WESTMORELAND COAL (WLBAQ) 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 __________________________________________

FORM 10-Q

 __________________________________________

(Mark One)

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

For the quarterly period ended June 30, 2013

¨ 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 incorporation or organization)	(I.R.S. Employer Identification No.)
9540 South Maroon Circle, Suite 200 Englewood, CO	80112
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (855) 922-6463

 __________________________________________­

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

Yes x No ¨

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 x No ¨

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	¨		Accelerated filer	x
Non-accelerated filer	¨	(Do not check if a smaller reporting company.)	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 ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 25, 2013: 14,592,231 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	9
ITEM 2 -	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38
ITEM 3 -	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49
ITEM 4 -	CONTROLS AND PROCEDURES	49
PART II - OTHER INFORMATION		50
ITEM 1 -	LEGAL PROCEEDINGS	50
ITEM 1A -	RISK FACTORS	50
ITEM 2 -	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50
ITEM 4 -	MINE SAFETY DISCLOSURES	50
ITEM 6 -	EXHIBITS	50
SIGNATURES		51
EXHIBIT INDEX		52

2

PART I - FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

	(Unaudited)
	June 30, 2013		December 31, 2012
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	36,274	$	31,610
Receivables:
Trade	56,916		60,037
Contractual third-party reclamation receivables	10,886		10,207
Other	2,972		3,220
	70,774		73,464
Inventories	39,711		37,734
Other current assets	19,418		16,504
Total current assets	166,177		159,312
Property, plant and equipment:
Land and mineral rights	262,845		261,741
Plant and equipment	653,531		635,720
	916,376		897,461
Less accumulated depreciation, depletion and amortization	413,957		384,621
Net property, plant and equipment	502,419		512,840
Advanced coal royalties	5,226		4,316
Reclamation deposits	73,744		72,718
Restricted investments and bond collateral	88,079		87,209
Contractual third-party reclamation receivables, less current portion	82,501		84,158
Intangible assets, net of accumulated amortization of $13.3 million and $12.4 million at June 30, 2013 and December 31, 2012, respectively	2,364		3,203
Other assets	13,093		12,359
Total Assets	$	933,603	$	936,115

See accompanying Notes to Consolidated Financial Statements.

3

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets (Continued)

	(Unaudited)
	June 30, 2013			December 31, 2012
	(In thousands)
Liabilities and Shareholders’ Deficit
Current liabilities:
Current installments of long-term debt	$	22,710		$	23,791
Accounts payable and accrued expenses:
Trade	54,860			52,093
Production taxes	35,612			33,228
Workers’ compensation	810			820
Postretirement medical benefits	14,068			14,068
SERP	390			390
Deferred revenue	11,612			12,822
Asset retirement obligations	24,105			22,238
Other current liabilities	13,149			11,462
Total current liabilities	177,316			170,912
Long-term debt, less current installments	326,326			337,198
Workers’ compensation, less current portion	8,436			8,710
Excess of black lung benefit obligation over trust assets	8,075			8,356
Postretirement medical benefits, less current portion	321,867			319,775
Pension and SERP obligations, less current portion	54,022			54,250
Deferred revenue, less current portion	51,887			56,891
Asset retirement obligations, less current portion	239,046			241,609
Intangible liabilities, net of accumulated amortization of $11.9 million and $11.4 million at June 30, 2013 and December 31, 2012, respectively	6,115			6,625
Other liabilities	22,073			18,020
Total liabilities	1,215,163			1,222,346
Shareholders’ deficit:
Preferred stock of $1.00 par value
Authorized 5,000,000 shares;
Issued and outstanding 159,960 shares at June 30, 2013 and December 31, 2012	160			160
Common stock of $2.50 par value
Authorized 30,000,000 shares;
Issued and outstanding 14,549,409 shares at June 30, 2013 and 14,201,411 shares at December 31, 2012	36,372			35,502
Other paid-in capital	133,495			130,852
Accumulated other comprehensive loss	(144,637		)	(148,345		)
Accumulated deficit	(293,074		)	(289,727		)
Total Westmoreland Coal Company shareholders’ deficit	(267,684		)	(271,558		)
Noncontrolling interest	(13,876		)	(14,673		)
Total deficit	(281,560		)	(286,231		)
Total Liabilities and Shareholders’ Deficit	$	933,603		$	936,115

See accompanying Notes to Consolidated Financial Statements.

4

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(In thousands, except per share data)
Revenues	$	162,499		$	132,842		$	323,947		$	280,078
Cost, expenses and other:
Cost of sales	130,528			111,078			260,949			222,817
Depreciation, depletion and amortization	15,397			13,720			29,823			27,009
Selling and administrative	11,969			12,933			23,855			25,492
Heritage health benefit expenses	3,109			4,052			7,060			7,862
Loss (gain) on sales of assets	(74		)	239			(308		)	277
Other operating income	(10,405		)	(4,918		)	(15,142		)	(8,203		)
	150,524			137,104			306,237			275,254
Operating income (loss)	11,975			(4,262		)	17,710			4,824
Other income (expense):
Interest expense	(10,076		)	(11,032		)	(20,236		)	(20,915		)
Loss on extinguishment of debt	(64		)	—			(64		)	—
Interest income	280			490			577			895
Other income	130			237			198			414
	(9,730		)	(10,305		)	(19,525		)	(19,606		)
Income (loss) before income taxes	2,245			(14,567		)	(1,815		)	(14,782		)
Income tax expense (benefit)	28			(921		)	55			(914		)
Net loss	2,217			(13,646		)	(1,870		)	(13,868		)
Less net income (loss) attributable to noncontrolling interest	2,499			(1,563		)	797			(2,643		)
Net income (loss) attributable to the Parent company	(282		)	(12,083		)	(2,667		)	(11,225		)
Less preferred stock dividend requirements	340			340			680			680
Net loss applicable to common shareholders	$	(622	)	$	(12,423	)	$	(3,347	)	$	(11,905	)
Net loss per share applicable to common shareholders:
Basic and diluted	$	(0.04	)	$	(0.89	)	$	(0.23	)	$	(0.85	)
Weighted average number of common shares outstanding
Basic and diluted	14,495			13,991			14,389			13,926

See accompanying Notes to Consolidated Financial Statements.

5

W0ESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
							(In thousands)
Net income (loss)	$	2,217		$	(13,646	)	$	(1,870	)	$	(13,868	)
Other comprehensive income
Pension and other postretirement plans:
Amortization of accumulated actuarial gains or losses, pension	1,004			729			1,745			1,458
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	1,001			643			2,002			1,286
Tax effect of other comprehensive income gains	—			(471		)	—			(975		)
Unrealized and realized gains and losses on available-for-sale securities	(39		)	(154		)	(39		)	(223		)
Other comprehensive income	1,966			747			3,708			1,546
Comprehensive income (loss) attributable to Westmoreland Coal Company	$	4,183		$	(12,899	)	$	1,838		$	(12,322	)

See accompanying Notes to Consolidated Financial Statements.

6

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Deficit

Six Months EndedJune 30, 2013

(Unaudited)

	Preferred Stock			Common Stock			Other Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Non-controlling Interest			Total Shareholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount
	(In thousands, except shares data)
Balance at December 31, 2012	159,960	$	160	14,201,411	$	35,502	$	130,852		$	(148,345	)	$	(289,727	)	$	(14,673	)	$	(286,231	)
Preferred dividends declared	—	—		—	—		—			—			(680		)	—			(680		)
Common stock issued as compensation	—	—		215,600	539		3,232			—			—			—			3,771
Issuance of restricted stock	—	—		132,398	331		(589		)	—			—			—			(258		)
Net (loss) income	—	—		—	—		—			—			(2,667		)	797			(1,870		)
Other comprehensive income	—	—		—	—		—			3,708			—			—			3,708
Balance at June 30, 2013	159,960	$	160	14,549,409	$	36,372	$	133,495		$	(144,637	)	$	(293,074	)	$	(13,876	)	$	(281,560	)

See accompanying Notes to Consolidated Financial Statements.

7

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2013			2012
	(In thousands)
Cash flows from operating activities:
Net loss	$	(1,870	)	$	(13,868	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization	29,823			27,009
Accretion of asset retirement obligation and receivable	6,338			5,996
Non-cash tax benefits	—			(975		)
Amortization of intangible assets and liabilities, net	326			325
Share-based compensation	3,771			3,461
Loss (gain) on sales of assets	(308		)	277
Amortization of deferred financing costs	1,856			1,812
Loss on extinguishment of debt	64			—
Gain on sales of investment securities	(28		)	(190		)
Changes in operating assets and liabilities:
Receivables, net	3,687			(6,925		)
Inventories	(1,977		)	(706		)
Excess of black lung benefit obligation over trust assets	(281		)	1,168
Accounts payable and accrued expenses	1,701			8,849
Deferred revenue	(6,214		)	(4,727		)
Income tax payable	(56		)	—
Accrual for workers’ compensation	(284		)	(158		)
Asset retirement obligations	(5,424		)	(4,122		)
Accrual for postretirement medical benefits	4,094			2,742
Pension and SERP obligations	1,517			1,371
Other assets and liabilities	(1,811		)	2,576
Net cash provided by operating activities	34,924			23,915
Cash flows from investing activities:
Additions to property, plant and equipment	(13,467		)	(11,981		)
Change in restricted investments and bond collateral and reclamation deposits	(8,714		)	(27,607		)
Cash payments related to acquisitions	—			(72,522		)
Net proceeds from sales of assets	577			91
Proceeds from the sale of restricted investments	6,807			1,581
Receivable from customer for property and equipment purchases	(308		)	(183		)
Net cash used in investing activities	(15,105		)	(110,621		)
Cash flows from financing activities:
Change in book overdrafts	1,777			895
Borrowings from long-term debt, net of debt discount	—			119,364
Repayments of long-term debt	(16,070		)	(10,854		)
Borrowings on revolving lines of credit	6,000			3,000
Repayments on revolving lines of credit	(6,000		)	(3,000		)
Debt issuance costs and other refinancing costs	(182		)	(5,472		)
Preferred dividends paid	(680		)	(680		)
Net cash provided by (used in) financing activities	(15,155		)	103,253
Net increase in cash and cash equivalents	4,664			16,547
Cash and cash equivalents, beginning of period	31,610			30,783
Cash and cash equivalents, end of period	$	36,274		$	47,330

See accompanying Notes to Consolidated Financial Statements.

