WESTMORELAND COAL (WLBAQ) 10-K 2013 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2013

OR

¨ 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

Securities registered pursuant to Section 12(b) of the Act:

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Title of Each Class	Name of Exchange on Which Registered
Common Stock, par value $2.50 per share	NASDAQ Global Market
Depositary Shares, each representing one-quarter of a share of Series A Convertible Exchangeable Preferred Stock

Securities registered pursuant to Section 12(g) of the Act:

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Series A Convertible Exchangeable Preferred Stock, par value $1.00 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨     No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨     No   x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K.  ¨

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 Act).    Yes  ¨    No  x

The aggregate market value of voting common stock held by non-affiliates as of June 30, 2013 was $133,270,554.

There were 14,847,053 shares outstanding of the registrant’s common stock, $2.50 par value per share (the registrant’s only class of common stock), as of February 26, 2014.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed by the Company in connection with its 2014 Annual Meeting of Stockholders scheduled to be held on May 20, 2014, which will be filed within 120 days after December 31, 2013, are incorporated by reference into Part III of this Annual Report on Form 10-K.

WESTMORELAND COAL COMPANY

FORM 10-K

ANNUAL REPORT

TABLE OF CONTENTS

Item		Page
	PART I
1	Business	4
1A	Risk Factors	19
1B	Unresolved Staff Comments	36
2	Properties	37
3	Legal Proceedings	37
4	Mine Safety Disclosure	37
	PART II
5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	38
6	Selected Financial Data	40
7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
7A	Quantitative and Qualitative Disclosures about Market Risk	56
8	Financial Statements and Supplementary Data	58
9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	121
9A	Controls and Procedures	121
	PART III
10	Directors, Executive Officers and Corporate Governance	123
11	Executive Compensation	123
12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	123
13	Certain Relationships and Related Transactions, and Director Independence	123
14	Principal Accountant Fees and Services	123
	PART IV
15	Exhibits and Financial Statement Schedules	124
Signatures		125

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Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K 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 throughout this report regarding the Sherritt Acquisition and its anticipated effects on us, and statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Significant Anticipated Variances Between 2013 and 2014 and Related Uncertanties” regarding factors that may cause our results of operation in future periods to differ from our expectations.

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:

• Changes in our post-retirement medical benefit and pension obligations and the impact of the recently enacted healthcare legislation;

• The impact of the recently enacted healthcare legislation and its effect on our employee health benefit costs;

• Our potential inability to expand or continue current coal operations due to limitations in obtaining bonding capacity for new mining permits, and/or increases in our mining costs as a result of increased bonding expenses;

• Our substantial level of indebtedness, now and following the Sherritt Acquisition, and potential inability to maintain compliance with debt covenant requirements;

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

• The effect of Environmental Protection Agency inquiries and regulations on the operations of the power plants we provide coal to;

• The effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers;

• 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;

• Our ability to complete the Sherritt Acquisition;

• Our expansion into international operations as a result of the Sherritt Acquisition which will expose us to risks relating to exchange rates and exchange controls, general economic and political conditions, costs associated with compliance with governmental regulations in multiple jurisdictions, tax-related risks and export or import requirements for, or restrictions related to, our products;

• Our efforts to effectively integrate the Sherritt operations with our existing business and our ability to manage our expanded operations following the acquisition; and

• Our ability to realize growth opportunities and cost synergies as a result of the Sherritt Acquisition.

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 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.

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PART I

The words “we,” “our,” “the Company,” or “Westmoreland,” as used in this report, refer to Westmoreland Coal Company and its applicable subsidiary or subsidiaries.

ITEM 1 — BUSINESS.

Overview

Westmoreland Coal Company began mining in Westmoreland County, Pennsylvania in 1854 as a Pennsylvania corporation. In 1910, we incorporated in Delaware and continued our focus on underground coal operations in Pennsylvania and the Appalachian Basin. We moved our headquarters from Philadelphia, Pennsylvania to Colorado Springs in 1995 and relocated the headquarters to Englewood, Colorado in November 2011.

Today, Westmoreland Coal Company is an energy company employing approximately 1,370 employees 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 24.9 million tons of coal in 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.

The following chart provides an overview of the operating subsidiaries that comprise our coal and power segments and our relationship to each of them:

We produce and sell thermal coal primarily to investment grade utility customers under long-term cost-protected contracts. Our focus is on coal markets where we can utilize dragline surface mining methods that historically have predictable and consistent costs and production rates and with which we have extensive operational experience. In addition, we focus on mine locations that allow us to take advantage of close customer proximity through mine-mouth power plants and strategically located rail transportation, with the goal of being the low-cost supplier of choice to the customers that we serve. We believe this business model has contributed to the stability of our cash flows and results of operations.

As of December 31, 2013, we had two classes of long-term debt outstanding: (1) $85.5 million of term debt issued by Westmoreland Mining, LLC, or WML, referred to herein as the WML Notes; and (2) $251.5 million of senior secured notes issued by us at the parent level, referred to herein as the 10.75% Senior Notes or the Notes. We incorporate by reference the information regarding the revenues, operating income and total assets of each of our segments for the years ended December 31, 2013, 2012 and 2011 contained in Note 16 — Business Segment Information to our consolidated financial statements.

Recent Developments

As we have previously announced, on December 24, 2013, we entered into a definitive Arrangement Agreement, which we refer to as the Arrangement Agreement, to acquire the coal operations of Sherritt International Corporation, or Sherritt, which consist of its Prairie Mines & Royalty Ltd. subsidiary, or PMRL or Prairie, and its Coal Valley Resources Inc. subsidiary, or CVRI or Mountain. We refer to this transaction and certain related transactions as the Sherritt Acquisition. Upon closing of the Sherritt Acquisition, PMRL and CVRI, which we refer to as the Sherritt Subsidiaries, will become wholly owned subsidiaries of Westmoreland. PMRL and CVRI collectively operate seven surface coal mines located in Alberta and Saskatchewan and a char production facility and hold a 50% interest in an activated carbon plant, which we refer to as the

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Sherritt Assets. Sherritt’s royalty business, currently held under its Prairie operations, will be transferred by Westmoreland to Altius Minerals Corporation concurrently with the closing of the Sherritt Acquisition. We expect the Sherritt Acquisition to be completed by the end of the first quarter of 2014.

