(3,745	)
Less net loss attributable to noncontrolling interest		(1,121	)		(890	)

Net loss attributable to the Parent company		(17,611	)		(2,855	)
Less preferred stock dividend requirements		340			340

Net loss applicable to common shareholders	$	(17,951	)	$	(3,195	)


Net loss per share applicable to common shareholders:
Basic and diluted	$	(1.45	)	$	(0.30	)

Weighted average number of common shares outstanding:
Basic and diluted		12,369			10,521

Net loss (from above)	$	(18,732	)	$	(3,745	)
Other comprehensive loss:
Tax effect of other comprehensive income gains		(110	)		—
Amortization of accumulated actuarial gains or losses and transition obligations, pension		385			228
Amortization of accumulated actuarial gains or losses transition obligations and prior service costs, postretirement medical benefits		(72	)		(68	)
Unrealized and realized gain on available-for-sale securities		(30	)		(499	)

Comprehensive loss	$	(18,559	)	$	(4,084	)

See accompanying Notes to Consolidated Financial Statements.

Westmoreland Coal Company and Subsidiaries
Consolidated Statement of Shareholders’ Deficit
Three Months Ended March 31, 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 paid		—		—		—		—			(20,281	)		—			(20,281	)

Common stock issued as compensation (104,019 shares)		—		260		1,393		—			—			—			1,653

Common stock options exercised (12,500 shares)		—		31		100		—			—			—			131

Conversion of convertible notes (1,877,946 shares)		—		4,695		20,789		—			—			—			25,484

Net loss		—		—		—		—			(17,611	)		(1,121	)		(18,732	)

Tax effect of other comprehensive income gains		—		—		—		(110	)		—			—			(110	)
Amortization of accumulated actuarial gains or losses and transition obligations, pension		—		—		—		385			—			—			385
Amortization of accumulated actuarial gains or losses, transition obligations and prior service costs, postretirement medical benefits		—		—		—		(72	)		—			—			(72	)

Unrealized losses on available-for-sale securities		—		—		—		(30	)		—			—			(30	)

Balance at March 31, 2011 (160,129 preferred shares and 13,155,263 common shares outstanding)	$	160	$	32,887	$	120,748	$	(57,507	)	$	(264,632	)	$	(5,583	)	$	(173,927	)

See accompanying Notes to Consolidated Financial Statements.

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


	Three Months Ended March 31,
	2011			2010
	(In thousands)
Cash flows from operating activities:
Net loss	$	(18,732	)	$	(3,745	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization		11,245			11,392
Accretion of asset retirement obligation and receivable		2,700			3,003
Amortization of intangible assets and liabilities, net		163			85
Non-cash tax benefits		(110	)		—
Share-based compensation		1,653			1,363
Loss on sales of assets		83			71
Non-cash interest expense		—			388
Amortization of deferred financing costs		635			523
Loss on extinguishment of debt		17,030			—
Gain on impairment and sales of investment securities		—			(659	)
Loss on derivative instruments		3,079			4,515
Changes in operating assets and liabilities:
Receivables, net		3,630			(3,866	)
Inventories		(2,609	)		(1,502	)
Excess of pneumoconiosis benefit obligation over trust assets		480			347
Accounts payable and accrued expenses		2,009			3,770
Deferred revenue		(1,985	)		617
Accrual for workers’ compensation		(67	)		(51	)
Asset retirement obligation		(2,661	)		(1,875	)
Accrual for postretirement medical benefits		(625	)		(361	)
Pension and SERP obligations		(394	)		(39	)
Other assets and liabilities		658			(680	)

Net cash provided by operating activities		16,182			13,296


Cash flows from investing activities:
Additions to property, plant and equipment		(2,923	)		(4,337	)
Change in restricted investments and bond collateral and reclamation deposits		(1,080	)		(592	)
Net proceeds from sales of assets		22			379
Proceeds from the sale of investments		—			1,119
Receivable from customer for property and equipment purchases		(1,903	)		(510	)

Net cash used in investing activities		(5,884	)		(3,941	)


Cash flows from financing activities:
Change in book overdrafts		108			890
Borrowings from long-term debt, net of debt discount		142,500			—
Repayments of long-term debt		(60,391	)		(8,112	)
Borrowings on revolving lines of credit		50,700			28,400
Repayments of revolving lines of credit		(69,100	)		(23,300	)
Debt issuance and other refinancing costs		(14,756	)		—
Preferred dividends paid		(20,281	)		—
Exercise of stock options		131			8

Net cash provided by (used in) financing activities		28,911			(2,114	)


Net increase in cash and cash equivalents		39,209			7,241
Cash and cash equivalents, beginning of period		5,775			10,519

Cash and cash equivalents, end of period	$	44,984		$	17,760


Non-cash transactions:
Capital leases	$	—		$	866

See accompanying Notes to Consolidated Financial Statements.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 collaterized 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 collaterized 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 three months ended March 31, 2011 are not necessarily indicative of results to be expected for the year ending December 31, 2011.

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.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

INVENTORIES

Inventories consisted of the following:


	March 31,			December 31,
	2011			2010
	(In thousands)
Coal stockpiles	$	694		$	678
Coal fuel inventories		3,808			1,936
Materials and supplies		22,258			21,538
Reserve for obsolete inventory		(580	)		(581	)

Total	$	26,180		$	23,571

RESTRICTED INVESTMENTS AND BOND COLLATERAL

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


	March 31,		December 31,
	2011		2010
	(In thousands)
Coal Segment:
Westmoreland Mining — debt reserve account	$	9,964	$	7,514
Reclamation bond collateral:
Rosebud Mine		12,264		12,263
Absaloka Mine		10,974		10,956
Jewett Mine		3,001		3,001
Beulah Mine		1,270		1,270

Power Segment:
Letter of credit account		5,976		5,990
Debt protection account		—		905
Repairs and maintenance account		—		1,067
Ash reserve account		—		602

Corporate Segment:
Workers’ compensation bonds		6,390		6,350
Postretirement medical benefit bonds		5,862		5,466

Total restricted investments and bond collateral	$	55,701	$	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 investment and bond collateral accounts are not available to meet the Company’s cash needs.

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.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at March 31, 2011 are as follows:


	Carrying Value		Fair Value
	(In thousands)
Cash and cash equivalents	$	42,606	$	42,606
Time deposits		7,679		7,679
Held-to-maturity securities		2,544		2,853
Available-for-sale securities		2,872		2,872

	$	55,701	$	56,010

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 March 31, 2011, is as follows (in thousands):


Amortized cost	$	2,544
Gross unrealized holding gains		309

Fair value	$	2,853

Maturities of held-to-maturity securities are as follows at March 31, 2011:


	Amortized Cost		Fair Value
	(In thousands)
Due in five years or less	$	659	$	730
Due after five years to ten years		772		857
Due in more than ten years		1,113		1,266

	$	2,544	$	2,853

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at March 31, 2011, is as follows (in thousands):


Cost basis	$	2,566
Gross unrealized holding gains		306

Fair value	$	2,872

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

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
	March 31,			December 31,
	2011			2010
	(In thousands)
Corporate:
Senior secured notes	$	150,000		$	—
Convertible notes		—			18,495
Debt discount		(7,383	)		(4,823	)
Westmoreland Mining, LLC:
Revolving line of credit		—			1,500
Term debt		125,000			125,000
Capital lease obligations		17,184			18,407
Other term debt		2,368			2,556
Westmoreland Resources, Inc.:
Revolving line of credit		—			16,900
Term debt		—			9,600
Capital lease obligations		7,193			7,821
ROVA:
Term debt		—			46,220
Debt premiums		—			428

Total debt outstanding		294,362			242,104
Less current portion		(17,673	)		(14,973	)

Total debt outstanding, less current portion	$	276,689		$	227,131

The following table presents aggregate contractual debt maturities of all long-term debt and the lines of credit at March 31, 2011 (in thousands):


Remainder of 2011	$	12,934
2012		21,512
2013		24,815
2014		22,565
2015		21,910
Thereafter		198,009

Total		301,745
Less: debt discount		(7,383	)

Total debt	$	294,362

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 three months ended March 31, 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 March 31, 2011, the Company was in compliance with all covenants.