8

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include accounts of Westmoreland Coal Company, or the Company, or Parent, and its subsidiaries and controlled entities. The Company’s current principal activities, all conducted within the United States, are the production and sale of coal from its mines in Montana, Wyoming, 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 Kemmerer Mine is owned by its subsidiary Westmoreland Kemmerer, Inc., or Kemmerer. 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) $94.5 million senior secured notes at WML that are

collateralized by all assets of WML, Westmoreland Savage Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC; and (2) $251.5 million senior secured notes at the Parent level that are collateralized by the assets of the Parent, WRI, Kemmerer and ROVA.

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, 2012, or the 2012 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 2012 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.

On May 30, 2013, WRI amended certain documents pertaining to a series of transactions that were originally entered into in October 2008 in order to enable WRI to take advantage of Indian Coal Production Tax Credits (ICTC) which it had not been able to fully utilize. The ICTC is provided under Section 45(e) of the Internal Revenue Code to producers of coal on Indian lands from facilities placed in service by January 1, 2009, if such coal is sold to unrelated parties. In January, 2013 the ICTC was extended one year to December 31, 2013. WRI's Absaloka Mine operates under a coal mineral lease with the Crow Tribe of Indians in Montana. To more fully realize the value of ICTC, Absaloka Coal, LLC, a variable interest entity consolidated by WRI, sold a 99% membership interest to a large East Coast financial institution (Investor). The Investor's share of Absaloka Coal, LLC's operations is reflected as Net income (loss) attributable to noncontrolling interest. The purpose of the amendments was to modify the contract mining fee mark up and the contingency adjustment and to change the per ton amount that Absaloka Coal, LLC pays Westmoreland Coal Sales Company (a subsidiary of Westmoreland Coal Company), all effective January 1, 2012. The amendments also extended the term of the transactions with the Investor to December 31, 2013 from the original expiration date of October 15, 2013. As a result, the Company recorded an increase of $3.7 million in Other operating income for each of the three and six month periods ended June 30, 2013 with a corresponding increase in Net income attributable to noncontrolling interest. There was no impact on Net loss applicable to common shareholders.

The Company received business interruption insurance proceeds for the six months ended June 30, 2013 due to an explosion and subsequent fire at a customer’s facility. The Company recognizes income as business interruption losses are incurred and reimbursement is virtually assured. The Company reports this income in Other operating income and has recognized $6.5 million and $11.3 million of income for the three and six months ended June 30, 2013, respectively; and $5.5 million and $8.6 million of income for the three and six months ended June 30, 2012, respectively.

The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles and require use of management’s estimates. The financial information contained in this Form 10-Q is unaudited, but reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2013 are not necessarily indicative of results to be expected for the year ending December 31, 2013.

9

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Income Taxes

The difference between the statutory income tax rate and the effective income tax rate is due to a change in the valuation allowance.

2. ACQUISITION

On January 31, 2012, the Company, through Westmoreland Kemmerer, Inc., acquired from Chevron Mining Inc., a Missouri corporation, the Kemmerer surface coal mine, associated processing facilities and other related real and personal property assets located in Kemmerer, Wyoming and assumed certain liabilities related to the mine. The Company did not acquire working capital in the acquisition, other than inventory.

During the second quarter of 2012, the Company revised its preliminary allocation of the purchase price for $2.2 million of deferred revenue. Adjustments to preliminary fair values are assumed to have been made as of the acquisition date. As a result, Revenues and Operating income for the first quarter of 2012 would have been higher and Net loss would have been lower by approximately $1.3 million. The results in the consolidated statements of operations for the six months ended June 30, 2012 reflect this adjustment. The remaining $0.9 million of deferred revenue was recognized as revenue in the second quarter of 2012.

The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisition occurred on January 1, 2011. The unaudited pro forma results have been prepared based on estimates and assumptions, which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the acquisition occurred on January 1, 2011, or of future results of operations.

	Six Months Ended June 30, 2012
	(In thousands)
Total Revenues
As reported	$	280,078
Pro forma	$	294,191
Operating Income
As reported	$	4,824
Pro forma	$	7,098
Net loss applicable to common shareholders
As reported	$	(11,905	)
Pro forma	$	(10,843	)
Net loss per share applicable to common shareholders
As reported	$	(0.85	)
Pro forma	$	(0.78	)

3. ACCOUNTING POLICIES

Effective January 1, 2013, the Company adopted an accounting standards update which requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. This accounting standards update is effective for interim and annual reporting periods beginning after December 15, 2012.

10

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

4. INVENTORIES

Inventories consisted of the following:

	June 30, 2013			December 31, 2012
	(In thousands)
Coal stockpiles	$	1,074		$	989
Coal fuel inventories	4,679			3,048
Materials and supplies	35,071			34,954
Reserve for obsolete inventory	(1,113		)	(1,257		)
Total	$	39,711		$	37,734

5. RESTRICTED INVESTMENTS AND BOND COLLATERAL

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

	June 30, 2013		December 31, 2012
	(In thousands)
Coal Segment:
WML debt reserve account	$	13,065	$	13,062
Reclamation bond collateral:
Kemmerer Mine	24,699		24,702
Absaloka Mine	14,563		14,507
Rosebud Mine	12,496		12,495
Beulah Mine	1,270		1,270
Power Segment:
Letter of credit account	5,995		5,990
Corporate Segment:
Postretirement medical benefit bonds	9,362		8,593
Workers’ compensation bonds	6,629		6,590
Total restricted investments and bond collateral	$	88,079	$	87,209

For all of its restricted investments and bond collateral accounts, the Company can select from limited fixed-income investment options for the funds and receive the investment returns on these investments. Funds in the restricted investments and bond collateral accounts are not available to meet the Company’s cash needs.

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

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at June 30, 2013 are as follows:

	Carrying Value		Fair Value
	(In thousands)
Cash and cash equivalents	$	59,830	$	59,830
Time deposits	8,439		8,439
Held-to-maturity securities	19,810		19,842
	$	88,079	$	88,111

For the six months ended June 30, 2013, the Company recorded less than $0.1 million of gains on the sale of available-for-sale securities held as restricted investments and bond collateral.

11

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Held-to-Maturity Restricted Investments and Bond Collateral

The amortized cost, gross unrealized holding gains and fair value of held-to-maturity securities at June 30, 2013 is as follows (in thousands):

Amortized cost	$	19,810
Gross unrealized holding gains	266
Gross unrealized holding losses	(234		)
Fair value	$	19,842

Maturities of held-to-maturity securities are as follows at June 30, 2013:

	Amortized Cost		Fair Value
	(In thousands)
Due within one year	$	604	$	609
Due in five years or less	13,177		13,264
Due after five years to ten years	2,000		2,000
Due in more than ten years	4,029		3,969
	$	19,810	$	19,842

The Company does not intend to sell its held-to-maturity securities and it is not more likely than not that the Company will be required to sell the securities before recovery of amortized cost bases, which may be maturity.

6. LINES OF CREDIT AND LONG-TERM DEBT

The amounts outstanding under the Company’s long-term debt consisted of the following as of the dates indicated:

	Total Debt Outstanding
	June 30, 2013			December 31, 2012
	(In thousands)
10.75% senior notes due 2018	$	251,500		$	252,000
WML term debt due 2018	94,500			103,500
Capital lease obligations	10,922			13,926
Other	1,435			1,654
Debt discount	(9,321		)	(10,091		)
Total debt outstanding	349,036			360,989
Less current installments	(22,710		)	(23,791		)
Total debt outstanding, less current installments	$	326,326		$	337,198

In March 2013, the Company amended the WML Revolving Credit Agreement by extending the maturity date from June 26, 2013 to December 31, 2017. Issuance costs related to the amendment of $0.2 million have been capitalized. This Revolving Credit Agreement has a borrowing limit of $25.0 million.

During the six months ended June 30, 2013, the Company paid $0.5 million, excluding accrued interest, to repurchase Senior Notes with a principal amount of $0.5 million. The Company recognized losses of $0.1 million on these repurchases, which were recorded as losses on extinguishment of debt. The losses on the repurchases were measured based on the carrying value of the repurchased portion of the Senior Notes, which included a portion of the unamortized debt issue costs and the debt discount on the dates of repurchase.

During the six months ended June 30, 2013, the Company paid $2.7 million to purchase equipment under capital leases with a principal amount of $2.5 million. The difference between the purchase price and the carrying amount of the capital lease obligation was recorded as an adjustment to the carrying amount of the equipment.

12

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Other than the foregoing, there were no significant changes to the Company's long-term debt subsequent to December 31, 2012. Information regarding the Company's debt is outlined in Note 5 to the Consolidated Financial Statements in the Company's 2012 Form 10-K.

7. POSTRETIREMENT MEDICAL BENEFITS AND PENSION

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 components of net periodic postretirement medical benefit cost are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)				(In thousands)
Components of net periodic benefit cost:
Service cost	$	1,109	$	888	$	2,218	$	1,540
Interest cost	3,035		3,185		6,069		6,170
Amortization of deferred items	1,001		643		2,003		1,286
Total net periodic benefit cost	$	5,145	$	4,716	$	10,290	$	8,996

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)				(In thousands)
Former mining operations	$	3,119	$	2,828	$	6,237	$	5,657
Current operations	2,026		1,888		4,053		3,339
Total net periodic benefit cost	$	5,145	$	4,716	$	10,290	$	8,996

The costs for the former mining operations are included in Heritage health benefit expenses and costs for current operations are included in Cost of sales and Selling and administrative expenses.

Pension

The Company provides pension benefits to qualified full-time employees pursuant to collective bargaining agreements.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(In thousands)						(In thousands)
Components of net periodic benefit cost:
Service cost	$	638		$	590		$	1,173		$	1,030
Interest cost	1,555			1,699			3,180			3,147
Expected return on plan assets	(2,325		)	(2,174		)	(4,385		)	(4,079		)
Amortization of deferred items	1,004			729			1,745			1,458
Total net periodic pension cost	$	872		$	844		$	1,713		$	1,556

These costs are included in Cost of sales and Selling and administrative expenses.

13

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

The Company did not contribute cash to its pension plans in the six months ended June 30, 2013 and expects to make $3.4 million of pension plan contributions during the remainder of 2013.