We are financing the Sherritt Acquisition and certain related transactions through the issuance of $425 million in aggregate principal amount of 10.75% Senior Secured Notes, which are referred to herein as the New Notes. On February 7, 2014, we closed the initial offering of the New Notes at a price of 106.875% plus accrued interest from February 1, 2014. The net proceeds of the offering of the New Notes will be used to finance the approximately $293 million cash portion of the purchase price of the Sherritt Acquisition, an estimated $58 million to satisfy the cash bonding obligations for the Sherritt Assets and cash transaction costs associated with the acquisition and the offering of New Notes of approximately $26 million. The balance of the proceeds will be used to fund the prepayment of the WML Notes and for other general corporate purposes. The proceeds of the offering are being held in escrow pending the completion of the Sherritt Acquisition.

Following the Sherritt Acquisition, we will be the sixth largest North American coal producer as measured by pro forma combined 2012 production of nearly 52 million tons, and we believe the 27 total dragline excavators we operate will make us the largest dragline operator among North American coal companies. The following map shows our combined, pro forma operations following the Sherritt Acquisition:

Westmoreland Operations - Pro Forma after giving effect to the Sherritt Acquisition

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Coal Segment

General

Our coal segment’s focus is on niche coal markets where we take advantage of customer proximity and strategically located rail transportation. As of December 31, 2013, approximately three-fourths of our coal production was mine mouth, sold under long-term coal contracts to neighboring power plants. The remaining coal production was sold on the open market, where we use our logistical advantages to deliver our coal via truck and rail transportation. Two-thirds of our coal production comes from our sub-bituminous coal reserves located in the Northern Powder River Basin and southwestern Wyoming, as of December 31, 2013. The remaining third of our production is lignite. We project that about 60% of our contracted tons in 2014 will remain under contract through 2018.

In 2013, we sold 24.9 million tons of coal compared to 21.7 million in 2012.

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The following table provides summary information regarding our principal mining operations as of December 31, 2013:

Mining Operation	Prior  Operator	Manner of Transport	Machinery	Tons Sold (In thousands)			Total Cost of Property, Plant and Equipment ($ in millions)		Employees/Labor Relations(1)	Coal Seam
				2011	2012	2013
MONTANA
Rosebud	Entech, Inc., a subsidiary of Montana Power, Purchased 2001	Ÿ  Conveyor     belt Ÿ  BNSF Rail  Ÿ  Truck	Ÿ  4 draglines  Ÿ  Load-out      facility	8,785	8,018	8,234	$	164.7	369 employees; 291 represented by Local 400 of the IUOE	Ÿ  Rosebud
Absaloka	Washington Group International, Inc. as contract operator, Ended contract in 2007	Ÿ  BNSF Rail  Ÿ  Truck	Ÿ  1 dragline  Ÿ  Load-out     facility	5,557	2,714	4,168	$	152.3	183 employees; 150 represented by Local 400 of the IUOE	Ÿ  Rosebud-McKay
Savage	Knife River Corporation, a subsidiary of MDU Resources Group, Inc., Purchased 2001	Ÿ  Truck	Ÿ  1 dragline	350	298	350	$	9.1	13 employees; 11 represented by Local 400 of the IUOE	Ÿ  Pust
TEXAS
Jewett	Entech, Inc., a subsidiary of Montana Power, Purchased 2001	Ÿ  Conveyor     belt	Ÿ  4 draglines	4,204	4,201	5,015	$	32.0	322 employees	Ÿ  Wilcox     Group
NORTH DAKOTA
Beulah	Knife River Corporation, a subsidiary of MDU Resources Group, Inc., Purchased 2001	Ÿ  Conveyor     belt Ÿ  BNSF Rail	Ÿ  1 dragline Ÿ  Load-out     facility	2,920	2,267	2,521	$	65.5	139 employees; 111 represented by Local 1101 of the UMWA	Ÿ  Schoolhouse Ÿ  Beulah-Zap
WYOMING(2)
Kemmerer	Chevron Mining Inc., Purchased 2012	Ÿ  Conveyor     belt Ÿ  Rail Ÿ  Truck	Ÿ  Truck and     shovel	*(2)	4,247	4,639	$	162.8	285 employees; 226 represented by Local 1307 of the UMWA	Ÿ  Adaville Series
TOTALS
				21,816	21,745	24,927	$	586.4	1,311 employees

(1) As of December 31, 2013, 789 employees, or approximately 58% of our total employees, were represented by collective bargaining agreements. The labor agreements at the Absaloka Mine, Savage Mine, Kemmerer Mine and Rosebud Mine expire in 2015, 2016, 2018 and 2019, respectively. The labor agreement at our Beulah expires in 2014, which covers approximately 8% of our total work force.

(2) We closed on the acquisition of the Kemmerer Mine on January 31, 2012; historical tonnage for 2011 is not applicable.

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Properties

We had an estimated 514.5 million tons of total proven or probable coal reserves as of December 31, 2013. Montana, Wyoming, Texas, and North Dakota each use a permitting process approved by the Office of Surface Mining. Our mines have chosen to permit coal reserves on an incremental basis and given the current rates of mining and demand, have sufficient permitted coal to meet production for the periods shown in the table below. We secure all of our final reclamation obligations by reclamation bonds as required by the respective state agencies. We perform contemporaneous reclamation activities at each mine in the normal course of operations and coal production.