Westmoreland Mining LLC

WML has outstanding $125.0 million in term debt as of March 31, 2011 and is party to a revolving credit facility with a maximum availability of $25.0 million. In the three months ended March 31, 2011, WML repaid $1.4 million of its capital lease obligations and other term debt. The weighted average interest rate for WML’s capital leases and other term debt was 7.99% and 6.19%, respectively, at March 31, 2011.

The available balance on the $25.0 million revolving line of credit at March 31, 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 March 31, 2011.

WML’s lending arrangements contain, among other provisions, events of default and various affirmative and negative covenants. As of March 31, 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 three months ended March 31, 2011, WRI repaid $0.6 million of its capital lease obligations. WRI did not enter into any capital lease or other debt agreements during the three months ended March 31, 2011. The weighted average interest rate for WRI’s capital leases was 6.68% at March 31, 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.

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
	March 31,
	2011			2010
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	153		$	196
Interest cost		1,120			1,606
Expected return on plan assets		(1,106	)		(1,299	)
Amortization of deferred items		385			228

Total net periodic benefit cost	$	552		$	731

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 $0.9 million in cash to its retirement plans in the three months ended March 31, 2011. The Company expects to make approximately $9.3 million of pension plan contributions during the remainder of 2011.

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 as follows:


	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	123		$	141
Interest cost		2,627			2,752
Amortization of deferred items		(72	)		(68	)

Total net periodic benefit cost	$	2,678		$	2,825

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


	Three Months Ended
	March 31,
	2011		2010
	(In thousands)
Former mining operations	$	2,314	$	2,518
Current operations		364		307

Total net periodic benefit cost	$	2,678	$	2,825

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.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

The Company expects to pay approximately $10.3 million for postretirement medical benefits during the remainder of 2011, net of Medicare Part D reimbursements. A total of $3.3 million was paid in the three months ended March 31, 2011, net of Medicare Part D reimbursements.

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
	March 31,
	2011		2010
	(In thousands)
Health care benefits	$	2,454	$	2,676
Combined benefit fund payments		686		756
Workers’ compensation benefits		158		136
Black lung benefits		480		347

Total	$	3,778	$	3,915

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 March 31, 2011 are summarized below:


			Contractual Third-
	Asset Retirement		Party Reclamation		Reclamation
	Obligations		Receivables		Deposits
	(In thousands)
Rosebud	$	107,247	$	14,797	$	73,007
Jewett		80,816		80,816		—
Absaloka		32,437		539		—
Beulah		18,390		—		—
Savage		2,733		—		—
ROVA		729		—		—

Total	$	242,352	$	96,152	$	73,007

Asset Retirement Obligations

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


	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Asset retirement obligations, beginning of period	$	241,643		$	244,615
Accretion		5,019			4,792
Liabilities settled		(4,310	)		(3,906	)

Asset retirement obligations, end of period		242,352			245,501
Less current portion		(15,235	)		(16,675	)

Asset retirement obligations, less current portion	$	227,117		$	228,826

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Contractual Third-Party Reclamation Receivables

The Company has recognized an asset of $96.2 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 March 31, 2011 are as follows:


	Carrying Value		Fair Value
	(In thousands)
Cash and cash equivalents	$	36,146	$	36,146
Held-to-maturity securities		18,767		20,036
Time deposits		15,903		15,903
Available-for-sale securities		2,191		2,191

	$	73,007	$	74,276

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 March 31, 2011 are as follows (in thousands):


Amortized cost	$	18,767
Gross unrealized holding gains		1,341
Gross unrealized holding losses		(72	)

Fair value	$	20,036

Maturities of held-to-maturity securities at March 31, 2011 are as follows:


	Amortized Cost		Fair Value
	(In thousands)
Due in five years or less	$	7,529	$	7,854
Due after five years to ten years		4,067		4,177
Due in more than ten years		7,171		8,005

	$	18,767	$	20,036

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at March 31, 2011 are as follows (in thousands):


Cost basis	$	2,000
Gross unrealized holding gains		191

Fair value	$	2,191

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

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 the conversion feature in the Company’s convertible debt instrument was determined using the following assumptions at February 4, 2011:


Stock Price	Bond Yield
$13.57		4.55	%

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


	Balance Sheet	March 31,		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 was as follows:


		Three Months Ended
	Statement of	March 31,
Derivative Instruments	Operations Location	2011			2010
		(In thousands)
Convertible debt — conversion feature	Other income (loss)	$	(3,079	)	$	(4,521	)
Warrant	Other income (loss)		—			6

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.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

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


	Fair Value at
	March 31, 2011
	Level 1
	(In thousands)
Assets:
Available-for-sale investments included in Restricted investments and bond collateral	$	2,872
Available-for-sale investments included in Reclamation deposits		2,191

Total assets	$	5,063

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


	Three Months Ended
	March 31, 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 March 31, 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
March 31, 2011	$	267,617	$	278,465

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.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

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
	March 31,
	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	$	569	$	225
Contributions of stock to the Company’s 401(k) plan		1,084		1,138

Total share-based compensation expense	$	1,653	$	1,363

Restricted Stock Units

A summary of restricted stock unit activity for the three months ended March 31, 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
Non-vested at March 31, 2011		192,697	$	8.13	$	1,118	⁽¹⁾


¹		Expected to be recognized over the next two years.

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.

Stock Options

Information with respect to stock option activity for the three months ended March 31, 2011 is as follows:


						Weighted
						Average
						Remaining		Aggregate		Unamortized
				Weighted		Contractual		Intrinsic		Compensation
	Stock			Average		Life		Value		Expense
	Options			Exercise Price		(in years)		(In thousands)		(In thousands)
Outstanding at December 31, 2010		318,590		$	18.99
Exercised		(12,500	)	$	10.48			$	49
Expired or forfeited		(20,000	)	$	12.04

Outstanding at March 31, 2011		286,090		$	19.86		4.5	$	17

Options exercisable at March 31, 2011		241,334		$	19.57		4.0	$	17	$	131	⁽¹⁾


¹		Expected to be recognized over the next three months.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Stock Appreciation Rights

Information with respect to stock appreciation rights, or SARs, activity for the three months ended March 31, 2011 is as follows:

Weighted

Average

Remaining

Aggregate

Unamortized

Weighted

Contractual

Intrinsic

Compensation

Average

Life

Value

Expense

SARs

Base Price

(in years)

(In thousands)

Outstanding at December 31, 2010

118,934

22.13

Outstanding and exercisable at March 31, 2011

118,934

22.13

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 months ended March 31, 2011 and March 31, 2010 because the Company incurred a loss from operations in each of these periods and the effect of inclusion would have been anti-dilutive.

The table below shows the number of shares that were excluded from the calculation of diluted income (loss) per share because their inclusion would be anti-dilutive to the calculation:


	Three Months Ended
	March 31,
	2011		2010
	(In thousands)
Convertible notes and securities		1,094		2,859
Restricted stock units, stock options, SARs, and warrant shares		598		776

Total shares excluded from diluted shares calculation		1,692		3,635

14.

BUSINESS SEGMENT INFORMATION

Segment information is based on a management approach, which requires segmentation based upon the Company’s internal organization and reporting of revenue and operating income.