8. 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 June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
	(In thousands)					(In thousands)
Health care benefits	$	3,089		$	2,874	$	6,266		$	5,677
Combined benefit fund payments	576			561		1,152			1,121
Workers’ compensation benefits	117			140		232			261
Black lung benefits (credit)	(673		)	477		(590		)	803
Total	$	3,109		$	4,052	$	7,060		$	7,862

9. ASSET RETIREMENT OBLIGATIONS, CONTRACTUAL THIRD-PARTY RECLAMATION RECEIVABLE, AND RECLAMATION DEPOSITS

The asset retirement obligation, contractual third-party reclamation receivable, and reclamation deposits for each of the Company’s mines and ROVA at June 30, 2013 are summarized below:

	Asset Retirement Obligation		Contractual Third-Party Reclamation Receivable		Reclamation Deposits
	(In thousands)
Rosebud	$	119,090	$	18,148	$	73,744
Jewett	74,833		74,833		—
Absaloka	27,078		406		—
Beulah	18,802		—		—
Kemmerer	17,491		—		—
Savage	4,997		—		—
ROVA	860		—		—
Total	$	263,151	$	93,387	$	73,744

Asset Retirement Obligations

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

	Six Months Ended June 30,
	2013			2012
	(In thousands)
Asset retirement obligations, beginning of year (including current portion)	$	263,847		$	247,478
Accretion	10,951			10,856
Liabilities settled	(11,647		)	(8,744		)
Changes due to amount and timing of reclamation	—			(4,757		)
ARO acquired	—			15,103
Asset retirement obligations, end of period	263,151			259,936
Less current portion	(24,105		)	(18,489		)
Asset retirement obligations, less current portion	$	239,046		$	241,447

14

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Contractual Third-Party Reclamation Receivables

The Company has recognized as an asset $93.4 million as contractual third-party reclamation receivables, representing the present value of customer obligations to reimburse the Company for reclamation expenditures at the Company’s Rosebud, Jewett and Absaloka Mines.

Reclamation Deposits

The Company’s reclamation deposits will be used to fund final reclamation activities. The Company’s carrying value and estimated fair value of its reclamation deposits at June 30, 2013 are as follows:

	Carrying Value		Fair Value		Fair Value Hierarchy
	(In thousands)
Cash and cash equivalents	$	46,245	$	46,245	Level 1
Held-to-maturity securities	12,194		12,932		Level 2
Time deposits	14,289		14,289		Level 1
Available-for-sale securities	1,016		1,016		Level 1
	$	73,744	$	74,482

Held-to-Maturity and Available-for-Sale Reclamation Deposits

The amortized cost, gross unrealized holding gains and losses and fair value of held-to-maturity securities at June 30, 2013 are as follows (in thousands):

Amortized cost	$	12,194
Gross unrealized holding gains	811
Gross unrealized holding losses	(73		)
Fair value	$	12,932

Maturities of held-to-maturity securities are as follows at June 30, 2013:

	Amortized Cost		Fair Value
	(In thousands)
Within one year	$	—	$	—
Due in five years or less	6,541		6,870
Due after five years to ten years	3,454		3,597
Due in more than ten years	2,199		2,465
	$	12,194	$	12,932

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at June 30, 2013 are as follows (in thousands):

Cost basis	$	1,000
Gross unrealized holding gains	16
Fair value	$	1,016

15

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

10. FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Notes 5 and 9 for additional disclosures related to fair value measurements.

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

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

• Level 2, defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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

The table below sets forth, by level, the Company’s financial assets that are accounted for at fair value at June 30, 2013:

	Level 1
	(In thousands)
Assets:
Available-for-sale investments included in Reclamation deposits	$	1,016

Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2) and otherwise using discount rate estimates based on interest rates as of June 30, 2013 (Level 3). The estimated fair values of the Company’s debt with fixed interest rates are as follows:

	Carrying Value		Fair Value
	(In thousands)
December 31, 2012	$	345,408	$	359,753
June 30, 2013	$	336,679	$	360,319

The Company’s non-recurring fair value measurements include asset retirement obligations (refer to Note 9) and the purchase price allocations for the fair value of assets and liabilities acquired through business combinations (refer to Note 2).

The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to reclamation liabilities using level 3 inputs. The significant inputs used to calculate such liabilities includes estimates of costs to be incurred, the Company’s credit adjusted discount rate, inflation rates and estimated dates of reclamation. The asset retirement liability is accreted to its present value each period and the capitalized asset retirement cost is depleted using the units-of-production method.

The fair value of assets and liabilities acquired through business combinations is calculated using a discounted-cash flow approach using level 3 inputs. Cash flow estimates require forecasts and assumptions for many years into the future for a variety of factors.

16

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

11. SHAREHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Preferred Stock

The Company has outstanding Series A Convertible Exchangeable Preferred Stock on which cumulative dividends of $2.125 per share are payable quarterly. The Company has paid $0.7 million of preferred stock dividends during the first six months of 2013.

Changes in Accumulated Other Comprehensive Income

The following table reflects the changes in accumulated other comprehensive income (loss) by component:

	Pension			Postretirement medical benefits			Available for sale securities				Tax effect of other comprehensive income gains			Accumulated other comprehensive loss
	(In thousands)
Balance at December 31, 2012	$	(44,718	)	$	(77,528	)	$	57			$	(26,156	)	$	(148,345	)
Amounts reclassified from accumulated other comprehensive income (loss)	1,745			2,002			(39		)	��	—			3,708
Balance at June 30, 2013	$	(42,973	)	$	(75,526	)	$	18			$	(26,156	)	$	(144,637	)

The following table reflects the reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2013 are as follows (in thousands):

Details about accumulated other comprehensive income (loss) components	Amount reclassified from accumulated other comprehensive income (loss)1						Affected line item in the statement where net income (loss) is presented
	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
Available-for sale securities
Unrealized gains and losses on available-for sale securities	$	(27	)	$	(27	)	Interest income
Realized gains and losses on available-for sale securities	(12		)	(12		)	Other income (loss)
	$	(39	)	$	(39	)	Total
Amortization of defined benefit pension items
Actuarial losses	$	1,004		$	1,745		2
Amortization of postretirement medical items
Prior service costs	$	(159	)	$	(319	)	3
Actuarial losses	1,160			2,321			3
	$	1,001		$	2,002		Total

____________________

(1) Amounts in parentheses indicate debits to income/loss.

(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost. (See Note 7 - Pensions for additional details)

(3) These accumulated other comprehensive income components are included in the computation of net periodic postretirement medical cost. (See Note 7 - Postretirement Medical Benefits for additional details)

12. SHARE-BASED COMPENSATION

The Company grants employees and non-employee directors restricted stock units from the Amended and Restated 2007 Equity Incentive Stock Plan. The Amended and Restated 2007 Equity Incentive Stock Plan provides that non-employee directors will receive equity awards of 7,000 shares of Company stock after each annual meeting.

17

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

The Company anticipates that beginning in July 2013, it will contribute cash to its 401(k) plan instead of Company stock.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)				(In thousands)
Recognition of fair value of restricted stock units, stock options and SARs over vesting period; and issuance of stock	$	597	$	984	$	2,260	$	1,728
Contributions of stock to the Company’s 401(k) plan	788		575		1,511		1,733
Total share-based compensation expense	$	1,385	$	1,559	$	3,771	$	3,461

Restricted Stock Units

A summary of restricted stock award activity for six months ended June 30, 2013 is as follows:

	Units		Weighted Average Grant-Date Fair Value		Unamortized Compensation Expense (In thousands)
Non-vested at December 31, 2012	680,173		$	8.88
Granted	103,730		11.70
Vested	(154,969	)	8.75
Non-vested at June 30, 2013	628,934		$	7.45	$	3,803	(1)

____________________

(1) Expected to be recognized over the next three years.

In April 2013, 54,730 restricted stock units were granted, of which 27,366 units will vest ratably over a three-year period. The remaining 27,364 units are performance-based, which will vest and pay out at the end of a three-year period if performance goals are met. The Company’s management believes it is probable that the target performance condition

will be met.

Stock Options and Stock Appreciation Rights (SARs)

During the six months ended June 30, 2013, 8,900 stock options expired while no activity occurred with SARs.

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, and restricted stock units. No such items were included in the computation of diluted loss per share in the three and six months ended June 30, 2013 and June 30, 2012 because the Company incurred a net loss applicable to common shareholders in these periods and the effect of inclusion would have been anti-dilutive.

18

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

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 June 30,		Six Months Ended June 30,
	2013	2012	2013	2012
	(In thousands)
Convertible securities	1,093	1,093	1,093	1,093
Restricted stock units, stock options and SARs	862	1,052	862	1,052
Total shares excluded from diluted shares calculation	1,955	2,145	1,955	2,145

14.   BUSINESS SEGMENT INFORMATION

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

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

Summarized financial information by segment is as follows:

	Coal		Power			Heritage			Corporate			Consolidated
	(In thousands)
Three Months Ended June 30, 2013
Revenues	$	139,337	$	23,162		$	—		$	—		$	162,499
Operating income (loss)	13,076		4,838			(3,530		)	(2,409		)	11,975
Depreciation, depletion, and amortization	12,753		2,551			—			93			15,397
Total assets	699,556		183,855			16,305			33,887			933,603
Capital expenditures	7,209		564			—			393			8,166
Three Months Ended June 30, 2012
Revenues	$	116,960	$	15,882		$	—		$	—		$	132,842
Operating income (loss)	5,018		(1,749		)	(4,527		)	(3,004		)	(4,262		)
Depreciation, depletion, and amortization	11,092		2,523			—			105			13,720
Total assets	695,688		188,143			14,631			49,120			947,582
Capital expenditures	6,102		1,401			—			58			7,561
Six Months Ended June 30, 2013
Revenues	$	281,449	$	42,498		$	—		$	—		$	323,947
Operating income (loss)	26,547		3,837			(7,705		)	(4,969		)	17,710
Depreciation, depletion, and amortization	24,555		5,081			—			187			29,823
Total assets	699,556		183,855			16,305			33,887			933,603
Capital expenditures	12,219		698			—			550			13,467
Six Months Ended June 30, 2012
Revenues	$	243,474	$	36,604		$	—		$	—		$	280,078
Operating income (loss)	19,454		1,042			(8,537		)	(7,135		)	4,824
Depreciation, depletion, and amortization	21,775		5,021			—			213			27,009
Total assets	695,688		188,143			14,631			49,120			947,582
Capital expenditures	10,038		1,912			—			31			11,981

19

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(In thousands)
Income (loss) from operations	$	11,975		$	(4,262	)	$	17,710		$	4,824
Loss on extinguishment of debt	(64		)	—			(64		)	—
Interest expense	(10,076		)	(11,032		)	(20,236		)	(20,915		)
Interest income	280			490			577			895
Other income (loss)	130			237			198			414
Loss before income taxes	$	2,245		$	(14,567	)	$	(1,815	)	$	(14,782	)

15. CONTINGENCIES

Contingencies

The Company is a party to routine 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.

20

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

16.   SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

Pursuant to the indenture governing the 10.75% Senior Notes, certain 100% owned subsidiaries of the Company have fully and unconditionally guaranteed the notes on a joint and several basis.