Our mines control coal reserves and deposits through long-term leases. Coal reserves are that part of a mineral deposit that can be economically and legally extracted at the time of the reserve determination. Coal deposits do not qualify as reserves until we conduct a final comprehensive economic evaluation and conclude it is legally and economically feasible to mine the coal. We base our estimate of the economic recoverability of our reserves through a comparison of potential reserves to reserves currently in production in a similar geologic setting to determine an estimated mining cost. We compare these estimated mining costs to existing market prices for the anticipated quality of coal. We only include reserves expected to be economically mined in our reserve estimates.

Our engineers and geologists generally prepare our reserve estimates. We periodically engage independent mining and geological consultants to review the models and procedures we use in preparing our internal estimates of coal reserves according to standard classifications of reliability. Total recoverable reserve estimates change over time to reflect mining activity, analysis of new engineering and geological data, information obtained from our ongoing drilling program, changes in reserve holdings and other factors. We compile data from individual drill holes in a database from which the depth, thickness and the quality of the coal are determined. We classify reserves as either proven or probable based on the density result of the drill pattern.

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The following table provides information about our mines as of December 31, 2013:

	Absaloka Mine	Rosebud Mine	Jewett Mine	Beulah Mine	Savage Mine	Kemmerer Mine	Total
Owned by	Westmoreland Resources, Inc.	Western Energy Company	Texas Westmoreland Coal Co.	Dakota Westmoreland Corporation	Westmoreland Savage Corporation	Westmoreland Kemmerer, Inc.
Location	Big Horn County, MT	Rosebud and Treasure Counties, MT	Leon,  Freestone and Limestone Counties, TX	Mercer and Oliver Counties, ND	Richland County, MT	Lincoln County, WY
Coal reserves (thousands of tons)(1) Proven	52,015	288,721	29,231	25,205	4,859	90,039	490,070
Probable	—	—	—	15,516	—	8,867	24,383
Total proven and probable reserves (thousands of tons)	52,015	288,721	29,231	40,721	4,859	98,906	514,453
Permitted reserves (thousands of tons)	52,015	107,394	29,231	11,622	4,859	40,186	245,307
2013 production (thousands of tons)	4,140	8,247	4,978	2,478	354	4,635	24,832
Estimated life of permitted reserves(2)	2020	2024	2021	2014	2026	2025
Lessor	Ÿ  Crow Tribe Ÿ  Private parties	Ÿ  Federal Government Ÿ  State of MT Ÿ  Great Northern Properties	Ÿ  Private parties	Ÿ  Private parties Ÿ  State of ND Ÿ  Federal Government	Ÿ  Federal Government Ÿ  Private parties	Ÿ  Federal Government Ÿ  Private parties
Lease term	Through exhaustion	Varies	Varies	Varies	Varies	Varies
Current production capacity (thousands of tons)	7,500	13,300	7,000	3,400	400	7,000
Coal type	Sub-bituminous	Sub-bituminous	Lignite	Lignite	Lignite	Sub-bituminous
Major customers	Ÿ  Xcel Energy Ÿ  Western Fuels Assoc. Ÿ  Midwest Energy Ÿ  Rocky Mountain Power Ÿ  Trans Alta	Ÿ  Colstrip 1&2 owners Ÿ  Colstrip 3&4 owners	Ÿ  NRG Texas Power LLC	Ÿ  Otter Tail Ÿ  MDU Ÿ  Northern Municipal Power Agency Ÿ  Northwestern Energy	Ÿ  MDU Ÿ  Sidney Sugars	Ÿ  PacifiCorp Ÿ  Various industrial customers
Delivery method	Rail / Truck	Truck / Rail / Conveyor	Conveyor	Conveyor /  Rail	Truck	Conveyor/  Rail/ Truck
Approx. heat content (BTU/lb.)(3)	8,509	8,530	6,619	7,090	6,549	9,986
Approx. sulfur content (%)(4)	0.64	0.69	0.85	0.66	0.52	0.77
Year current complex opened	1974	1968	1985	1963	1958	1950(5)
Total tons mined since inception (thousands of tons)	185,017	456,938	196,691	109,967	15,502	178,711

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(1) The SEC Industry Guide 7 defines reserves as that part of a mineral deposit, which could be economically and legally extracted or produced at the time of the reserve determination. Proven and probable coal reserves are defined by SEC Industry Guide 7 as follows:

Proven (Measured) Reserves — Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so close and the geographic character is so well defined that size, shape, depth and mineral content of reserves are well-established.

Probable (Indicated) Reserves — Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.

(2) Approximate year in which permitted reserves would be exhausted, based on current mine plan and production rates. The Jewett Mine’s reserves are covered under two separate mining permits, which must be renewed every five years.

(3) Approximate heat content applies to the coal mined in 2013.

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(4) Approximate sulfur content applies to the tons mined in 2013.

(5) The Elkol Underground Mine opened in 1950 and the Sorenson Surface Operations opened in 1963. Tons mined since inception for Kemmerer are for tons mined from 1950 through 2013.

With the exception of the Jewett and Kemmerer Mine, where we control some reserves through fee ownership, we lease all of our coal properties. We are a party to coal leases with the federal government, state governments, and private parties at our Absaloka, Rosebud, Beulah, Savage and Jewett Mines. Each of the federal and state government leases continue indefinitely provided there is diligent development of the property and continued operation of the related mines. Federal statute generally sets production royalties on federal leases at 12.5% of the gross proceeds of coal mined and sold for surface mines. At the Beulah and Savage Mines, we have received reductions in the federal royalty rate due to the quality of the lignite coal mined. Our private leases run for an average term of twenty years and have options for renewal. We believe that we have satisfied all lease conditions in order to retain the properties and keep the leases in place.