The Company’s operations are classified into four segments: coal, power, heritage and corporate.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Summarized financial information by segment is as follows:


	Coal		Power		Heritage			Corporate			Consolidated
	(In thousands)
Three Months Ended March 31, 2011
Revenues	$	104,136	$	23,628	$	—		$	—		$	127,764
Depreciation, depletion, and amortization		8,613		2,553		—			79			11,245
Operating income (loss)		8,819		4,619		(4,170	)		(1,828	)		7,440
Total assets		516,725		206,894		12,541			51,827			787,987
Capital expenditures		2,688		227		—			8			2,923
Three Months Ended March 31, 2010
Revenues	$	103,550	$	22,889	$	—		$	—		$	126,439
Depreciation, depletion, and amortization		8,757		2,536		—			99			11,392
Operating income (loss)		7,352		4,172		(4,255	)		(1,955	)		5,314
Total assets		538,886		220,127		11,247			8,258			778,518
Capital expenditures		3,829		68		—			440			4,337

A reconciliation of segment operating income to loss before income taxes follows:


	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Operating income	$	7,440		$	5,314
Interest expense		(6,967	)		(5,723	)
Loss on extinguishment of debt		(17,030	)		—
Interest income		382			410
Other loss		(3,017	)		(3,836	)

Loss before income taxes	$	(19,192	)	$	(3,835	)

15.

CONTINGENCIES

The Company is a party to claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably estimable. After conferring with counsel, it is the opinion of management that the ultimate resolution of pending claims will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

16.

SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

Pursuant to the indenture governing the Parent Notes, certain wholly owned subsidiaries of the Company have fully and unconditionally guaranteed the notes on a joint and several basis. The following tables present unaudited consolidating financial information for (i) the issuer of the notes (Westmoreland Coal Company), (ii) the co-issuer of the notes (Westmoreland Partners), (iii) the guarantors under the notes, and (iv) the entities which are not guarantors under the notes:

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING BALANCE SHEETS
March 31, 2011
(In thousands)


										Non-
	Parent/						Guarantor			Guarantor			Consolidating
Assets	Issuer			Co-Issuer			Subsidiaries			Subsidiaries			Adjustments			Total
Current assets:
Cash and cash equivalents	$	36,770		$	3,715		$	161		$	4,338		$	—		$	44,984
Receivables:
Trade		—			13,880			9			35,887			—			49,776
Contractual third-party reclamation receivables		—			—			127			7,511			—			7,638
Intercompany receivable/payable		(20,135	)		—			10,050			(23,504	)		33,589			—
Other		161			221			8,973			109			(5,844	)		3,620

		(19,974	)		14,101			19,159			20,003			27,745			61,034
Inventories		—			3,808			4,209			18,163			—			26,180
Other current assets		745			423			554			3,739			—			5,461

Total current assets		17,541			22,047			24,083			46,243			27,745			137,659

Property, plant and equipment:
Land and mineral rights		—			1,156			17,806			64,931			—			83,893
Capitalized asset retirement cost		—			239			20,463			94,154			—			114,856
Plant and equipment		2,619			216,391			117,447			172,556			—			509,013

		2,619			217,786			155,716			331,641			—			707,762
Less accumulated depreciation, depletion and amortization		(2,066	)		(44,709	)		(84,290	)		(168,316	)		—			(299,381	)

Net property, plant and equipment		553			173,077			71,426			163,325			—			408,381
Advanced coal royalties		—			—			848			2,684			—			3,532
Reclamation deposits		—			—			—			73,007			—			73,007
Restricted investments and bond collateral		12,251			5,976			10,975			26,499			—			55,701
Contractual third-party reclamation receivables, less current portion		—			—			412			88,102			—			88,514
Deferred income taxes		—			—			—			—			2,900			2,900
Intangible assets		—			5,793			—			344			—			6,137
Investment in subsidiaries		157,792			—			(717	)		3,770			(160,845	)		—
Other assets		7,385			—			1,387			3,384			—			12,156

Total assets	$	195,522		$	206,893		$	108,414		$	407,358		$	(130,200	)	$	787,987

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING BALANCE SHEETS
March 31, 2011
(In thousands)


									Non-
	Parent/						Guarantor		Guarantor			Consolidating
Liabilities and Stockholders’ Deficit	Issuer			Co-Issuer			Subsidiaries		Subsidiaries			Adjustments			Total
Current liabilities
Current installments of long-term debt	$	(735	)	$	—		$	2,296	$	16,112		$	—		$	17,673
Accounts payable and accrued expenses:
Trade		2,688			9,733			3,067		35,015			(6,149	)		44,354
Production taxes		—			334			1,354		26,779			—			28,467
Workers’ compensation		951			—			—		—			—			951
Postretirement medical benefits		12,198			—			—		1,383			—			13,581
SERP		304			—			—		—			—			304
Deferred revenue		—			8,689			37		1,868			—			10,594
Asset retirement obligations		—			—			3,184		12,051			—			15,235
Other current liabilities		2,571			—			2,000		2,925			28			7,524

Total current liabilities		17,977			18,756			11,938		96,133			(6,121	)		138,683

Long-term debt, less current installments		143,352			—			4,897		128,440			—			276,689
Workers’ compensation, less current portion		9,360			—			—		—			—			9,360
Excess of pneumoconiosis benefit obligation over trust assets		2,726			—			—		—			—			2,726
Postretirement medical benefits, less current portion		168,953			—			—		27,773			—			196,726
Pension and SERP obligations, less current portion		15,709			150			—		3,824			—			19,683
Deferred revenue, less current portion		—			65,050			—		7,975			—			73,025
Asset retirement obligations, less current portion		—			728			29,253		197,136			—			227,117
Intangible liabilities		—			8,409			—		—			—			8,409
Other liabilities		473			—			4,518		1,435			3,070			9,496
Intercompany receivable/payable		10,899			—			6,878		28,507			(46,284	)		—

Total liabilities		369,449			93,093			57,484		491,223			(49,335	)		961,914


Shareholders’ Deficit
Preferred stock		160			—			—		—			—			160
Common stock		32,887			5			110		132			(247	)		32,887
Other paid-in capital		120,748			52,699			16,583		52,717			(121,999	)		120,748
Accumulated other comprehensive loss		(57,507	)		(200	)		94		(14,113	)		14,219			(57,507	)
Accumulated deficit		(264,632	)		61,296			34,143		(122,601	)		27,162			(264,632	)

Total Westmoreland Coal Company shareholders’ deficit		(168,344	)		113,800			50,930		(83,865	)		(80,865	)		(168,344	)
Noncontrolling interest		(5,583	)		—			—		—			—			(5,583	)

Total deficit		(173,927	)		113,800			50,930		(83,865	)		(80,865	)		(173,927	)

Total liabilities and stockholders’ deficit	$	195,522		$	206,893		$	108,414	$	407,358		$	(130,200	)	$	787,987

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING BALANCE SHEETS
December 31, 2010
(In thousands)


										Non-
	Parent/						Guarantor			Guarantor			Consolidating
Assets	Issuer			Co-Issuer			Subsidiaries			Subsidiaries			Adjustments			Total
Current assets:
Cash and cash equivalents	$	271		$	880		$	—		$	4,624		$	—		$	5,775
Receivables:
Trade		—			14,148			65			36,365			—			50,578
Contractual third-party reclamation receivables		—			—			135			7,608			—			7,743
Intercompany receivable/payable		—			—			10,193			(21,544	)		11,351			—
Other		66			198			4,917			1,530			(2,166	)		4,545

		66			14,346			15,310			23,959			9,185			62,866
Inventories		—			1,935			4,624			17,012			—			23,571
Other current assets		796			224			469			3,944			(98	)		5,335