Guarantees of the Senior Notes will be released under certain circumstances, including:

(1) in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor Subsidiary, by way of merger, consolidation or otherwise, a sale or other disposition of all of the Equity Interests of such Guarantor Subsidiary then held by the Issuers or any Restricted Subsidiary; provided, that the sale or other disposition does not violate the “Asset Sales” provisions of the Indenture;

(2) if such Guarantor Subsidiary is designated as an Unrestricted Subsidiary in accordance with the provisions of this Indenture, upon effectiveness of such designation;

(3) upon Legal Defeasance or Covenant Defeasance (as such terms are defined in the indenture) or upon satisfaction and discharge of the Indenture;

(4) upon the liquidation or dissolution of such Guarantor Subsidiary, provided no event of default has occurred and is continuing; or

(5) at such time as such Guarantor Subsidiary is no longer required to be a Guarantor Subsidiary of the Senior Notes as described in the Indenture, provided no event of default has occurred and is continuing.

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 that are not guarantors under the notes:

21

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING BALANCE SHEETS

June 30, 2013

(In thousands)

Assets	Parent/ Issuer			Co-Issuer		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Current assets:
Cash and cash equivalents	$	15,665		$	476	$	10,470		$	9,663		$	—		$	36,274
Receivables:
Trade	—			15,013		9,909			31,994			—			56,916
Contractual third-party reclamation receivables	—			—		57			10,829			—			10,886
Intercompany receivable/payable	(5,538		)	—		2,753			(30,220		)	33,005			—
Other	113			—		16,551			1,355			(15,047		)	2,972
	(5,425		)	15,013		29,270			13,958			17,958			70,774
Inventories	—			4,679		16,462			18,570			—			39,711
Other current assets	5,754			109		9,695			3,860			—			19,418
Total current assets	15,994			20,277		65,897			46,051			17,958			166,177
Property, plant and equipment:
Land and mineral rights	—			1,395		92,637			168,813			—			262,845
Plant and equipment	3,850			220,641		227,231			201,809			—			653,531
	3,850			222,036		319,868			370,622			—			916,376
Less accumulated depreciation, depletion and amortization	2,550			66,556		118,656			226,195			—			413,957
Net property, plant and equipment	1,300			155,480		201,212			144,427			—			502,419
Advanced coal royalties	—			—		500			4,726			—			5,226
Reclamation deposits	—			—		—			73,744			—			73,744
Restricted investments and bond collateral	15,991			5,995		39,263			26,830			—			88,079
Contractual third-party reclamation receivables	—			—		349			82,152			—			82,501
Intangible assets	—			2,103		—			261			—			2,364
Investment in subsidiaries	241,397			—		(792		)	3,770			(244,375		)	—
Other assets	9,459			—		2,314			3,320			(2,000		)	13,093
Total assets	$	284,141		$	183,855	$	308,743		$	385,281		$	(228,417	)	$	933,603

22

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING BALANCE SHEETS

June 30, 2013

(In thousands)

Liabilities and Shareholders’ Deficit	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Current liabilities
Current installments of long-term debt	$	(1,637	)	$	—		$	2,454		$	21,893		$	—		$	22,710
Accounts payable and accrued expenses:
Trade	2,779			8,278			15,372			43,467			(15,036		)	54,860
Production taxes	—			805			13,264			21,543			—			35,612
Workers’ compensation	810			—			—			—			—			810
Postretirement medical benefits	12,494			—			87			1,487			—			14,068
SERP	390			—			—			—			—			390
Deferred revenue	—			9,101			279			2,232			—			11,612
Asset retirement obligations	—			—			3,563			20,542			—			24,105
Other current liabilities	11,292			—			722			1,149			(14		)	13,149
Total current liabilities	26,128			18,184			35,741			112,313			(15,050		)	177,316
Long-term debt, less current installments	245,815			—			1,877			80,634			(2,000		)	326,326
Workers’ compensation, less current portion	8,436			—			—			—			—			8,436
Excess of black lung benefit obligation over trust assets	8,075			—			—			—			—			8,075
Postretirement medical benefits, less current portion	222,720			—			58,931			40,216			—			321,867
Pension and SERP obligations, less current portion	28,660			284			19,640			5,438			—			54,022
Deferred revenue, less current portion	—			45,736			—			6,151			—			51,887
Asset retirement obligations, less current portion	—			860			41,004			197,182			—			239,046
Intangible liabilities	—			6,115			—			—			—			6,115
Other liabilities	5,694			—			14,872			1,507			—			22,073
Intercompany receivable/payable	20,173			—			(5,097		)	1,849			(16,925		)	—
Total liabilities	565,701			71,179			166,968			445,290			(33,975		)	1,215,163
Shareholders’ deficit
Preferred stock	160			—			—			—			—			160
Common stock	36,372			5			110			132			(247		)	36,372
Other paid-in capital	133,495			52,821			92,203			66,178			(211,202		)	133,495
Accumulated other comprehensive loss	(144,637		)	(358		)	(5,003		)	(23,658		)	29,019			(144,637		)
Accumulated earnings (deficit)	(293,074		)	60,208			54,465			(102,661		)	(12,012		)	(293,074		)
Total Westmoreland Coal Company shareholders’ deficit	(267,684		)	112,676			141,775			(60,009		)	(194,442		)	(267,684		)
Noncontrolling interest	(13,876		)	—			—			—			—			(13,876		)
Total equity (deficit)	(281,560		)	112,676			141,775			(60,009		)	(194,442		)	(281,560		)
Total liabilities and shareholders’ deficit	$	284,141		$	183,855		$	308,743		$	385,281		$	(228,417	)	$	933,603

23

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING BALANCE SHEETS

December 31, 2012

(In thousands)

Assets	Parent/ Issuer			Co-Issuer		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Current assets:
Cash and cash equivalents	$	14,836		$	4,545	$	5,362		$	6,867		$	—		$	31,610
Receivables:
Trade	—			13,018		13,428			33,591			—			60,037
Contractual third-party reclamation receivables	—			—		56			10,151			—			10,207
Intercompany receivable/payable	(8,002		)	—		5,667			(30,641		)	32,976			—
Other	77			—		16,806			1,182			(14,845		)	3,220
	(7,925		)	13,018		35,957			14,283			18,131			73,464
Inventories	—			3,047		16,538			18,149			—			37,734
Other current assets	739			298		5,550			9,917			—			16,504
Total current assets	7,650			20,908		63,407			49,216			18,131			159,312
Property, plant and equipment:
Land and mineral rights	—			1,395		91,741			168,605			—			261,741
Plant and equipment	3,198			219,857		215,751			196,914			—			635,720
	3,198			221,252		307,492			365,519			—			897,461
Less accumulated depreciation, depletion and amortization	2,364			61,474		108,151			212,632			—			384,621
Net property, plant and equipment	834			159,778		199,341			152,887			—			512,840
Advanced coal royalties	—			—		500			3,816			—			4,316
Reclamation deposits	—			—		—			72,718			—			72,718
Restricted investments and bond collateral	15,183			5,990		39,208			26,828			—			87,209
Contractual third-party reclamation receivables	—			—		327			83,831			—			84,158
Intangible assets	—			2,923		—			280			—			3,203
Investment in subsidiaries	248,565			—		(792		)	3,770			(251,543		)	—
Other assets	10,267			—		635			3,457			(2,000		)	12,359
Total assets	$	282,499		$	189,599	$	302,626		$	396,803		$	(235,412	)	$	936,115

24

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING BALANCE SHEETS

December 31, 2012

(In thousands)

Liabilities and Shareholders’ Deficit	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Current liabilities
Current installments of long-term debt	$	(1,548	)	$	—		$	1,939		$	23,400		$	—		$	23,791
Accounts payable and accrued expenses:
Trade	4,707			4,978			15,163			42,085			(14,840		)	52,093
Production taxes	—			3			10,014			23,211			—			33,228
Workers’ compensation	820			—			—			—			—			820
Postretirement medical benefits	12,494			—			87			1,487			—			14,068
SERP	390			—			—			—			—			390
Deferred revenue	—			8,788			2,997			1,037			—			12,822
Asset retirement obligations	—			—			3,519			18,719			—			22,238
Other current liabilities	11,312			—			10			144			(4		)	11,462
Total current liabilities	28,175			13,769			33,729			110,083			(14,844		)	170,912
Long-term debt, less current installments	245,456			—			2,473			91,269			(2,000		)	337,198
Workers’ compensation, less current portion	8,710			—			—			—			—			8,710
Excess of black lung benefit obligation over trust assets	8,356			—			—			—			—			8,356
Postretirement medical benefits, less current portion	224,336			—			55,981			39,458			—			319,775
Pension and SERP obligations, less current portion	29,265			289			19,346			5,350			—			54,250
Deferred revenue, less current portion	—			50,239			—			6,652			—			56,891
Asset retirement obligations, less current portion	—			829			40,063			200,717			—			241,609
Intangible liabilities	—			6,625			—			—			—			6,625
Other liabilities	701			—			15,677			1,642			—			18,020
Intercompany receivable/payable	23,731			—			(7,972		)	35,787			(51,546		)	—
Total liabilities	568,730			71,751			159,297			490,958			(68,390		)	1,222,346
Shareholders’ deficit
Preferred stock	160			—			—			—			—			160
Common stock	35,502			5			110			132			(247		)	35,502
Other paid-in capital	130,852			52,807			93,456			62,539			(208,802		)	130,852
Accumulated other comprehensive loss	(148,345		)	(372		)	(4,987		)	(24,492		)	29,851			(148,345		)
Accumulated earnings (deficit)	(289,727		)	65,408			54,750			(132,334		)	12,176			(289,727		)
Total Westmoreland Coal Company shareholders’ deficit	(271,558		)	117,848			143,329			(94,155		)	(167,022		)	(271,558		)
Noncontrolling interest	(14,673		)	—			—			—			—			(14,673		)
Total equity (deficit)	(286,231		)	117,848			143,329			(94,155		)	(167,022		)	(286,231		)
Total liabilities and shareholders’ deficit	$	282,499		$	189,599		$	302,626		$	396,803		$	(235,412	)	$	936,115

25

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended June 30, 2013

(In thousands)