We are a party to two leases with the Crow Tribe covering 18,406 acres of land at our Absaloka Mine, which are held by our wholly owned subsidiary, Westmoreland Resources, Inc., or WRI. In 2008, and in order to take advantage of certain available tax credits for the production of coal on the leased Crow Tribe land, WRI entered into a series of transactions, including the formation of Absaloka Coal, LLC with an unaffiliated partner. We received a private letter ruling from the IRS providing that the Indian Coal Tax Credits are available to us. As part of such transaction, WRI subleased its leases with the Crow Tribe to Absaloka Coal, LLC, granting it the right to mine specified quantities of coal with WRI as contract miner. We have paid the Crow Tribe 33% of the expected payments we have received from the partner. 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. The tax credit expired at the end of 2013. Our partner did not extend the ICTC monetization transaction with us and it expired on December 31, 2013. Since 2009, we have experienced a yearly average of $3.1 million of income and $6.1 million of cash receipts from the ICTC. We are currently pursuing future monetization of the ICTC in the event that the IRS extends the ICTC beyond December 31, 2013.

The majority of our properties and assets are encumbered by liens securing our and our subsidiaries outstanding indebtedness. In particular, all of the assets of WRI, consisting primarily of our Absaloka Mine, and the assets of our wholly owned subsidiary, Westmoreland Kemmerer, Inc., or WKI, which holds our Kemmerer Mine, are encumbered by liens securing our 10.75% Senior Notes. In addition, the assets of our WML subsidiary, consisting primarily of our Rosebud, Beulah and Savage mines, are encumbered by liens securing the WML Notes and revolving line of credit. Finally, we are party to revolving credit facility with The PrivateBank and Trust Company, which we refer to as our Revolving Credit Facility, borrowings under which are secured by first priority liens on our and our subsidiaries accounts receivable, inventory and certain other specified assets.

Customers

We sell most of the coal that we produce (89% in 2013) to plants that generate electricity. In 2013, we derived approximately 67% of our total revenues from coal sales to five power plants: Colstrip Units 3&4 (17%), Naughton Power Station (17%), Limestone Generating Station (13%), Colstrip Units 1&2 (13%) and Coyote Station (7%). We sell the majority of our tons under contracts with remaining supply obligation terms of three years or more. We provide coal delivery via conveyor belt to our mine-mouth customers, and also sell coal and lignite on a Free On Board, or FOB, basis to our other customers. The purchaser of coal normally bears the cost of transportation and risk of loss from load-out to its final destination.

Rosebud. The Rosebud Mine has two contracts with the adjacent Colstrip Station power generating facility. A new cost protected agreement with Colstrip Units 1&2 has a projected term through at least 2019 and expected tons of 3.0 million per year. A second agreement at Units 3&4 covers approximately 7.0 million tons per year and is set to expire at the end of 2019. This contract is also cost-plus, but has provisions for specific returns on capital investment.

Absaloka. The Absaloka Mine operates primarily in the open market and has several three- to five-year contracts with various parties that generally supply 5.5 million tons per year, but only supplied 4.2 million tons in 2013 due to customer outages. Approximately 42% of all tons sold in 2013 were to the rail-served Sherburne County Generating Station in Minnesota under multiple contracts. Prices under these agreements are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.

Savage. The Savage Mine supplies approximately 0.3 million tons per year to the local Lewis & Clark Power Station. The mine entered into a new agreement with the Lewis & Clark Power Station in December 2012 that expires December 2017. Prices under this agreement are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.

Jewett. The Jewett Mine has a cost protected agreement with NRG Texas Power’s adjacent Limestone Generating Station. NRG Texas Power is also responsible for the mine’s capital and reclamation expenditures. The agreement has a term

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through 2018, which may be extended by NRG Texas Power for up to an additional ten years or until the mine’s reserves are exhausted. NRG has the option to determine volumes to be delivered, which average approximately 5.0 million tons per year, and to terminate the agreement at its discretion.

Beulah. The Beulah Mine supplies approximately 2.1 million tons per year to the adjacent Coyote Electric Generating Plant via conveyor belt under an agreement that expires in May 2016. It also supplies approximately 0.4 million tons per year via rail to the Heskett Power Station under an agreement that expires in 2016. Prices under these agreements are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.

Kemmerer. The Kemmerer Mine supplies approximately 2.9 million tons per year to the adjacent Naughton Power Station via conveyor belt under an agreement that expires in December 2021. Kemmerer also supplies approximately 1.7 million tons a year to various industrial customers, with the vast majority being shipped short-haul rail or truck to Trona plants in Green River, Wyoming. Prices under these agreements are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.

Competition

While the coal industry is intensely competitive, we focus on niche coal markets where we take advantage of long-term coal contracts with neighboring power plants. For our open market coal sales, we compete with many other suppliers of coal to provide fuel to power plants. Additionally, coal producers compete with producers of alternative fuels used for electrical power generation, such as nuclear energy, natural gas, hydropower, petroleum and wind. Costs and other factors such as safety, environmental and regulatory considerations relating to these alternative fuels affect the overall demand for coal as a fuel.

We believe that our mines have a competitive advantage based on three factors:

• all of our mines are the most economic suppliers to each of their respective principal customers, as a result of transportation advantages over our competitors in each of our key markets;

• nearly all of the power plants we supply were specifically designed to use our coal; and

• the plants we supply are among the lowest cost producers of electric power in their respective regions and are among the cleaner producers of power from solid fossil fuels.

Because of the foregoing, we believe that our current customers are more likely to be dispatched to produce power and to continue purchasing coal extracted from our mines.

The principal customers of the Rosebud, Jewett, Beulah and Kemmerer Mines are located adjacent to the mines; we deliver the coal for these customers by conveyor belt instead of more expensive means such as truck or rail. The customers of the Savage Mine are located approximately 20 to 25 miles from the mine so that we can transport coal economically by truck.

The Absaloka Mine faces a different competitive situation. The Absaloka Mine sells its coal in the rail market to utilities located in the northern tier of the United States served by BNSF. These utilities may purchase coal from us or from other producers. We compete with other producers based on price and quality, with the purchasers also taking into account the cost of transporting the coal to their plants. The Absaloka Mine enjoys an over 300-mile rail advantage over its principal competitors from the Southern Powder River Basin in supplying customers located in the northern tier. Rail rates have increased over the last several years by 50 to 100%, which strengthens our competitive advantage.