Total current assets		1,133			17,385			20,403			49,539			9,087			97,547

Property, plant and equipment:
Land and mineral rights		—			1,156			17,806			64,862			—			83,824
Capitalized asset retirement cost		—			239			20,463			94,154			—			114,856
Plant and equipment		2,611			215,851			117,360			170,839			—			506,661

		2,611			217,246			155,629			329,855			—			705,341
Less accumulated depreciation, depletion and amortization		(1,987	)		(42,156	)		(82,239	)		(162,004	)		—			(288,386	)

Net property, plant and equipment		624			175,090			73,390			167,851			—			416,955
Advanced coal royalties		—			—			998			2,697			—			3,695
Reclamation deposits		—			—			—			72,274			—			72,274
Restricted investments and bond collateral		11,816			8,563			10,956			24,049			—			55,384
Contractual third-party reclamation receivables		—			—			390			87,349			—			87,739
Deferred income taxes		—			—			—			—			2,458			2,458
Intangible assets		—			6,203			—			352			—			6,555
Investment in subsidiaries		115,612			—			(717	)		3,770			(118,665	)		—
Other assets		2,060			401			1,683			3,555			—			7,699

Total assets	$	131,245		$	207,642		$	107,103		$	411,436		$	(107,120	)	$	750,306

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING BALANCE SHEETS
December 31, 2010
(In thousands)


										Non-
	Parent/						Guarantor			Guarantor			Consolidating
Liabilities and Stockholders’ Deficit	Issuer			Co-Issuer			Subsidiaries			Subsidiaries			Adjustments			Total
Current liabilities
Current installments of long-term debt	$	—		$	—		$	2,255		$	12,718		$	—		$	14,973
Accounts payable and accrued expenses:
Trade		5,187			8,549			3,283			31,709			(2,481	)		46,247
Production taxes		—			2			1,084			25,231			—			26,317
Workers’ compensation		954			—			—			—			—			954
Postretirement medical benefits		12,198			—			—			1,383			—			13,581
SERP		304			—			—			—			—			304
Deferred revenue		—			8,805			349			1,055			—			10,209
Asset retirement obligations		—			—			3,371			11,143			—			14,514
Other current liabilities		249			782			3,138			2,164			(92	)		6,241

Total current liabilities		18,892			18,138			13,480			85,403			(2,573	)		133,340

Long-term debt, less current installments		13,671			46,648			15,166			133,246			—			208,731
Revolving lines of credit, less current portion		—			—			16,900			1,500			—			18,400
Workers’ compensation, less current portion		9,424			—			—			—			—			9,424
Excess of pneumoconiosis benefit obligation over trust assets		2,246			—			—			—			—			2,246
Postretirement medical benefits, less current portion		169,677			—			—			27,602			—			197,279
Pension and SERP obligations, less current portion		16,105			154			—			4,203			—			20,462
Deferred revenue, less current portion		—			67,308			—			8,087			—			75,395
Asset retirement obligations, less current portion		—			715			28,967			197,447			—			227,129
Intangible liabilities		—			8,663			—			—			—			8,663
Other liabilities		4,153			—			3,149			1,409			2,881			11,592
Intercompany receivable/payable		59,432			—			(19,590	)		26,424			(66,266	)		—

Total liabilities		293,600			141,626			58,072			485,321			(65,958	)		912,661


Shareholders’ Deficit
Preferred stock		160			—			—			—			—			160
Common stock		27,901			5			110			132			(247	)		27,901
Other paid-in capital		98,466			30			16,036			53,264			(69,330	)		98,466
Accumulated other comprehensive income		(57,680	)		(203	)		120			(14,353	)		14,436			(57,680	)
Accumulated earnings (deficit)		(226,740	)		66,184			32,765			(112,928	)		13,979			(226,740	)

Total Westmoreland Coal Company shareholders’ deficit		(157,893	)		66,016			49,031			(73,885	)		(41,162	)		(157,893	)
Noncontrolling interest		(4,462	)		—			—			—			—			(4,462	)

Total equity (deficit)		(162,355	)		66,016			49,031			(73,885	)		(41,162	)		(162,355	)

Total liabilities and stockholders’ deficit	$	131,245		$	207,642		$	107,103		$	411,436		$	(107,120	)	$	750,306

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2011
(In thousands)


										Non-
	Parent/						Guarantor			Guarantor			Consolidating
	Issuer			Co-Issuer			Subsidiaries			Subsidiaries			Adjustments			Total
Revenues	$	—		$	23,628		$	14,824		$	103,197		$	(13,885	)	$	127,764

Costs, expenses:
Cost of sales		—			15,559			11,152			84,684			(13,885	)		97,510
Depreciation, depletion and amortization		79			2,553			2,051			6,562			—			11,245
Selling and administrative		2,379			897			1,008			5,021			—			9,305
Heritage health benefit expenses		3,576			—			—			202			—			3,778
Loss on sales of assets		—			—			—			83			—			83
Other operating income		—			—			(1,597	)		—			—			(1,597	)

		6,034			19,009			12,614			96,552			(13,885	)		120,324

Operating income (loss)		(6,034	)		4,619			2,210			6,645			—			7,440
Other income (expense):
Interest expense		(3,073	)		(428	)		(301	)		(3,184	)		19			(6,967	)
Loss on extinguishment of debt		(7,873	)		(9,073	)		(84	)		—			—			(17,030	)
Interest income		60			6			68			267			(19	)		382
Other income (loss)		(3,079	)		—			33			29			—			(3,017	)

		(13,965	)		(9,495	)		(284	)		(2,888	)		—			(26,632	)

Income (loss) from operations before income taxes		(19,999	)		(4,876	)		1,926			3,757			—			(19,192	)
Equity in income of subsidiaries		(1,104	)		—			—			—			1,104			—

		(18,895	)		(4,876	)		1,926			3,757			(1,104	)		(19,192	)
Income tax (benefit) expense from operations		(163	)		—			547			1,566			(2,410	)		(460	)

Net income (loss)		(18,732	)		(4,876	)		1,379			2,191			1,306			(18,732	)
Less net income attributable to noncontrolling interest		(1,121	)		—			—			—			—			(1,121	)

Net income (loss) attributable to the Parent company	$	(17,611	)	$	(4,876	)	$	1,379		$	2,191		$	1,306		$	(17,611	)

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2010
(In thousands)


										Non-
	Parent/						Guarantor			Guarantor			Consolidating
	Issuer			Co-Issuer			Subsidiaries			Subsidiaries			Adjustments			Total
Revenues	$	(33	)	$	22,889		$	12,721		$	103,253		$	(12,391	)	$	126,439

Costs, expenses:
Cost of sales		—			15,045			11,637			83,419			(12,424	)		97,677
Depreciation, depletion and amortization		99			2,537			1,921			6,835			—			11,392
Selling and administrative		2,356			1,136			1,115			5,369			—			9,976
Heritage health benefit expenses		3,681			—			—			234			—			3,915
Loss on sales of assets		—			—			—			71			—			71
Other operating income		—			—			(1,906	)		—			—			(1,906	)

		6,136			18,718			12,767			95,928			(12,424	)		121,125

Operating income (loss)		(6,169	)		4,171			(46	)		7,325			33			5,314
Other income (expense):
Interest expense		(724	)		(1,218	)		(641	)		(3,140	)		—			(5,723	)
Interest income		53			18			(133	)		477			(5	)		410
Other income (loss)		(4,424	)		5			—			583			—			(3,836	)

		(5,095	)		(1,195	)		(774	)		(2,080	)		(5	)		(9,149	)