	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	—		$	23,162		$	45,742		$	98,246		$	(4,651	)	$	162,499
Costs and expenses:
Cost of sales	—			14,901			42,116			78,161			(4,650		)	130,528
Depreciation, depletion and amortization	93			2,551			5,289			7,465			(1		)	15,397
Selling and administrative	3,131			872			2,618			5,348			—			11,969
Heritage health benefit expenses	2,844			—			—			265			—			3,109
Gain on sales of assets	—			—			(14		)	(60		)	—			(74		)
Other operating income	—			—			(10,405		)	—			—			(10,405		)
	6,068			18,324			39,604			91,179			(4,651		)	150,524
Operating income (loss)	(6,068		)	4,838			6,138			7,067			—			11,975
Other income (expense):
Interest expense	(7,591		)	(10		)	(85		)	(2,399		)	9			(10,076		)
Loss on extinguishment of debt	(64		)	—			—			—			—			(64		)
Interest income	46			5			67			171			(9		)	280
Other income (loss)	—			—			149			(21		)	2			130
	(7,609		)	(5		)	131			(2,249		)	2			(9,730		)
Income (loss) before income taxes and income of consolidated subsidiaries	(13,677		)	4,833			6,269			4,818			2			2,245
Equity in income of subsidiaries	15,893			—			—			—			(15,893		)	—
Loss before income taxes	2,216			4,833			6,269			4,818			(15,891		)	2,245
Income tax expense (benefit)	(1		)	—			(2,571		)	3,710			(1,110		)	28
Net income (loss)	2,217			4,833			8,840			1,108			(14,781		)	2,217
Less net loss attributable to noncontrolling interest	2,499			—			—			—			—			2,499
Net income (loss) attributable to the Parent company	$	(282	)	$	4,833		$	8,840		$	1,108		$	(14,781	)	$	(282	)

26

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended June 30, 2012

(In thousands)

	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	—		$	15,882		$	44,920		$	78,512		$	(6,472	)	$	132,842
Costs and expenses:
Cost of sales	—			14,165			33,418			69,967			(6,472		)	111,078
Depreciation, depletion and amortization	105			2,522			4,871			6,222			—			13,720
Selling and administrative	3,726			943			2,818			5,446			—			12,933
Heritage health benefit expenses	3,799			—			—			253			—			4,052
Loss on sales of assets	—			—			—			239			—			239
Other operating income	—			—			(4,918		)	—			—			(4,918		)
	7,630			17,630			36,189			82,127			(6,472		)	137,104
Operating income (loss)	(7,630		)	(1,748		)	8,731			(3,615		)	—			(4,262		)
Other income (expense):
Interest expense	(8,122		)	(10		)	(111		)	(2,817		)	28			(11,032		)
Interest income	98			1			64			355			(28		)	490
Other income	138			—			63			36			—			237
	(7,886		)	(9		)	16			(2,426		)	—			(10,305		)
Income (loss) before income taxes and income of consolidated subsidiaries	(15,516		)	(1,757		)	8,747			(6,041		)	—			(14,567		)
Equity in income of subsidiaries	923			—			—			—			(923		)	—
Income (loss) before income taxes	(14,593		)	(1,757		)	8,747			(6,041		)	(923		)	(14,567		)
Income tax expense (benefit)	(947		)	—			1,231			(2,490		)	1,285			(921		)
Net income (loss)	(13,646		)	(1,757		)	7,516			(3,551		)	(2,208		)	(13,646		)
Less net loss attributable to noncontrolling interest	(1,563		)	—			—			—			—			(1,563		)
Net income (loss) attributable to the Parent company	$	(12,083	)	$	(1,757	)	$	7,516		$	(3,551	)	$	(2,208	)	$	(12,083	)

27

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended June 30, 2013

(In thousands)

	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	—		$	42,498		$	96,429		$	198,647		$	(13,627	)	$	323,947
Costs and expenses:
Cost of sales	—			31,856			82,538			160,182			(13,627		)	260,949
Depreciation, depletion and amortization	187			5,082			10,478			14,076			—			29,823
Selling and administrative	6,185			1,726			5,255			10,689			—			23,855
Heritage health benefit expenses	6,533			—			—			527			—			7,060
Gain on sales of assets	—			—			(147		)	(161		)	—			(308		)
Other operating income	—			—			(15,142		)	—			—			(15,142		)
	12,905			38,664			82,982			185,313			(13,627		)	306,237
Operating income (loss)	(12,905		)	3,834			13,447			13,334			—			17,710
Other income (expense):
Interest expense	(15,175		)	(20		)	(159		)	(4,899		)	17			(20,236		)
Loss on extinguishment of debt	(64		)	—			—			—			—			(64		)
Interest income	76			15			110			393			(17		)	577
Other income (loss)	—			—			242			(44		)	—			198
	(15,163		)	(5		)	193			(4,550		)	—			(19,525		)
Income (loss) before income taxes and income of consolidated subsidiaries	(28,068		)	3,829			13,640			8,784			—			(1,815		)
Equity in income of subsidiaries	26,198			—			—			—			(26,198		)	—
Loss before income taxes	(1,870		)	3,829			13,640			8,784			(26,198		)	(1,815		)
Income tax expense (benefit)	—			—			(2,075		)	6,533			(4,403		)	55
Net income (loss)	(1,870		)	3,829			15,715			2,251			(21,795		)	(1,870		)
Less net loss attributable to noncontrolling interest	797			—			—			—			—			797
Net income (loss) attributable to the Parent company	$	(2,667	)	$	3,829		$	15,715		$	2,251		$	(21,795	)	$	(2,667	)

28

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended June 30, 2012

(In thousands)

	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	—		$	36,604		$	83,111		$	173,928		$	(13,565	)	$	280,078
Costs and expenses:
Cost of sales	—			28,662			60,251			147,469			(13,565		)	222,817
Depreciation, depletion and amortization	213			5,021			8,651			13,124			—			27,009
Selling and administrative	6,793			1,879			5,202			13,145			(1,527		)	25,492
Heritage health benefit expenses	7,368			—			—			494			—			7,862
Loss on sales of assets	—			—			—			277			—			277
Other operating loss (income)	—			—			(9,730		)	—			1,527			(8,203		)
	14,374			35,562			64,374			174,509			(13,565		)	275,254
Operating income (loss)	(14,374		)	1,042			18,737			(581		)	—			4,824
Other income (expense):
Interest expense	(15,022		)	(20		)	(205		)	(5,716		)	48			(20,915		)
Interest income	148			4			117			674			(48		)	895
Other income	190			—			87			137			—			414
	(14,684		)	(16		)	(1		)	(4,905		)	—			(19,606		)
Income (loss) before income taxes and income of consolidated subsidiaries	(29,058		)	1,026			18,736			(5,486		)	—			(14,782		)
Equity in income of subsidiaries	14,215			—			—			—			(14,215		)	—
Loss before income taxes	(14,843		)	1,026			18,736			(5,486		)	(14,215		)	(14,782		)
Income tax expense (benefit)	(975		)	—			1,769			(871		)	(837		)	(914		)
Net income (loss)	(13,868		)	1,026			16,967			(4,615		)	(13,378		)	(13,868		)
Less net loss attributable to noncontrolling interest	(2,643		)	—			—			—			—			(2,643		)
Net income (loss) attributable to the Parent company	$	(11,225	)	$	1,026		$	16,967		$	(4,615	)	$	(13,378	)	$	(11,225	)

29

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended June 30, 2013

(In thousands)

	Parent/Issuer			Co-Issuer		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	2,217		$	4,833	$	8,840		$	1,108		$	(14,781	)	$	2,217
Other comprehensive income (loss)
Amortization of accumulated actuarial gains or losses, pension	1,004			8		—			240			(248		)	1,004
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	1,001			—		—			214			(214		)	1,001
Unrealized and realized gains and losses on available-for-sale securities	(39		)	—		(17		)	(22		)	39			(39		)
Other comprehensive income (loss)	1,966			8		(17		)	432			(423		)	1,966
Comprehensive income (loss) attributable to Westmoreland Coal Company	$	4,183		$	4,841	$	8,823		$	1,540		$	(15,204	)	$	4,183

30

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended June 30, 2012

(In thousands)

	Parent/Issuer			Co-Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	(13,646	)	$	(1,757	)	$	7,516	$	(3,551	)	$	(2,208	)	$	(13,646	)
Other comprehensive income (loss)
Amortization of accumulated actuarial gains or losses, pension	729			5			—		186			(191		)	729
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	643			—			—		243			(243		)	643
Tax effect of other comprehensive income gains	(471		)	—			—		—			—			(471		)
Unrealized and realized gains and losses on available-for-sale securities	(154		)	—			—		—			—			(154		)
Other comprehensive income (loss)	747			5			—		429			(434		)	747
Comprehensive income (loss) attributable to Westmoreland Coal Company	$	(12,899	)	$	(1,752	)	$	7,516	$	(3,122	)	$	(2,642	)	$	(12,899	)

31

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Six Months Ended June 30, 2013

(In thousands)

	Parent/Issuer			Co-Issuer		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	(1,870	)	$	3,829	$	15,715		$	2,251		$	(21,795	)	$	(1,870	)
Other comprehensive income (loss)
Amortization of accumulated actuarial gains or losses, pension	1,745			14		—			433			(447		)	1,745
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	2,002			—		—			427			(427		)	2,002
Unrealized and realized gains and losses on available-for-sale securities	(39		)	—		(17		)	(22		)	39			(39		)
Other comprehensive income (loss)	3,708			14		(17		)	838			(835		)	3,708
Comprehensive income (loss) attributable to Westmoreland Coal Company	$	1,838		$	3,843	$	15,698		$	3,089		$	(22,630	)	$	1,838

32

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Six Months Ended June 30, 2012

(In thousands)

	Parent/Issuer			Co-Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	(13,868	)	$	1,026	$	16,967	$	(4,615	)	$	(13,378	)	$	(13,868	)
Other comprehensive income (loss)
Amortization of accumulated actuarial gains or losses, pension	1,458			10		—		372			(382		)	1,458
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	1,286			—		—		243			(243		)	1,286
Tax effect of other comprehensive income gains	(975		)	—		—		—			—			(975		)
Unrealized and realized gains and losses on available-for-sale securities	(223		)	—		1		(18		)	17			(223		)
Other comprehensive income (loss)	1,546			10		1		597			(608		)	1,546
Comprehensive income (loss) attributable to Westmoreland Coal Company	$	(12,322	)	$	1,036	$	16,968	$	(4,018	)	$	(13,986	)	$	(12,322	)

33

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2013

(In thousands)