Seasonality

Our coal business has historically experienced only limited variability in its results due to the effect of seasons; however, we are impacted by seasonality due to weather patterns and our customer's annual maintenance outages which typically occur during the second quarter. In addition, our customers generally respond to seasonal variations in electricity demand based upon the number of heating degree days and cooling degree days. Due to stockpile management by our customers, our coal sales may not experience the same direct seasonal volatility; however, extended mild weather patterns can impact the demand for our coal. Our sales typically benefit from decreases in customers' stockpiles due to high electricity demand. Conversely, when these stockpiles increase, demand for our coal will typically soften. Further, our ability to deliver coal is impacted by the seasons. Because the majority of our mines are mine-mouth operations that deliver their coal production to adjacent power plants, our exposure to transportation delays or outages as a result of adverse weather conditions is limited.

Material Effects of Regulation

We are subject to extensive regulation with respect to environmental and other matters by federal, state, provincial and local authorities. Federal laws to which we are subject include the Surface Mining Control and Reclamation Act of 1977, or

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SMCRA, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act, the Endangered Species Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Emergency Planning and Community Right to Know Act and the Resource Conservation and Recovery Act. The United States Environmental Protection Agency, or EPA, and/or other authorized federal or state agencies administer and enforce these laws. Non-compliance with federal, tribal and state and provincial laws and regulations could subject us to material administrative, civil or criminal penalties or other liabilities, including suspension or termination of operations. In addition, we may be required to make large and unanticipated capital expenditures to comply with future laws, regulations or orders as well as future interpretations and more rigorous enforcement of existing laws, regulations or orders. Our reclamation obligations under applicable environmental laws will be substantial. Certain of our coal sales agreements contain government imposition provisions that allow the pass-through of compliance costs in some circumstances.

Safety is a core value of Westmoreland Coal Company. We use a grass roots approach, encouraging and promoting employee involvement in safety and accept input from all employees; we feel employee involvement is a pillar of our safety excellence. In 2012, our Rosebud Mine received the Sentinels of Safety award in the large surface coal category.

During 2013, we continued to maintain reportable and lost time incident rates significantly below national averages as indicated in the table below.

	2013
	Reportable Rate	Lost Time Rate
WCC Mines	1.32	0.66
National Surface Mines	1.69	1.17

Following passage of The Mine Improvement and New Emergency Response Act of 2006, amending the Federal Mine Safety and Health Act of 1977, the U.S. Mine Safety and Health Administration (“MSHA”) significantly increased the oversight, inspection and enforcement of safety and health standards and imposed safety and health standards on all aspects of mining operations. There has also been a dramatic increase in the dollar penalties assessed by MSHA for citations issued over the past two years. Most of the states in which we operate have inspection programs for mine safety and health. Collectively, federal and state safety and health regulations in the coal mining industry are perhaps the most comprehensive and pervasive systems for protection of employee health and safety affecting any segment of U.S. industry.

The following provides brief summaries of certain Federal laws and regulations to which we are subject and their effects upon us:

Surface Mining Control and Reclamation Act. SMCRA establishes minimum national operational, reclamation and closure standards for all surface coal mines. SMCRA requires that comprehensive environmental protection and reclamation standards be met during the course of and following completion of coal mining activities. Permits for all coal mining operations must be obtained from the Federal Office of Surface Mining Reclamation and Enforcement, or OSM, or, where state regulatory agencies have adopted federally approved state programs under SMCRA, the appropriate state regulatory authority. States that operate federally approved state programs may impose standards that are more stringent than the requirements of SMCRA and OSM’s regulations and, in many instances, have done so. Permitting under SMCRA has generally become more difficult in recent years, which adversely affects the cost and availability of coal purchased by ROVA, especially in light of significant permitting issues affecting the Central Appalachia region. This difficulty in permitting also affects the availability of coal reserves at our coal mines.

It is our policy to comply in all material respects with the requirements of the SMCRA and the state and tribal laws and regulations governing mine reclamation. In 2012, our Jewett Mine received the 2012 Railroad Commission of Texas Core Mining Reclamation Award for its innovative techniques in stream channel restoration.

Clean Air Act and Related Regulations. The federal Clean Air Act and comparable state laws that regulate air emissions affect coal mining operations both directly and indirectly. Direct impacts on coal mining and processing operations include Clean Air Act permitting requirements and emission control requirements relating to air pollutants, including particulate matter, which may include controlling fugitive dust. The Clean Air Act indirectly affects coal mining operations by extensively regulating the emissions of particulate matter, sulfur dioxide, nitrogen oxides, mercury and other compounds emitted by coal-fired power plants. It also affects us directly because ROVA is subject to significant regulation under the Clean Air Act. In recent years, Congress has considered legislation that would require increased reductions in emissions of sulfur dioxide, nitrogen oxide and mercury, as well as GHGs. The air emissions programs, regulatory initiatives and standards that may affect our operations, directly or indirectly, include, but are not limited to, the following:

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• Greenhouse Gas Emissions Standards. In April 2012, the EPA proposed new limits on greenhouse gas emissions from new electric generating units (“EGUs”) under Section 111 of the Clean Air Act (“GHG NSPS”). The proposed limits are referred to as “new source performance standards” because they apply only to new or reconstructed sources. The proposal required all new fossil-fuel-fired EGUs to emit no more than 1,000 pounds of CO2 / megawatt hour on an average annual basis, which is based on the CO2 emissions from natural gas combined cycle facilities. The EPA later indicated its intention to issue a new proposal in light of over 2 million comments on the April 2012 proposal and ongoing developments in the industry. In June 2013, President Obama directed the EPA to issue that new proposal by September 30, 2013, and to finalize it in a timely manner. In September 2013, the EPA revoked its April 2012 proposal and instead proposed new limits, which would require all new coal-fired EGUs to emit no more than 1,100 pounds of CO2 / megawatt hour on an average annual basis, and new natural gas-fired plants to meet a standard of either 1,000 or 1,100 pounds of CO2 / megawatt hour (depending on size). Under the Clean Air Act, new source performance standards like the GHG NSPS have binding effect from the date of proposal. Once NSPSs are finalized, EPA must issue guidance to states for the issuance of existing source standards. The GHG NSPS as currently proposed may be a major obstacle to the construction and development of any new coal-fired generation capacity because it is unlikely, with a few possible exceptions, that the limits in the proposal can be achieved by a new coal-fired EGU without the use of carbon capture and sequestration technology.