Income (loss) from operations before income taxes		(11,264	)		2,976			(820	)		5,245			28			(3,835	)
Equity in income of subsidiaries		(8,408	)		—			—			—			8,408			—

		(2,856	)		2,976			(820	)		5,245			(8,380	)		(3,835	)
Income tax (benefit) expense from operations		—			32			(246	)		2,737			(2,613	)		(90	)

Net income (loss)		(2,856	)		2,944			(574	)		2,508			(5,767	)		(3,745	)
Less net income attributable to noncontrolling interest		—			—			—			—			(890	)		(890	)

Net income (loss) attributable to the Parent company	$	(2,856	)	$	2,944		$	(574	)	$	2,508		$	(4,877	)	$	(2,855	)

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2011
(In thousands)


										Non-
	Parent/						Guarantor			Guarantor			Consolidating
Statements of Cash Flows	Issuer			Co-Issuer			Subsidiaries			Subsidiaries			Adjustments			Total
Cash flows from operating activities:
Net income (loss)	$	(18,732	)	$	(4,875	)	$	1,378		$	2,192		$	1,305		$	(18,732	)
Adjustments to reconcile net loss to net cash provided by operation activities:
Equity in income of subsidiaries		(1,104	)		—			—			—			1,104			—
Depreciation, depletion, and amortization		79			2,553			2,051			6,562			—			11,245
Accretion of asset retirement obligation and receivable		—			14			758			1,928			—			2,700
Amortization of intangible assets and liabilities, net		—			155			—			8			—			163
Non-cash tax benefits		—			—			—			—			(110	)		(110	)
Share-based compensation		1,653			—			—			—			—			1,653
Loss on sale of assets		—			—			—			83			—			83
Amortization of deferred financing costs		377			(21	)		109			170			—			635
Loss on extinguishment of debt		7,873			9,073			84			—			—			17,030
Gain (loss) on derivative		3,079			—			—			—			—			3,079
Changes in operating assets and liabilities:
Receivables, net		(95	)		245			(4,001	)		3,803			3,678			3,630
Inventories		—			(1,873	)		415			(1,151	)		—			(2,609	)
Excess of pneumoconiosis benefit obligation over trust assets		480			—			—			—			—			480
Accounts payable and accrued expenses		(2,499	)		533			(147	)		7,791			(3,669	)		2,009
Deferred revenue		—			(2,374	)		(312	)		701			—			(1,985	)
Accrual for workers’ compensation		(67	)		—			—			—			—			(67	)
Asset retirement obligations		—			—			(673	)		(1,988	)		—			(2,661	)
Accrual for postretirement medical benefits		(870	)		—			—			245			—			(625	)
Pension and SERP obligations		(193	)		—			—			(201	)		—			(394	)
Other assets and liabilities		2,425			(314	)		1,202			(2,425	)		(230	)		658

Net cash provided by (used in) operating activities		(7,594	)		3,116			864			17,718			2,078			16,182

Cash flows from investing activities:
Distributions received by subsidiaries		11,700			—			—			—			(11,700	)		—
Additions to property, plant and equipment		(8	)		(227	)		(112	)		(2,576	)		—			(2,923	)
Change in restricted investments and bond collateral and reclamation deposits		(440	)		2,587			(45	)		(3,182	)		—			(1,080	)
Net proceeds from sales of assets		—			—			—			22			—			22
Receivable from customer for property and equipment purchases		—			—			—			(1,903	)		—			(1,903	)

Net cash provided by (used in) investing activities		11,252			2,360			(157	)		(7,639	)		(11,700	)		(5,884	)

Cash flows from financing activities:
Bank overdrafts		(146	)		—			(674	)		928			—			108
Borrowings of long-term debt, net of debt discount		142,500			—			—			—			—			142,500
Repayments of long-term debt		(2,532	)		(46,220	)		(10,230	)		(1,409	)		—			(60,391	)
Borrowings on revolving lines of credit		—			1,500			12,200			37,000			—			50,700
Repayments on revolving lines of credit		—			(1,500	)		(29,100	)		(38,500	)		—			(69,100	)
Debt issuance and other refinancing costs		(5,779	)		(9,077	)		100			—			—			(14,756	)
Dividends/distributions		(20,281	)		—			—			(11,700	)		11,700			(20,281	)
Exercise of stock options		131			—			—			—			—			131
Transactions with Parent/affiliates		(81,051	)		52,656			27,158			3,315			(2,078	)		—

Net cash provided by (used in) financing activities		32,842			(2,641	)		(546	)		(10,366	)		9,622			28,911

Net increase (decrease) in cash and cash equivalents		36,500			2,835			161			(287	)		—			39,209
Cash and cash equivalents, beginning of year		271			880			—			4,624			—			5,775

Cash and cash equivalents, end of year	$	36,771		$	3,715		$	161		$	4,337		$	—			44,984

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2010
(In thousands)


										Non-
	Parent/						Guarantor			Guarantor			Consolidating
Statements of Cash Flows	Issuer			Co-Issuer			Subsidiaries			Subsidiaries			Adjustments			Total
Cash flows from operating activities:
Net income (loss)	$	(11,264	)	$	2,943		$	(573	)	$	2,507		$	2,642		$	(3,745	)
Adjustments to reconcile net income (loss) to net cash provided by operation activities:
Equity in income of subsidiaries		(8,408	)		—			—			—			8,408			—
Depreciation, depletion, and amortization		99			2,537			1,921			6,835			—			11,392
Accretion of asset retirement obligation and receivable		—			13			752			2,238			—			3,003
Amortization of intangible assets and liabilities, net		—			155			—			(70	)		—			85
Share-based compensation		1,363			—			—			—			—			1,363
Loss on sale of assets		—			—			—			71			—			71
Non-cash interest expense		388			—			—			—			—			388
Amortization of deferred financing costs		335			(86	)		125			149			—			523
Gain on impairments and sales of investment securities		(97	)		—			—			(562	)		—			(659	)
Gain (loss) on derivative		4,521			(6	)		—			—			—			4,515
Changes in operating assets and liabilities:
Receivables, net		359			(432	)		(2,540	)		(2,609	)		1,356			(3,866	)
Inventories		—			(1,363	)		116			(255	)		—			(1,502	)
Excess of pneumoconiosis benefit obligation over trust assets		347			—			—			—			—			347
Accounts payable and accrued expenses		(322	)		3,069			134			2,597			(1,708	)		3,770
Deferred revenue		—			(572	)		—			1,189			—			617
Accrual for workers’ compensation		(51	)		—			—			—			—			(51	)
Asset retirement obligations		—			—			(188	)		(1,687	)		—			(1,875	)
Accrual for postretirement medical benefits		(522	)		—			—			161			—			(361	)
Pension and SERP obligations		280			1			—			(320	)		—			(39	)
Other assets and liabilities		(634	)		(187	)		680			(417	)		(122	)		(680	)

Net cash provided by (used in) operating activities		(13,606	)		6,072			427			9,827			10,576			13,296

Cash flows from investing activities:
Distributions received by subsidiaries		8,100			—			—			—			(8,100	)		—
Additions to property, plant and equipment		(440	)		(68	)		(635	)		(3,194	)		—			(4,337	)
Change in restricted investments and bond collateral and reclamation deposits		(579	)		1,691			131			(1,835	)		—			(592	)
Net proceeds from sales of assets		—			—			—			379			—			379
Proceeds from the sale of investments		156			—			—			963			—			1,119
Receivable from customer for property and equipment purchases		—			—			—			(510	)		—			(510	)

Net cash provided by (used in) investing activities		7,237			1,623			(504	)		(4,197	)		(8,100	)		(3,941	)