Statements of Cash Flows	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Cash flows from operating activities:
Net income (loss)	$	(1,870	)	$	3,829		$	15,715		$	2,251		$	(21,795	)	$	(1,870	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in income of subsidiaries	26,198			—			—			—			(26,198		)	—
Depreciation, depletion, and amortization	187			5,082			10,478			14,076			—			29,823
Accretion of asset retirement obligation and receivable	—			32			2,096			4,210			—			6,338
Amortization of intangible assets and liabilities, net	—			311			—			15			—			326
Share-based compensation	1,292			23			822			1,634			—			3,771
Gain on sale of assets	—			—			(147		)	(161		)	—			(308		)
Amortization of deferred financing costs	1,541			—			21			294			—			1,856
Loss on extinguishment of debt	64			—			—			—			—			64
Gain on sales of investment securities	—			—			(6		)	(22		)	—			(28		)
Changes in operating assets and liabilities:
Receivables, net	(36		)	(1,995		)	3,784			205			1,729			3,687
Inventories	—			(1,632		)	76			(421		)	—			(1,977		)
Excess of black lung benefit obligation over trust assets	(281		)	—			—			—			—			(281		)
Accounts payable and accrued expenses	(2,050		)	4,102			1,028			(1,173		)	(206		)	1,701
Deferred revenue	—			(4,190		)	(2,718		)	694			—			(6,214		)
Income tax payable	—			—			(1,679		)	1,623			—			(56		)
Accrual for workers’ compensation	(284		)	—			—			—			—			(284		)
Asset retirement obligations	—			—			(1,012		)	(4,412		)	—			(5,424		)
Accrual for postretirement medical benefits	(40		)	—			2,950			1,184			—			4,094
Pension and SERP obligations	695			9			294			519			—			1,517
Other assets and liabilities	(24		)	101			(5,887		)	3,999			—			(1,811		)
Net cash provided by (used in) operating activities	25,392			5,672			25,815			24,515			(46,470		)	34,924
Cash flows from investing activities:
Distributions received from subsidiaries	36,600			—			—			—			(36,600		)	—
Additions to property, plant and equipment	(550		)	(698		)	(8,114		)	(4,105		)	—			(13,467		)
Change in restricted investments and bond collateral and reclamation deposits	(808		)	(5		)	(373		)	(7,528		)	—			(8,714		)

34

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Net proceeds from sales of assets	—			—			323			254			—			577
Proceeds from the sale of investments	—			—			308			6,499			—			6,807
Receivable from customer for property and equipment purchases	—			—			—			(308		)	—			(308		)
Net cash provided by (used in) investing activities	35,242			(703		)	(7,856		)	(5,188		)	(36,600		)	(15,105		)
Cash flows from financing activities:
Change in book overdrafts	—			—			715			1,062			—			1,777
Repayments of long-term debt	(500		)	—			(1,529		)	(14,041		)	—			(16,070		)
Borrowings on revolving lines of credit	—			—			—			6,000			—			6,000
Repayments on revolving lines of credit	—			—			—			(6,000		)	—			(6,000		)
Debt issuance costs and other refinancing costs	(26		)	—			—			(156		)	—			(182		)
Dividends/distributions	(680		)	(9,000		)	(16,000		)	(11,600		)	36,600			(680		)
Transactions with Parent/affiliates	(58,599		)	(38		)	3,963			8,204			46,470			—
Net cash provided by (used in) financing activities	(59,805		)	(9,038		)	(12,851		)	(16,531		)	83,070			(15,155		)
Net increase (decrease) in cash and cash equivalents	829			(4,069		)	5,108			2,796			—			4,664
Cash and cash equivalents, beginning of year	14,836			4,545			5,362			6,867			—			31,610
Cash and cash equivalents, end of year	$	15,665		$	476		$	10,470		$	9,663		$	—		$	36,274

35

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2012

(In thousands)

Statements of Cash Flows	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Cash flows from operating activities:
Net income (loss)	$	(13,868	)	$	1,026		$	16,967		$	(4,615	)	$	(13,378	)	$	(13,868	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in income of subsidiaries	14,215			—			—			—			(14,215		)	—
Depreciation, depletion, and amortization	213			5,021			8,651			13,124			—			27,009
Accretion of asset retirement obligation and receivable	—			29			1,943			4,024			—			5,996
Amortization of intangible assets and liabilities, net	—			311			—			14			—			325
Non-cash tax benefits	(975		)	—			—			—			—			(975		)
Share-based compensation	1,429			24			290			1,718			—			3,461
Loss on sale of assets	—			—			—			277			—			277
Amortization of deferred financing costs	1,316			—			178			318			—			1,812
Gain on sales of investment securities	(190		)	—			—			—			—			(190		)
Changes in operating assets and liabilities:
Receivables, net	58			5,764			(13,121		)	(4,096		)	4,470			(6,925		)
Inventories	—			(722		)	379			(363		)	—			(706		)
Excess of black lung benefit obligation over trust assets	1,168			—			—			—			—			1,168
Accounts payable and accrued expenses	5,044			440			9,661			(1,981		)	(4,315		)	8,849
Deferred revenue	—			(4,003		)	(1,841		)	1,117			—			(4,727		)
Accrual for workers’ compensation	(158		)	—			—			—			—			(158		)
Asset retirement obligations	—			—			(306		)	(3,816		)	—			(4,122		)
Accrual for postretirement medical benefits	(482		)	—			2,182			1,042			—			2,742
Pension and SERP obligations	617			5			322			427			—			1,371
Other assets and liabilities	(35		)	113			3,444			(946		)	—			2,576
Net cash provided by (used in) operating activities	8,352			8,008			28,749			6,244			(27,438		)	23,915
Cash flows from investing activities:
Distributions received from subsidiaries	11,000			—			—			—			(11,000		)	—
Additions to property, plant and equipment	(30		)	(1,912		)	(3,367		)	(6,672		)	—			(11,981		)
Change in restricted investments and bond collateral and reclamation deposits	(2,440		)	(3		)	(24,789		)	(375		)	—			(27,607		)
Cash payments related to acquisitions and other	4,000			—			(76,522		)	—			—			(72,522		)
Net proceeds from sales of assets	—			—			20			71			—			91

36

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

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

Proceeds from the sale of investments	1,581			—			—			—			—			1,581
Receivable from customer for property and equipment purchases	—			—			—			(183		)	—			(183		)
Net cash provided by (used in) investing activities	14,111			(1,915		)	(104,658		)	(7,159		)	(11,000		)	(110,621		)
Cash flows from financing activities:
Change in book overdrafts	—			(259		)	—			1,154			—			895
Borrowings from long-term debt	119,364			—			—			—			—			119,364
Repayments of long-term debt	—			—			(1,221		)	(9,633		)	—			(10,854		)
Borrowings on revolving lines of credit	—			—			—			3,000			—			3,000
Repayments on revolving lines of credit	—			—			—			(3,000		)	—			(3,000		)
Debt issuance costs and other refinancing costs	(5,472		)	—			—			—			—			(5,472		)
Dividends/distributions	(680		)	(3,500		)	—			(7,500		)	11,000			(680		)
Transactions with Parent/affiliates	(127,957		)	67			85,132			15,320			27,438			—
Net cash provided by (used in) financing activities	(14,745		)	(3,692		)	83,911			(659		)	38,438			103,253
Net increase (decrease) in cash and cash equivalents	7,718			2,401			8,002			(1,574		)	—			16,547
Cash and cash equivalents, beginning of year	26,141			6			143			4,493			—			30,783
Cash and cash equivalents, end of year	$	33,859		$	2,407		$	8,145		$	2,919		$	—		$	47,330

37

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 are not limited to, statements we make about our expectation that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future, our anticipated cash spend on heritage health and pension obligations, the timing of when our customer's plant will be back online, and the possibility that we may from time to time use available cash to repurchase our 10.75% Senior Notes on the open market.

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 therefore caution you against relying on any of these forward-looking statements. They are statements neither 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:

• risks associated with our estimated postretirement medical benefit and pension obligations, including those we assumed in the Kemmerer acquisition, and the impact of regulatory changes on those obligations;

• changes in our black lung obligations, changes in our experience related to black lung claims, and the impact of the Patient Protection and Affordable Care Act;

• our potential inability to maintain compliance with debt covenant requirements;

• competition with natural gas and other non-coal energy resources, which may be increased as a result of energy policies, regulations and subsidies or other government incentives that encourage or mandate use of alternative energy sources;

• coal-fired power plant capacity, including the impact of environmental regulations, energy policies and other factors that may cause utilities to phase out or close existing coal-fired power plants or reduce construction of any new coal-fired power plants;

• railroad, export terminal capacity and other transportation performance, costs and availability;

• 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;

• our potential inability to enter into new coal supply agreements with existing customers due to the unfavorable result of competitive bid processes or the shutdown of a power facility due to new environmental legislation or regulations;

• risks associated with the structure of Westmoreland Energy LLC’s and its subsidiaries, collectively referred to herein as ROVA, contracts with its coal suppliers and power purchaser, which could dramatically affect the overall profitability of ROVA;

• the effect of Environmental Protection Agency inquiries and regulations on the operations of ROVA and our customer's power facilities;

• 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 or catastrophic events;

• the potential that insurance proceeds from our business interruption claim relating to the unexpected shutdown of one of the Absaloka mine customers will not be sufficient to cover our losses associated with the business interruption;

• 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

• other factors that are described in “Risk Factors” in our 2012 Form 10-K and any subsequent quarterly filing on Form 10-Q

Unless otherwise specified, the forward-looking statements in this report speak as of the filing date of this report. 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

38

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONT.)

predict all of them. We undertake no obligation to publicly update any forward-looking statements, whether because of new information, future developments or otherwise, except as may be required by law.

Overview

Westmoreland Coal Company is an energy company whose operations include six surface coal mines in Montana, Wyoming, North Dakota and Texas, and two coal-fired power-generating units in North Carolina. We sold 21.7 million tons of coal in 2012 and 11.8 million tons through June 30, 2013. Our two principal operating segments are our coal and power segments. Our two non-operating segments are our heritage and corporate segments. Our heritage segment primarily includes the costs of benefits we provide to former mining operation employees and our corporate segment consists primarily of corporate administrative expenses.

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.

Indian Coal Production Tax Credits (ICTC) amendment and extension

On May 30, 2013, we extended our ICTC monetization transaction two and a half months to December 31, 2013 to coincide with the IRS's extension of the ICTC.  We also agreed with our partner in the transaction to adjust the mining fee WRI receives as compensation for mining to better reflect current market conditions.  As a result of the change in the mining fee, we recorded an increase of $3.7 million in Other operating income for each of the three and six month periods ended June 30, 2013 with a corresponding increase in Net income attributable to noncontrolling interest.  There was no impact on Net loss applicable to common shareholders.

Xcel Fire

In November 2011, an explosion and subsequent fire occurred at Unit 3 of Xcel Energy's Sherburne County Generating Station, or Unit 3, which is the largest customer of our Absaloka Mine. Xcel indicated that Unit 3 would be offline for an extended period. Sherburne County Generating Station has indicated a start up date of September 2013. WRI, our wholly owned subsidiary that operates the Absaloka Mine, maintains business interruption insurance coverage and has recognized $6.5 million and $11.3 million of income for the three and six months ended June 30, 2013, respectively; and $5.5 million and $8.6 million of income for the three and six months ended June 30, 2012, respectively. We received $4.2 million and $7.4 million of cash proceeds for the three and six months ended June 30, 2013, respectively. Insurance proceeds are included in Net cash provided by operating activities.