• Mercury Air Standards. In February 2012, the EPA published national emission standards under Section 112 of the Clean Air Act setting limits on hazardous air pollutant emissions from coal- and oil-fired EGUs. The “Mercury Air Toxics Standards,” or “MATS Rule,” is expected to be one of the most costly rules ever issued by the EPA. It has also proven highly controversial, drawing numerous legal challenges in the U.S. Court of Appeals for the D.C. Circuit as well as petitions for administrative reconsideration filed with the EPA. While the MATS Rule will generally require all coal- and oil-fired EGUs to reduce their hazardous air pollutant emissions, it is particularly problematic for any new coal-fired sources. This is because the new-source limits are so low that they cannot be accurately measured and vendors of pollution control equipment have said they cannot provide commercial guarantees that the limits can be achieved. And because such guarantees are a precondition to obtaining financing in the marketplace, the MATS Rule effectively amounts to a ban on the construction of new coal-fired EGUs. In July 2012, however, the EPA agreed to reconsider the new source standards in response to requests by industry. In November 2012, the EPA published proposed new source standards with revised, less stringent, emission limits. In April 2013, the EPA published new new-source limits under the MATS Rule, and then in June 2013, the EPA reopened for 60 days the public comment period on certain startup and shutdown provisions included in the November 2012 proposal. In June 2013, certain environmental organizations and industry groups filed appeals of the rule as revised.

• National Ambient Air Quality Standards (“NAAQS”) for Criteria Pollutants. The Clean Air Act requires the EPA to set standards, referred to as NAAQS, for six common air pollutants, including nitrogen oxide and sulfur dioxide. Areas that are not in compliance (referred to as non-attainment areas) with these standards must take steps to reduce emissions levels. Meeting these limits may require reductions of nitrogen oxide and sulfur dioxide emissions. Although our operations are not currently located in non-attainment areas, we could be required to incur significant costs to install additional emissions control equipment, or otherwise change our operations and future development if that were to change. On June 22, 2010, the EPA published a final rule that tightens the NAAQS for sulfur dioxide. On February 17, 2012 the EPA published final NAAQS for nitrogen dioxide. On January 15, 2013, EPA published final NAAQS for particulate matter; EPA lowered the annual standard for particles less than 2.5 micrometers in diameter but maintained the NAAQS for particles less than 10 micrometers in diameter. Non-attainment designations were set for sulfur dioxide in February 2013 and were set for nitrogen dioxide in January 2012. State implementation plans are due in the winter of 2014 and the deadline to achieve attainment is the summer of 2017. We do not know whether or to what extent these developments might affect our operations or our customers’ businesses. In 2008, EPA finalized the current 8-hour ozone standard. EPA agreed to reconsider the standard, and in 2010 EPA proposed to further reduce the standard. Under orders from President Obama, this NAAQS was not finalized and review is ongoing. A proposal for a lower standard was expected during 2013, but the EPA has not yet published any.

• Clean Air Interstate Rule and Cross-State Air Pollution Rule.(“CAIR”) and Cross-State Air Pollution Rule (“CSAPR”). The CAIR calls for power plants in 28 states and the District of Columbia to reduce emission levels of sulfur dioxide and nitrogen oxide pursuant to a cap-and-trade program similar to the system now in effect for acid rain. In 2008, the U.S. Court of Appeals for the District of Columbia Circuit found that the CAIR was fatally flawed, but ultimately agreed to allow it to remain in place pending the EPA’s development of a replacement rule because of concerns about potential disruptions. In June 2011, the EPA finalized the CSAPR as a replacement rule to the CAIR, which requires 28 states in the Midwest and eastern seaboard of the United States to reduce power plant emissions that cross state lines and contribute to ozone and/or fine particle pollution in other states. Under the CSAPR, the first phase of the nitrogen oxide and sulfur dioxide emissions reductions would commence in 2012 with further reductions effective in 2014. On December 15, 2011, the EPA finalized a supplemental rulemaking to require Iowa, Michigan,

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Missouri, Oklahoma and Wisconsin to make summertime reductions to nitrogen oxide emissions under the CSAPR ozone-season control program. However, on December 30, 2011, the U.S. Court of Appeals for the District of Columbia Circuit stayed the implementation of CSAPR pending resolution of judicial challenges to the rules and ordered the EPA to continue enforcing the CAIR until the pending legal challenges have been resolved. In August 2012, the US Court of Appeals vacated the CSAPR in a 2-to-1 decision and left the CAIR standards in place. In January 2013, the court rejected EPA’s request for en banc review. In March 2013, the Solicitor General’s office, on behalf of the EPA, and separately certain non-governmental organizations, filed petitions for writs of certiorari with the US Supreme Court seeking review of the Court of Appeals decision, and the Supreme Court granted those petitions in June 2013. The Supreme Court heard oral arguments in December 2013 and will likely issue a decision by June 2014.