Cash flows from financing activities:
Bank overdrafts		(76	)		—			(14	)		980			—			890
Borrowings of long-term debt		—			—			—			—			—			—
Repayments of long-term debt		—			(5,405	)		(1,118	)		(1,589	)		—			(8,112	)
Borrowings on revolving lines of credit		—			3,800			20,100			4,500			—			28,400
Repayments on revolving lines of credit		—			—			(18,800	)		(4,500	)		—			(23,300	)
Debt issuance costs		—			—			—			—			—			—
Exercise of stock options		8			—			—			—			—			8
Dividends/distributions		—			—			—			(8,100	)		8,100			—
Transactions with Parent/affiliates		6,186			(163	)		(75	)		4,628			(10,576	)		—

Net cash provided by (used in) financing activities		6,118			(1,768	)		93			(4,081	)		(2,476	)		(2,114	)

Net increase (decrease) in cash and cash equivalents		(251	)		5,927			16			1,549			—			7,241
Cash and cash equivalents, beginning of year		755			138			—			9,626			—			10,519

Cash and cash equivalents, end of year	$	504		$	6,065		$	16		$	11,175		$	—			17,760

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. Examples of forward-looking statements include, but not limited to, statements we make about our expectation that coal tons delivered over the remainder of 2011 may decrease as a result of favorable hydropower conditions, the expectation that our cash flows from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the next several years, our intended use of the net proceeds remaining from the Parent Notes offering for general corporate purposes including the possible acquisition of new reserves, and our expectation that distributions from ROVA and WRI will comprise a significant source of liquidity for us.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include political, economic, business, competitive, market, weather and regulatory conditions and the following:

•

changes in our postretirement medical benefit and pension obligations and the impact of recently enacted healthcare legislation;

•

changes in our black lung obligations, changes in our experience related to black lung claims, and the impact of recently enacted healthcare legislation;

•

our potential inability to expand or continue current coal operations due to limitations in obtaining bonding capacity for new mining permits;

•

our potential inability to maintain compliance with debt covenant and waiver agreement requirements;

•

the potential inability of our subsidiaries to pay dividends to us due to restrictions in our debt arrangements, reductions in planned coal deliveries or other business factors;

•

risks associated with the structure of ROVA’s contracts with its lenders, coal suppliers and power purchaser, which could dramatically affect the overall profitability of ROVA;

•

the effect of EPA inquiries and regulations on the operations of ROVA;

•

the effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers, including unplanned outages at our customers due to the impact of weather-related variances;

•

future legislation and changes in regulations, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases; and

•

the other factors that are described in “Risk Factors” herein and under Part II, Item 1A and under Part I, Item 1A of the 2010 Form 10-K.

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it was made. Factors or events that could cause our actual results to differ may emerge from time-to-time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

Overview

Westmoreland Coal Company is an energy company whose operations include five surface coal mines in Montana, North Dakota and Texas and two coal-fired power-generating units with a total capacity of 230 megawatts in North Carolina. We sold 25.2 million tons of coal in 2010. Our two principal operating segments are our coal segment and our power segment, in addition to two non-operating segments.

We are a holding company and conduct our operations through subsidiaries. We have significant cash requirements to fund our ongoing heritage health benefit costs and corporate overhead expenses. The principal sources of cash flow to us are distributions from our principal operating subsidiaries. Following the Parent Notes offering, discussed below, we now have $45.0 million cash on hand at March 31, 2011. The indenture governing the Parent Notes also permits us to enter into a revolving credit facility at the Parent.

Recent Developments

In February 2011, we completed a private placement of $150.0 million of senior secured notes due in 2018, referred to herein as the Parent Notes. The net proceeds from the offering of the Parent Notes were used to pay all dividend arrearages on our Series A preferred stock, to repay all outstanding term and revolving line of credit debt at our Roanoke Valley power plants, or ROVA, and Westmoreland Resources, Inc., or WRI, to retire approximately $2.5 million of the outstanding principal owed on our senior secured convertible notes (the remaining principal balance of the senior secured convertible notes was converted to common stock) and for general corporate purposes. We are required to file a registration statement with the SEC to register the Parent Notes under the Securities Act of 1933 within 120 days after the completion of the offering, which was February 4, 2011.

Results of Operations

Items that Affect Comparability of Our Results

For the three months ended March 31, 2011 and 2010, our results have included items that do not relate directly to ongoing operations. The expense components of these items were as follows:


	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Loss on extinguishment of debt	$	(17,030	)	$	—
Fair value adjustment on derivatives and related amortization of debt discount		(3,215	)		(4,824	)

Impact	$	(20,245	)	$	(4,824	)

Items recorded in the three months ended March 31, 2011

As a result of the Parent Notes offering, we recorded $17.0 million of loss on extinguishment of debt. 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.

Upon the retirement of our convertible debt, we recorded an expense of $3.1 million resulting from the mark-to-market accounting for the conversion feature in the notes with $0.1 million of interest expense of a related debt discount.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

Items recorded in the three months ended March 31, 2010

We recorded an expense of $4.5 million resulting from the mark-to-market accounting of the conversion feature in our convertible notes with $0.3 million of interest expense of a related debt discount.

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Summary

Our first quarter 2011 revenues increased to $127.8 million compared with $126.4 million in the first quarter of 2010. This increase was partly driven by an increase in our coal segment revenues due to stronger tonnage sales at our Absaloka Mine which offset the expiration of an unprofitable coal contract at our Rosebud Mine. In addition, our power segment revenues increased primarily from contractual price increases.

Our first quarter 2011 net loss applicable to common shareholders increased to $18.0 million compared with a $3.2 million loss in the first quarter of 2010. Excluding $20.2 million of first quarter 2011 expenses and $4.8 million of first quarter 2010 expenses discussed in Items that Affect Comparability of Our Results, our net loss decreased by $0.6 million. The primary factors, in aggregate, driving this decrease in net loss were:


	Three Months
	Ended
	March 31, 2011
	(In millions)
Increase in our coal segment operating income primarily driven by the expiration of an unprofitable coal contract at our Rosebud Mine	$	1.5

Increase in interest expense primarily due to higher overall debt levels resulting from the Parent Notes offering		(1.4	)

Decrease in other income primarily due to gains on sales of securities during the first quarter of 2010		(0.6	)

Increase in our power segment operating income resulting primarily from contractual price increases		0.4

Increase in income tax benefit related to lower taxable income		0.4

Increase due to other factors		0.3


	$	0.6

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

Coal Segment Operating Results

The following table shows comparative coal revenues, operating income (loss) and sales volume and percentage changes between periods:


	Three Months Ended March 31,
					Increase / (Decrease)
	2011		2010		$			%
Revenues (in thousands)	$	104,136	$	103,550	$	586			0.6	%
Operating income (in thousands)		8,819		7,352		1,467			20.0	%
Adjusted EBITDA (in thousands)¹		21,285		20,237		1,048			5.2	%
Tons sold — millions of equivalent tons		5.6		6.3		(0.7	)		(11.1	)%
Operating income per ton sold	$	1.57	$	1.17	$	0.40		$	34.9	%


1)		Adjusted EBITDA is defined and reconciled to net loss at the end of this “Results of Operations” section.

Our first quarter 2011 coal segment revenues increased to $104.1 million compared with $103.6 million in the first quarter of 2010. This $0.6 million increase was primarily due to stronger tonnage sales at our Absaloka Mine which offset the expiration of an unprofitable coal contract at our Rosebud Mine.

Our coal segment operating income was $8.8 million in the first quarter of 2011 compared to $7.4 million in the first quarter of 2010. This $1.5 million increase was primarily driven by the expiration of an unprofitable coal contract at our Rosebud Mine discussed above.

We expect that coal tons delivered over the remainder of 2011 may decrease as a result of favorable hydropower condition, which may displace our customers’ coal-generated power.