Results of Operations

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Summary

The following table shows the comparative consolidated results and changes between periods:

	Three Months Ended June 30,
							Increase / (Decrease)
	2013			2012			$		%
	(In millions)
Revenues	$	162.5		$	132.8		$	29.7	22.4	%
Net income (loss) applicable to common shareholders	(0.6		)	(12.4		)	11.8		(95.2	)%
Adjusted EBITDA(1)	32.0			14.6			17.4		119.2	%

____________________

(1) Adjusted EBITDA , a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.

Our second quarter 2013 revenues increased primarily due to stronger power demand, favorable weather conditions, the timing of ROVA's planned maintenance, and planned 2012 mine customer outages.

39

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONT.)

Our second quarter 2013 net loss applicable to common shareholders decreased by $11.8 million. The primary factors, in aggregate, driving this decrease in net loss were:

	Three Months Ended June 30, 2013
	(In millions)
Increase in our power segment operating income due to timing of a planned maintenance outage and fewer unplanned outages.	$	6.6
Increase in our coal segment primarily due to stronger power demand, favorable weather conditions, and planned 2012 mine customer outages.	4.0
Decrease in interest expense due to lower debt levels.	1.0
Increase due to other factors	0.2
Total	$	11.8

Coal Segment Operating Results

The following table shows comparative coal revenues, operating income, adjusted EBITDA and sales volume, and percentage changes between periods:

	Three Months Ended June 30,
					Increase / (Decrease)
	2013		2012		$		%
	(In thousands, except per ton data)
Revenues	$	139,337	$	116,960	$	22,377	19.1	%
Operating income	13,076		5,018		8,058		160.6	%
Adjusted EBITDA(1)	29,667		20,337		9,330		45.9	%
Tons sold—millions of equivalent tons	5.7		3.9		1.8		46.2	%

____________________

(1) Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.

Our second quarter 2013 coal segment revenues, operating income and tons sold increased primarily due to stronger power demand, favorable weather conditions, and planned 2012 mine customer outages. In addition, operating income increased due to the ICTC amendment.

Power Segment Operating Results

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

	Three Months Ended June 30,
						Increase / (Decrease)
	2013		2012			$		%
	(In thousands)
Revenues	$	23,162	$	15,882		$	7,280	45.8	%
Operating income	4,838		(1,749		)	6,587		376.6	%
Adjusted EBITDA(1)	7,573		959			6,614		689.7	%
Megawatts hours	421		287			134		46.7	%

____________________

(1) Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.

Our second quarter 2013 power segment revenues, operating income and megawatt hours increased due to 2012 outage timing at our ROVA power plant and fewer unplanned outages.

40

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 heritage segment’s operating expenses and percentage change between periods: 

	Three Months Ended June 30,
					Increase / (Decrease)
	2013		2012		$			%
	(In thousands)
Heritage segment operating expenses	$	3,530	$	4,527	$	(997	)	(22.0	)%

Our second quarter 2013 heritage segment operating expenses decreased primarily due to favorable interest rates.

Corporate Segment Operating Results

The following table shows comparative corporate segment’s operating expenses and percentage change between periods:

	Three Months Ended June 30,
					Increase / (Decrease)
	2013		2012		$			%
	(In thousands)
Corporate segment operating expenses	$	2,409	$	3,004	$	(595	)	(19.8	)%

Our second quarter 2013 corporate segment operating expenses decreased primarily due to one-time

recruiting and compensation expenses related to a new executive position occurring during the second quarter of 2012.

Nonoperating Results (including interest expense, interest income, other income (loss), income tax expense, and net loss attributable to noncontrolling interest)

Our interest expense for the second quarter of 2013 decreased to $10.1 million compared with $11.0 million for the second quarter of 2012 primarily due to lower debt levels.

Our interest income and other income (loss) for the second quarter of 2013 is comparable to the second quarter of 2012.

Our income tax expense for the second quarter of 2013 increased to less than $0.1 million compared with $0.9 million of benefit for the second quarter of 2012 due to higher taxable income on improved results.

Our income attributable to noncontrolling interest for the second quarter of 2013increased to $2.5 million compared with a loss of $1.6 million for the second quarter of 2012 related to decreased losses from a partially owned consolidated subsidiary due to the ICTC amendment.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Summary

The following table shows the comparative consolidated results and changes between periods:

	Six Months Ended June 30,
							Increase / (Decrease)
	2013			2012			$		%
	(In millions)
Revenues	$	323.9		$	280.1		$	43.8	15.6	%
Net income (loss) applicable to common shareholders	(3.3		)	(11.9		)	8.6		(72.3	)%
Adjusted EBITDA(1)	57.7			41.9			15.8		37.7	%

____________________

(1) Adjusted EBITDA , a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.

41

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONT.)

Our revenues for the first six months of 2013 increased primarily due to stronger power demand, favorable weather conditions and the Kemmerer acquisition. In addition, our ROVA power plant had fewer unplanned outages.

Our net loss applicable to common shareholders for the first six months of 2013 decreased by $8.6 million. The primary factors, in aggregate, driving this decrease in net loss were:

	Six Months Ended June 30, 2013
	(In millions)
Increase in our coal segment primarily due to stronger power demand, favorable weather conditions, and the Kemmerer acquisition.	$	5.2
Increase in our power segment operating income due to fewer unplanned outages.	2.8
Decrease in interest expense due to lower debt levels.	0.7
Decrease due to other factors	(0.1		)
Total	$	8.6

Coal Segment Operating Results

The following table shows comparative coal revenues, operating income, adjusted EBITDA and sales volume, and percentage changes between periods:

	Six Months Ended June 30,
					Increase / (Decrease)
	2013		2012		$		%
	(In thousands, except per ton data)
Revenues	$	281,449	$	243,474	$	37,975	15.6	%
Operating income	26,547		19,454		7,093		36.5	%
Adjusted EBITDA(1)	59,573		49,496		10,077		20.4	%
Tons sold—millions of equivalent tons	11.8		9.5		2.3		24.2	%

____________________

(1) Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.

Our coal segment revenues, operating and tons sold increased for the first six months of 2013 primarily due to stronger power demand, favorable weather conditions, and the Kemmerer acquisition. In addition, operating income increased due to the ICTC amendment.

Power Segment Operating Results

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

	Six Months Ended June 30,
					Increase / (Decrease)
	2013		2012		$		%
	(In thousands)
Revenues	$	42,498	$	36,604	$	5,894	16.1	%
Operating income	3,837		1,042		2,795		268.2	%
Adjusted EBITDA(1)	9,282		6,426		2,856		44.4	%
Megawatts hours	761		660		101		15.3	%

____________________

(1) Adjusted EBITDA, a non-GAAP measure, is defined and reconciled to net loss at the end of this “Results of Operations” section.

Our power segment revenues, operating income and megawatt hours increased for the first six months of 2013 due to fewer unplanned outages at our ROVA power plant.

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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 heritage segment’s operating expenses and percentage change between periods: 

	Six Months Ended June 30,
					Increase / (Decrease)
	2013		2012		$			%
	(In thousands)
Heritage segment operating expenses	$	7,705	$	8,537	$	(832	)	(9.7	)%

Our heritage segment operating expenses decreased for the first six months of 2013 primarily due to favorable interest rates.

Corporate Segment Operating Results

The following table shows comparative corporate segment’s operating expenses and percentage change between periods:

	Six Months Ended June 30,
					Increase / (Decrease)
	2013		2012		$			%
	(In thousands)
Corporate segment operating expenses	$	4,968	$	7,135	$	(2,167	)	(30.4	)%

Our corporate segment operating expenses for the first six months of 2013 decreased primarily due to a deductible on a claim paid by our captive insurance entity to our subsidiary related to the business interruption claim at our Absaloka Mine during the first quarter of 2012, however this expense was offset by proceeds recorded in the coal segment and thus had no impact on a consolidated basis. In addition, expenses decreased due to one-time recruiting and compensation expenses related to a new executive position occurring during the first six months of 2012.

Nonoperating Results (including interest expense, interest income, other income (loss), income tax expense, and net loss attributable to noncontrolling interest)

Our interest expense for the first six months of 2013 decreased to $20.2 million compared with $20.9 million for the first six months of 2012 primarily due to lower overall debt levels.

Our interest income and other income (loss) for the first six months of 2013 is comparable to the first six months of 2012.

Our income tax expense for the first six months of 2013 increased to $0.1 million compared with $0.9 million of benefit for the first six months of 2012 due to higher taxable income on improved results.

Our income attributable to noncontrolling interest for the first six months of 2013increased to $0.8 million compared with a loss of $2.6 million for the first six months of 2012 related to decreased losses from a partially owned consolidated subsidiary due to the ICTC amendment.

Reconciliation of Adjusted EBITDA to Net Loss

The discussion in “Results of Operations” 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

• 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.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONT.)

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 calculated Adjusted EBITDA, including a breakdown by segment, and reconciles Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. Concerning the presentation of data for the Year Ended December 31, 2012 in the table below, please refer to our 2012 Form 10-K for additional information regarding our financial results. The Twelve Months Ended June 30, 2013 column is calculated from the prior three columns.

	Three Months Ended June 30,						Six Months Ended June 30,						Year Ended December 31,			Twelve Months Ended June 30,
	2013			2012			2013			2012			2012			2013
	(In thousands)
Reconciliation of Adjusted EBITDA to Net loss
Net income (loss)	$	2,217		$	(13,646	)	$	(1,870	)	$	(13,868	)	$	(13,662	)	$	(1,664	)
Income tax expense (benefit)	28			(921		)	55			(914		)	90			1,059
Other income	(130		)	(237		)	(198		)	(414		)	(723		)	(507		)
Interest income	(280		)	(490		)	(577		)	(895		)	(1,496		)	(1,178		)
Loss on extinguishment of debt	64			—			64			—			1,986			2,050
Interest expense	10,076			11,032			20,236			20,915			42,677			41,998
Depreciation, depletion and amortization	15,397			13,720			29,823			27,009			57,145			59,959
Accretion of ARO and receivable	3,156			3,143			6,338			5,996			12,189			12,531
Amortization of intangible assets and liabilities	165			163			326			325			658			659
EBITDA	30,693			12,764			54,197			38,154			98,864			114,907
(Gain)/loss on sale of assets	(74		)	239			(308		)	277			528			(57		)
Share-based compensation	1,385			1,559			3,771			3,461			6,040			6,350
Adjusted EBITDA	$	32,004		$	14,562		$	57,660		$	41,892		$	105,432		$	121,200

44

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONT.)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(In thousands)
Adjusted EBITDA by Segment
Coal	$	29,667		$	20,337		$	59,573		$	49,496
Power	7,573			959			9,282			6,426
Heritage	(3,530		)	(4,527		)	(7,705		)	(8,537		)
Corporate	(1,706		)	(2,207		)	(3,490		)	(5,493		)
Total	$	32,004		$	14,562		$	57,660		$	41,892

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(In thousands)
Adjusted EBITDA
Guarantor and Issuer	$	14,809	$	9,014	$	24,553	$	23,316
Non-Guarantor	17,195		5,548		33,107		18,576
Total	$	32,004	$	14,562	$	57,660	$	41,892

Liquidity and Capital Resources

We had the following liquidity at June 30, 2013 and December 31, 2012:

	June 30,		December 31,
	2013		2012
	(In millions)
Cash and cash equivalents	$	36.3	$	31.6
WML revolving line of credit	23.1		23.1
Corporate revolving line of credit	20.0		20.0
Total	$	79.4	$	74.7

We anticipate that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future.