• Other Programs. A number of other air-related programs may affect the demand for coal and, in some instances, coal mining directly. For example, the EPA has initiated a regional haze program designed to protect and improve visibility at and around national parks, national wilderness areas and international parks. The EPA’s new source review program under certain circumstances requires existing coal-fired power plants, when modifications to those plants significantly change emissions, to install the more stringent air emissions control equipment required of new plants, and concerns about potential failures to comply have resulted in a number of high-profile enforcement actions and settlements over the years resulting in some instances in settlements under which operators install expensive new emissions control equipment. The Acid Rain program under Title IV of the Clean Air Act continues to impose limits on overall sulphur dioxide and nitrogen oxide emissions from regulated EGUs. There is pending litigation to force the EPA to list coal mines as a category of air pollution sources that endanger public health or welfare under Section 111 of the Clean Air Act and establish standards to reduce emissions from sources of methane and other emissions related to coal mines after the EPA declined in 2013 to take such action, not based on the merits but citing resource constraints.

• Effect on Westmoreland Coal Company. Our mines do not produce “compliance coal” for purposes of the Clean Air Act. Compliance coal is coal containing 1.2 pounds or less of sulfur dioxide per million British thermal unit, or Btu. This restricts our ability to sell coal to power plants that do not utilize sulfur dioxide emission controls and otherwise leads to a price discount based, in part, on the market price for sulfur dioxide emission allowances under the Clean Air Act. Our coal also contains about fifty percent more ash content than our primary competitors, which can translate into a cost disadvantage where post-combustion coal ash must be land filled. We are at particular risk of changes in applicable environmental laws with respect to the Jewett Mine, whose customer, the NRG Texas Power- Limestone Station, blends our lignite with compliance coal from Wyoming. Tightened nitrogen oxide and new mercury emission standards could result in an increased blend of the Wyoming coal to reduce emissions. Further, increased market prices for sulfur dioxide emissions and increased coal ash costs could also favor an increased blend of the lower ash Wyoming compliance coal. In such a case, NRG Texas Power has the option to increase its purchases of other coal, reduce purchases of our coal, or to terminate our contract. If NRG terminates the contact, sales of lignite would end and the Jewett Mine would commence final reclamation activities. NRG would pay for all reclamation work plus a margin.

Clean Water Act. The Clean Water Act or CWA and corresponding state and local laws and regulations affect coal mining and power generation operations by restricting the discharge of pollutants, including dredged or fill materials, into waters of the U.S. The CWA provisions and associated state and federal regulations are complex and subject to amendments, legal challenges and changes in implementation. Legislation that seeks to clarify the scope of the CWA jurisdiction is under consideration by Congress. Recent court decisions, regulatory actions and proposed legislation have created uncertainty over CWA jurisdiction and permitting requirements that could either increase or decrease the cost and time spent on CWA compliance.

Endangered Species Act. The Federal Endangered Species Act ESA and similar state laws protect species threatened with extinction. Protection of endangered and threatened species may cause us to modify mining plans or develop and implement species-specific protection and enhancement plans to avoid or minimize impacts to endangered species or their habitats. A number of species indigenous to the areas where we operate are protected under the ESA. Based on the species that have been identified and the current application of applicable laws and regulations, we do not believe that there are any species protected under the ESA or state laws that would materially and adversely affect our ability to mine coal from our properties.

Resource Conservation and Recovery Act. We may generate wastes, including “solid” wastes and “hazardous” wastes that are subject to the federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes, although certain mining and mineral beneficiation wastes and certain wastes derived from the combustion of coal currently are exempt from regulation as hazardous wastes under RCRA. The EPA has limited the disposal options for certain wastes that are designated as hazardous wastes under RCRA. Furthermore, it is possible that certain wastes generated by our operations that currently are exempt from regulation as hazardous wastes may in the future be designated as hazardous wastes, and therefore be subject to more rigorous and costly management, disposal and clean-up requirements.

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The EPA determined that coal combustion residuals (“CCR”) do not warrant regulation as hazardous wastes under RCRA in May 2000. Most state hazardous waste laws do not regulate CCR as hazardous wastes. The EPA also concluded that beneficial uses of CCR, other than for mine filling, pose no significant risk and no additional national regulations of such beneficial uses are needed. However, the EPA determined that national non-hazardous waste regulations under RCRA are warranted for certain wastes generated from coal combustion, such as coal ash, when the wastes are disposed of in surface impoundments or landfills or used as minefill. There have been several legislative proposals that would require the EPA to further regulate the storage of CCR. Any significant changes in the management of CCR could increase our customers’ operating costs and potentially reduce their ability to purchase coal. In addition, in June 2010 the EPA released a proposal with two possible options for the regulation of CCR. One would regulate the CCR as hazardous or special waste and the other would classify the CCR as non-hazardous waste. Under both options, the EPA would establish dam safety requirements to address the structural integrity of surface impoundments to prevent catastrophic releases. The EPA conducted additional information collections in late 2011; however, the EPA had not finalized CCR rules nor established a timeline for finalization. The EPA did not address in the proposed regulations the use of CCR as minefill, but indicated that it would separately work with the Office of Surface Mining in order to develop effective federal regulations ensuring that such placement is adequately controlled. In April 2012, several environmental organizations filed suit against the EPA to compel the EPA to take action on the proposed rule. If CCR were classified as a special or hazardous waste, regulations may impose restrictions on ash disposal, provide specifications for storage facilities, require groundwater testing and impose restrictions on storage locations, which could increase our and our customers’ operating costs and potentially reduce their ability to purchase coal. In addition, contamination caused by the past disposal of CCR, including coal ash, can lead to material liability for our customers under RCRA or other federal or state laws and potentially reduce the demand for coal.