Power Segment Operating Results

The following table shows comparative power revenues, operating income, production and percentage changes between periods:


	Three Months Ended March 31,
					Increase / (Decrease)
	2011		2010		$		%
	(In thousands)
Revenues	$	23,628	$	22,889	$	739		3.2	%
Operating income		4,619		4,172		447		10.7	%
Adjusted EBITDA¹		7,352		6,881		471		6.8	%
Megawatts hours		435		435		—		—


1)		Adjusted EBITDA is defined and reconciled to net loss at the end of this “Results of Operations” section.

Our first quarter 2011 power segment revenues increased to $23.6 million compared to $22.9 million in first quarter 2010. This $0.7 million increase is primarily from contractual price increases.

Our power segment operating income increased to $4.6 million in the first quarter of 2011 compared to $4.2 million in the first quarter of 2010. This $0.4 million increase was primarily from the contractual price increases discussed above.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

Heritage Segment Operating Results

The following table shows comparative detail of the heritage segment’s operating expenses and percentage changes between periods:


	Three Months Ended March 31,
					Increase / (Decrease)
	2011		2010		$			%
	(In thousands)
Health care benefits	$	2,454	$	2,676	$	(222	)		(8.3	)%
Combined benefit fund payments		686		756		(70	)		(9.3	)%
Workers’ compensation benefits		158		136		22			16.2	%
Black lung benefits		480		347		133			38.3	%

Total heritage health benefit expenses		3,778		3,915		(137	)		(3.5	)%

Selling and administrative costs		392		340		52			15.3	%

Heritage segment operating loss	$	4,170	$	4,255	$	(85	)		(2.0	)%

Our first quarter 2011 heritage operating expenses of $4.2 million was comparable to $4.3 million in the first quarter of 2010.

Corporate Segment Operating Results

Our corporate segment operating expenses for the first quarter of 2011 of $1.8 million was comparable to $1.9 million in the first quarter of 2010.

Nonoperating Results (including interest expense, other income (expense) and income tax benefit)

Our interest expense for the first quarter of 2011 increased to $7.0 million compared with $5.7 million for the first quarter of 2010. This increase was primarily due to the higher overall debt levels resulting from the Parent Notes offering.

Our other expense for the first quarter of 2011 decreased to $3.0 million compared with $3.8 million of expense for the first quarter of 2010. Excluding the $1.4 million impact of the fair value adjustment on derivatives discussed in Items that Affect Comparability of Our Results, our other expense increased $0.6 million primarily due to gains on sales of securities during the first quarter of 2010.

Our income tax benefit for the first quarter of 2011 increased to $0.5 million compared with $0.1 million for the first quarter of 2010. This increase was due to lower taxable income.

Reconciliation of Adjusted EBITDA to Net Loss

The discussion in “Results of Operations” in 2011 and 2010 includes references to our Adjusted EBITDA results. EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are key metrics used by us to assess our operating performance and we believe that EBITDA and Adjusted EBITDA are useful to an investor in evaluating our operating performance because these measures:

•

are used widely by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors; and

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

•

help investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure and asset base from our operating results.

Neither EBITDA nor Adjusted EBITDA is a measure calculated in accordance with GAAP. The items excluded from EBITDA and Adjusted EBITDA are significant in assessing our operating results. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. For example, EBITDA and Adjusted EBITDA:

•

do not reflect our cash expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;

•

do not reflect income tax expenses or the cash requirements necessary to pay income taxes;

•

do not reflect changes in, or cash requirements for, our working capital needs; and

•

do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on certain of our debt obligations.

In addition, although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements. Other companies in our industry and in other industries may calculate EBITDA and Adjusted EBITDA differently from the way that we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only as supplemental data.

The tables below show how we calculate EBITDA and Adjusted EBITDA, including a breakdown by segment for Adjusted EBITDA.


	Three Months Ended March 31,
	2011			2010
	(In thousands)
Reconciliation of Adjusted EBITDA to net loss
Net loss	$	(18,732	)	$	(3,745	)

Income tax benefit from continuing operations		(460	)		(90	)
Other loss		3,017			3,836
Interest income		(382	)		(410	)
Loss on extinguishment of debt		17,030			—
Interest expense		6,967			5,723
Depreciation, depletion and amortization		11,245			11,392
Accretion of ARO and receivable		2,700			3,003
Amortization of intangible assets and liabilities		163			85

EBITDA		21,548			19,794

Loss on sale of assets		83			71
Share-based compensation		1,653			1,363

Adjusted EBITDA	$	23,284		$	21,228

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)


	Three Months Ended March 31,
	2011			2010
	(In thousands)
Adjusted EBITDA by Segment
Coal	$	21,285		$	20,237
Power		7,352			6,881
Heritage		(4,170	)		(4,255	)
Corporate		(1,183	)		(1,635	)

Total	$	23,284		$	21,228

Liquidity and Capital Resources

At March 31, 2011, we had $45.0 million of cash and cash equivalents and $23.1 million of available borrowing capacity under our Westmoreland Mining LLC, or WML, revolving line of credit. We anticipate that our cash flows from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the next several years.

Parent Notes Offering and Use of Proceeds

On February 4, 2011, we issued the Parent Notes, which are $150.0 million of 10.750% senior secured notes. Our subsidiary, Westmoreland Partners, was a co-issuer of the notes. Interest is due at an annual fixed rate of 10.750% and will be paid in cash semi-annually, in arrears, on February 1 and August 1 of each year beginning August 1, 2011. The Parent Notes mature February 1, 2018. They are fully and unconditionally guaranteed by Westmoreland Energy LLC and WRI and their respective subsidiaries (other than Absaloka Coal, LLC) and by certain other subsidiaries.

We received net proceeds from the sale of the Parent Notes in the offering of approximately $135.0 million after deducting the Initial Purchaser’s discount of $7.5 million and offering costs of $7.5 million. We repaid existing outstanding debt with those proceeds as follows: $52.7 million to repay all outstanding term and revolving line of credit at ROVA, including a make-whole payment of $9.1 million; $20.1 million to repay all outstanding term and revolving line of credit at WRI; and $2.5 million to retire certain of our convertible notes. The holder of our convertible notes agreed to convert the convertible notes not retired into shares of our common stock. In addition, we used $19.9 million of the net proceeds to pay all dividend arrearages on our preferred stock. We will use the remaining net proceeds from the offering for general corporate purposes including the possible acquisition of new reserves. The indenture governing the Parent Notes requires us to offer to redeem the notes on an annual basis with certain Excess Cash Flow (as defined in the indenture), and amounts used for such redemptions will not be available for other purposes.

In connection with the Parent Notes offering, we terminated the WRI and ROVA revolving credit agreements. The WML Credit Agreements remained in place following the offering. Following the Parent Notes offering, we are able to enter into a parent-level revolving credit facility without the consent of the holders of the notes, subject to certain conditions.

Liquidity Limitations and Requirements

The cash at WML is available to us through quarterly distributions. The WML credit agreement requires a debt service account and imposes timing and other restrictions on the ability of WML to distribute funds to us. Cash available from WML is affected beginning in June of this year by payments due in respect of principal on the WML Notes. Following the February 4, 2011 Parent Notes offering, we expect that distributions from ROVA and WRI will comprise a significant source of liquidity for us. The cash at WRM is also available to us through dividends, subject to maintaining a statutory minimum level of capital, which was $0.1 million at March 31, 2011.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

Our liquidity continues to be affected by our heritage health and pension obligations as follows:


			2011 Remaining
	Year-to-date		Expected
	2011 Actual		Amounts
	(In millions)
Postretirement medical benefits	$	3.3	$	10.3
Pension contributions		0.9		9.3
CBF premiums		0.7		2.0
Workers’ compensation benefits		0.2		0.8

In addition to the Parent Notes mentioned above, WML has $125.0 million of fixed rate term debt outstanding at March 31, 2011. Principal on the notes is scheduled to be paid as follows: $7.5 million in 2011, $14.0 million in 2012, $18.0 million in 2013, $18.0 million in 2014, $20.0 million in 2015, $20.0 million in 2016, $22.0 million in 2017 and the remaining $5.5 million in 2018. The revolving credit facility has a borrowing limit of $25.0 million and matures in June 2013. At March 31, 2011, WML had no outstanding balance under the revolving credit facility and a letter of credit of $1.9 million supported by the revolving credit facility, leaving it with $23.1 million of unused borrowings. WML’s revolving line of credit is only available to fund the operations of its subsidiaries.