We are a holding company and conduct our operations through subsidiaries. Our parent holding company has significant cash requirements to fund our debt obligations, ongoing heritage health benefit costs, pension contributions, and corporate overhead expenses. The principal sources of cash flow to the parent company are distributions from our principal operating subsidiaries. The cash at ROVA, Kemmerer, and WRI has no restrictions and is immediately available. 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. The cash at WRMI is also available to us through dividends and is subject to maintaining a statutory minimum level of capital, which is two hundred and fifty thousand dollars.

Under the indenture governing the 10.75% Senior Notes, we are required to offer a portion of our Excess Cash Flow (as defined by the indenture) for each fiscal year to purchase some of these notes at 100% of the principal amount. In addition to any Excess Cash Flow redemption required under the indenture, the Company may continue to use available cash to repurchase these notes on the open market, as permitted by the indenture.

We anticipate that beginning in July 2013, we will contribute cash to our 401(k) plan instead of Company stock. Annual requirements for this funding approximates three million dollars.

45

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONT.)

Debt Obligations

10.75% Senior Notes

The 10.75% Senior Notes were outstanding in the principal amount of $251.5 million at June 30, 2013. Interest is due at an annual fixed rate of 10.75% and paid in cash semi-annually, in arrears, on February 1 and August 1 of each year. The 10.75% Senior Notes mature February 1, 2018 and contain provisions that affect our sources of liquidity, such as limitations on our ability to enter into new capital leases and other forms of credit. The notes are fully and unconditionally guaranteed by ROVA, Kemmerer, WRI and their respective subsidiaries (other than Absaloka Coal, LLC) and by certain other subsidiaries.

During the six months ended June 30, 2013, we paid $0.5 million, excluding accrued interest, to repurchase 10.75%

Senior Notes with a principal amount of $0.5 million.

2012 Revolving Credit Agreement

Our 2012 Revolving Credit Agreement has a borrowing limit of $20.0 million and an expiration date of June 30, 2017. At June 30, 2013, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit.

Two interest rate options exist under the revolver. The Base Rate option bears interest at the greater of a Federal Funds Rate plus 0.5% or the Prime Rate, as defined in the loan agreement and is payable monthly. The LIBOR Rate option bears interest at the London Interbank Offering Rate, or LIBOR, rate plus 2.25% and is payable monthly. In addition, a commitment fee of 0.75% of the average unused portion of the available revolver is payable monthly.

The loan agreement contains various affirmative, negative and financial covenants. Financial covenants in the agreement include a fixed charge coverage ratio and an EBITDA measure. The fixed charge coverage ratio must meet or exceed a specified minimum. The EBITDA covenant requires a minimum amount of EBITDA to be achieved. We met these covenant requirements as of June 30, 2013. All extensions of credit under the revolver are collateralized by a first priority security interest in and lien upon the inventory and accounts receivable of the Parent, WRI, Kemmerer and ROVA.

WML Term Debt and Revolving Credit Agreement

WML had $94.5 million of fixed rate term debt outstanding at June 30, 2013. This term debt matures March 31, 2018, and bears an annual fixed rate of 8.02%, payable quarterly. The principal on the WML notes is scheduled to be paid as follows (in millions):

2013 remaining	$	9.0
2014	18.0
2015	20.0
2016	20.0
2017	22.0
2018	5.5

In March 2013, we amended the WML Revolving Credit Agreement by extending the maturity date from June 26, 2013 to December 31, 2017. WML's revolving line of credit has a borrowing limit of $25.0 million. The interest rate under the revolving line of credit at June 30, 2013 was 3.75% per annum. At June 30, 2013, WML had no outstanding balance under the revolving line of credit and the revolving line of credit supports a letter of credit of $1.9 million, leaving it with $23.1 million of borrowing availability. WML's revolving line of credit is only available to fund the operations of its respective subsidiaries.

WML's credit agreement contains various affirmative and negative covenants. Operational covenants in the agreements prohibit, among other things, WML from incurring or guaranteeing additional indebtedness, creating liens on its assets, making investments or engaging in asset sales or transactions with affiliates, in each case subject to specified exceptions. Financial covenants in the agreements impose requirements relating to specified debt service coverage and leverage ratios.

The debt service coverage ratio covenant requires that at the end of each quarter WML's ratio of EBITDA less unfinanced capital expenditures to debt service (all defined) for the four quarters then ended meets or exceeds a specified minimum. The coverage ratio as of June 30, 2013 was 1.72 and the specified minimum was 1.30. The leverage ratio covenant requires that WML not permit the ratio of total debt at the end of each quarter to EBITDA (both as defined) for the four

46

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONT.)

quarters then ended to be greater than a specified amount. The leverage ratio as of June 30, 2013 was 1.45, which did not exceed the maximum amount of 2.00. WML met all of its covenant requirements as of June 30, 2013.

WML's term debt and revolving credit facility are secured by substantially all of the assets of WML and its subsidiaries (other than Texas Westmoreland Coal Co., or TWCC), our membership interests in WML, including certain dividends and other proceeds from such interests, and substantially all of the stock of WML's subsidiaries other than TWCC.

Capital Leases

During the six months ended June 30, 2013, we paid $2.7 million to purchase equipment under capital leases with a principal amount of $2.5 million. The difference between the purchase price and the carrying amount of the capital lease obligation was recorded as an adjustment to the carrying amount of the equipment.

Gross and Net Leverage Ratios

These ratios are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We use these ratios to assess our progress in reducing our aggregate debt levels. Refer to the Results of Operations section for the reconciliation of Adjusted EBITDA to net loss.

	June 30,		December 31,
	2013		2012
	(In millions)
Gross debt	$	349.0	$	361.0
Less:
Cash and cash equivalents	36.3		31.6
WML debt reserve account	13.1		13.1
Net debt	$	299.6	$	316.3
Adjusted EBITDA (for the twelve months ended)	$	121.2	$	105.4
Gross leverage ratio	2.88		3.43
Net leverage ratio	2.47		3.00

Heritage Health Costs and Pension Contributions

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

	Six Months Ended June 30,				2013 Remaining Expected Amounts
	2013		2012
	(In millions)
Postretirement medical benefits	$	6.0	$	6.2	$	7.2
CBF premiums	1.2		1.1		0.7
Workers’ compensation benefits	0.4		0.3		0.3
Total heritage health payments	$	7.6	$	7.6	$	8.2
Pension contributions	$	—	$	—	$	3.4

47

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONT.)

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:

	Six Months Ended June 30,
	2013			2012
	(In thousands)
Cash provided by (used in):
Operating activities	$	34,924		$	23,915
Investing activities	(15,105		)	(110,621		)
Financing activities	(15,155		)	103,253

Cash provided by operating activities increased $11.0 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 primarily due to stronger power demand, favorable weather conditions and the Kemmerer acquisition. In addition, our ROVA power plant had fewer unplanned outages.

Cash used in investing activities decreased $95.5 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 primarily due to the Kemmerer acquisition. Capital expenditures were $13.5 million and $12.0 million for the six months ended June 30, 2013 and 2012, respectively.

Cash provided by financing activities decreased $118.4 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 primarily due to the Kemmerer acquisition debt. Debt repayments were $16.1 million and $10.9 million for the six months ended June 30, 2013 and 2012, respectively.

Our working capital deficit of $11.1 million at June 30, 2013 remained consistent with December 31, 2012.

Critical Accounting Policies and Estimates

Please refer to the corresponding section in Part II, Item 7 of our 2012 Form 10-K and the footnote disclosures included in Part I, Item I of this report for a discussion of our accounting policies and estimates.

Recent Accounting Pronouncements

See Note 3 of Notes to Consolidated Financial Statements included in “Part I — Item 1 — Financial Statements.”

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. We utilize surety bonds and letters of credit 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. 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.

Our off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Form 10-K.

48

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There has been no material changes in our market risk during the six months ended June 30, 2013. For additional information, refer to the “Quantitative and Qualitative Disclosures about Market Risk” in Item  7A of our 2012 Form 10-K.

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 June 30, 2013. 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 the six months ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

49

PART II

OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS.

We are subject, from time-to-time, to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and may result in a negative impact on income in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our financial results.

ITEM 1A — RISK FACTORS.

We have disclosed under the heading “Risk Factors” in our 2012 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 2012 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 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The Company's purchases of its common stock during the three months ended June 30, 2013 were as follows:

Period	Total Number of Shares Purchased(1)	Average Price Paid per Share
April 2, 2013	22,571	$	11.42

____________________

(1) Shares purchased as indicated in this table represent the withholding of a portion of restricted shares to cover taxes on vested restricted shares.

ITEM 4 —MINE SAFETY DISCLOSURE.

On July 21, 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act. Section 1503(a) of the Act contains reporting requirements regarding mine safety. Mine safety violations and other regulatory matters, as required by Section 1503(a) of the Act and Item 104 of Regulation S-K, are included as Exhibit 95.1 to this report on Form 10-Q.

ITEM 6 — Exhibits

See Exhibit Index at page 52 of this report.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:	July 26, 2013	/s/ Kevin A. Paprzycki
		Kevin A. Paprzycki
		Chief Financial Officer and Treasurer (Principal Financial Officer and A Duly Authorized Officer)
Date:	July 26, 2013	/s/ Russell H. Werner
		Russell H. Werner
		Controller (Principal Accounting Officer and A Duly Authorized Officer)

51

EXHIBIT INDEX

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Filed Herewith	Submitted Herewith
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)					X
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)					X
32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350					X
95.1	Mine Safety Disclosure					X
101	Interactive Data File (Form 10-Q for the quarterly period ended June 30, 2013 furnished in XBRL). Users of this data are advised in accordance with Rule 406T of Regulation S-T promulgated by the Securities and Exchange Commission that this Interactive Data File is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” and “unreviewed.”						X

52