Historical Sources and Uses of Cash

The following is a summary of cash provided by or used in each of the indicated types of activities:


	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Cash provided by (used in):
Operating activities	$	16,182		$	13,296
Investing activities		(5,884	)		(3,941	)
Financing activities		28,911			(2,114	)

Cash Flow from Operations

Cash provided by operating activities increased $2.9 million in the three months ended March 31, 2011 compared to the three months ended March 31, 2010 primarily due to an increase in operating income.

Cash used in investing activities increased $1.9 million in the three months ended March 31, 2011 compared to the three months ended March 31, 2010. We received $1.5 million less of proceeds from the sale of assets and investments in the three months ended March 31, 2011 compared to the same period in 2010.

Cash provided by financing activities increased by $31.0 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010, primarily as a result of the Parent Notes offering.

Our working capital deficit at March 31, 2011 decreased by $34.8 million to $1.0 million compared to a $35.8 million deficit at December 31, 2010 primarily as a result of a $39.2 million increase in cash and cash equivalents mostly due to the Parent Notes offering.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT.)

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Surety bonds and letters of credit are issued by financial institutions to third parties to assure the performance of our obligations relating to reclamation, workers’ compensation obligations, postretirement medical benefit obligations, and other obligations. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and we do not expect any material adverse effects on our financial condition, results of operations or cash flows to result from these off-balance sheet arrangements.

There were no material changes to our off-balance sheet arrangements during the three months ended March 31, 2011. Our off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2010 Form 10-K.

Newly Adopted Accounting Pronouncements

See Note 2 of Notes to Consolidated Financial Statements included in “Part I — Item 1 — Financial Statements” for a description of recently issued and adopted accounting pronouncements, including the expected dates of adoption and estimated effects on our consolidated financial statements.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Other than the changes noted below, there have been no material changes in our market risk during the three months ended March 31, 2011. For additional information, refer to the “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of our 2010 Form 10-K for the fiscal year ended December 31, 2010.

Interest Rate Risk

Our exposure to changes in interest rates results from our debt obligations shown in the table below that are indexed to either the prime rate or LIBOR. Based on balances outstanding as of March 31, 2011, a change of one percentage point in the prime interest rate or LIBOR would increase or decrease interest expense on an annual basis by the amount shown below:


	Effect of 1%
	increase
	or 1% decrease
	(In thousands)

WML revolving line of credit	$	—

ITEM 4

CONTROLS AND PROCEDURES

As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of March 31, 2011. Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that the disclosure controls and procedures were effective as of such date.

Additionally, there have been no changes in internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

Please refer to the information contained in Note 15 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in Part I, Item 3 — Legal Proceedings of our 2010 Form 10-K, which is responsive to this Item 1 and is incorporated herein by reference. There have been no material developments with respect to our legal proceedings previously disclosed in our 2010
Form 10-K.

ITEM 1A

RISK FACTORS

We have disclosed under the heading “Risk Factors” in our 2010 Form 10-K, the risk factors that we believe materially affect our business, financial condition or results of operations. There have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth in the 2010 Form 10-K and the other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and or operating results.

ITEM 5

OTHER INFORMATION

Section 1503. Reporting Requirements Regarding Coal or Other Mine Safety.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act, was enacted. Section 1503 of the Act contains new reporting requirements regarding coal or other mine safety. Westmoreland Coal Company is committed to providing a safe workplace for all of our employees. Recently, two of our mines received the Montana Governor’s Award for Health and Safety, one in the Large Mining category and one in the Small Mining category. In addition, our Beulah Mine received the Lignite Energy Council’s Safety Excellence Award for the lowest accident incident rate in the lignite industry for 2010. Our other mines had excellent safety records in 2010, which continued through the first quarter of 2011. We continue to engage proactively with federal and state agencies in support of measures that can improve the safety and well-being of our employees.

The operation of our mines is subject to regulation by the federal Mine Safety and Health Administration, or MSHA, under the Federal Mine Safety and Health Act of 1977, or the Mine Act. MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Below, we have included information regarding certain mining safety and health citations and orders that MSHA has issued with respect to our coal mining operations. In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the coal mine, (ii) the number of citations and orders issued will vary from inspector-to-inspector and mine-to-mine, and (iii) citations and orders can be contested and appealed, and in that process, may be reduced in severity and amount, and are sometimes dismissed.

PART II

OTHER INFORMATION (CONT.)

The table below includes references to specific sections of the Mine Act. We are providing the information in the table by mine as that is how we manage and operate our business.


	(A)		(B)		(C)			(D)		(E)		(F)			(G)		(H)
												Proposed					Pending
	Section		Section		Section			Section		Section		Assessments					Legal
Mine Name/ID	104 S&S		104(b)		104(d)			110(b)(2)		107(a)		($)			Fatalities		Action

Rosebud Mine & Crusher Conveyor / 24-01747		1		—		—			—		—		—	^J		—		—

Absaloka Mine / 24-00910		2		—		1	^I		—		—		10,967			—		—

Savage Mine / 24-00106		1		—		—			—		—		—	^J		—		—

Jewett Mine / 41-03164		1		—		—			—		—		—	^J		—		—

Beulah Mine / 32-00043		—		—		—			—		—		—			—		—


(A)		The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the Mine Safety and Health Act of 1977 (30 U.S.C. 814) for which the operator received a citation from the Mine Safety and Health Administration.

(B)		The total number of orders issued under section 104(b) of such Act (30 U.S.C. 814(b)).

(C)		The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of such Act (30 U.S.C. 814(d)).

(D)		The total number of flagrant violations under section 110(b)(2) of such Act (30 U.S.C. 820(b)(2)).

(E)		The total number of imminent danger orders issued under section 107(a) of such Act (30 U.S.C. 817(a)).

(F)		The total dollar value of proposed assessments from the Mine Safety and Health Administration under such Act (30 U.S.C. 801 et seq.).

(G)		The total number of mining-related fatalities.

(H)		Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine.

(I)		Absaloka Mine received an unwarrantable failure citation for failure to comply with a mandatory standard as a dangerous amount of coal dust was allowed to accumulate under the return side of Belt #1, where the belt leaves the primary crusher. Corrective measures for this condition were not noted in the Plant Examination Book for a period of 24 hours.

(J)		Not assessed as of April 30, 2011.

PART II

OTHER INFORMATION (CONT.)

ITEM 6

EXHIBITS


	10.1			Form of Restricted Stock Unit Agreement with performance-based vesting

	31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a)

	31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a)

	32			Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	WESTMORELAND COAL COMPANY
Date: May 9, 2011	/s/ Kevin A. Paprzycki
	Kevin A. Paprzycki
	Chief Financial Officer and Treasurer (A Duly Authorized Officer)

EXHIBIT INDEX

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File
Number

Exhibit

Filing Date

Filed
Herewith

10.1

Form of Restricted Stock Unit Agreement with Performance-based Vesting

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350