Comprehensive Environmental Response, Compensation, and Liability Act. Under the Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, and similar state laws, responsibility for the entire cost of cleanup of a contaminated site, as well as natural resource damages, can be imposed upon current or former site owners or operators, or upon any party who released one or more designated “hazardous substances” at the site, regardless of the lawfulness of the original activities that led to the contamination. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to public health or the environment and to seek to recover from the potentially responsible parties the costs of such action. In the course of our operations, we may have generated and may generate wastes that fall within CERCLA’s definition of hazardous substances. We may also be an owner or operator of facilities at which hazardous substances have been released by previous owners or operators. We may be responsible under CERCLA for all or part of the costs of cleaning up facilities at which such substances have been released and for natural resource damages. We have not, to our knowledge, been identified as a potentially responsible party under CERCLA, nor are we aware of any prior owners or operators of our properties that have been so identified with respect to their ownership or operation of those properties. We also must comply with reporting requirements under the Emergency Planning and Community Right-to-Know Act and the Toxic Substances Control Act.

Climate Change Legislation and Regulations. Numerous proposals for federal and state legislation have been made relating to greenhouse gas, or GHG, emissions (including carbon dioxide) and such legislation could result in the creation of substantial additional costs in the form of taxes or required acquisition or trading of emission allowances. Many of the federal and state climate change legislative proposals use a “cap and trade” policy structure, in which GHG emissions from a broad cross-section of the economy would be subject to an overall cap. Under the proposals, the cap would become more stringent with the passage of time. The proposals establish mechanisms for GHG sources such as power plants to obtain “allowances” or permits to emit GHGs during the course of a year. The sources may use the allowances to cover their own emissions or sell them to other sources that do not hold enough emissions for their own operations. Some states, including California, and a number of states in the northeastern and mid-Atlantic regions of the US that are participants in a program known as the Regional Greenhouse Gas Initiative (often referred to as “RGGI”), which is limited to fossil-fuel-burning power plants, have enacted and are currently operating programs that, in varying ways and degrees, regulate GHGs.

In addition, the EPA has issued a notice of finding and determination that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment, which allows the EPA to begin regulating emissions of GHGs under existing provisions of the federal Clean Air Act. The EPA has begun to implement GHG-related reporting and permitting rules as described above.

The impact of GHG-related legislation and regulations, including a “cap and trade” structure, on us will depend on a number of factors, including whether GHG sources in multiple sectors of the economy are regulated, the overall GHG emissions cap level, the degree to which GHG offsets are allowed, the allocation of emission allowances to specific sources and the indirect impact of carbon regulation on coal prices. We may not recover the costs related to compliance with regulatory requirements imposed on us from our customer due to limitations in our agreements.

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Passage of additional state or federal laws or regulations regarding GHG emissions or other actions to limit carbon dioxide emissions could result in fuel switching from coal to other fuel sources by electricity generators and thereby reduce demand for our coal or indirectly the prices we receive in general. In addition, political and regulatory uncertainty over future emissions controls have been cited as major factors in decisions by power companies to postpone new coal-fired power plants. If these or similar measures, such as controls on methane emissions from coal mines, are ultimately imposed by federal or state governments or pursuant to international treaties, our operating costs or our revenues may be materially and adversely affected. In addition, alternative sources of power, including wind, solar, nuclear and natural gas could become more attractive than coal in order to reduce carbon emissions, which could result in a reduction in the demand for coal and, therefore, our revenues. Similarly, some of our customers, in particular smaller, older power plants, could be at risk of significant reduction in coal burn or closure as a result of imposed carbon costs. The imposition of a carbon tax or similar regulation could, in certain situations, lead to the shutdown of coal-fired power plants, which would materially and adversely affect our coal and power plant revenues.

Bonding Requirements. Federal and state laws require mine operators to assure, usually through the use of surety bonds, payment of certain long-term obligations, including the costs of mine closure and the costs of reclaiming the mined land. The costs of these bonds have fluctuated in recent years, and the market terms of surety bonds have generally become more favorable to us. Surety providers are requiring smaller percentages of collateral to secure a bond, which will require us to provide less cash to collateralize bonds to allow us to continue mining. These changes in the terms of the bonds have been accompanied, at times, by an increase in the number of companies willing to issue surety bonds. As of December 31, 2013, we have posted an aggregate of $298.6 million in surety bonds for reclamation purposes, with approximately $41.0 million of cash collateral.

Regulation applicable to ROVA. With respect to our Power segment, ROVA is among the newer and cleaner coal-fired power plants in the United States. Under Title IV of the Clean Air Act, ROVA is exempt from, but may opt-in to receive allocations of sulfur dioxide emission allowances. The plants are among the lowest coal-fired emitters of mercury in the country. We are evaluating whether ROVA could be a net consumer or seller of mercury allowances under new and pending regulations. Currently, ROVA is a consumer of sulfur dioxide allowances and nitrogen oxide credits, and we expect an increase in costs associated with nitrogen oxide allowances at ROVA. With regard to coal ash regulations, ROVA landfills its combustion waste. The landfills are lined and we believe they meet North Carolina Department of Solid Waste regulations.

An important factor relating to the impact of GHG-related legislation and regulations and any other environmental regulations on our Power segment will be our ability to recover the costs incurred to comply with any regulatory requirements that the government ultimately imposes. We may not recover the costs related to compliance with regulatory requirements imposed on us due to limitations in our power purchase agreements. If we are unable to pass through such costs incurred by ROVA to Dominion Virginia Power or recoup them in another manner such as through allowances, it could have a material adverse effect on our results of operations at ROVA.

Power Segment

General

We own two coal-fired power-generating units in Weldon, North Carolina with a total capacity of approximately 230 megawatts, which we refer to collectively as ROVA. We built ROVA, which commenced operations in 1994, as a Public Utility Regulatory Policies Act co-generation facility to supply Dominion North Carolina Power (“Dominion”). ROVA is held by our wholly-owned subsidiary Westmoreland Partners. All of the assets of Westmoreland Partners are encumbered by liens securing our 10.75% Senior Notes.

The following table shows megawatt hours produced and average annual capacity factors achieved at ROVA for the last three years:

Year	Megawatt Hours	Capacity Factor
2013	1,566,000	85	%
2012	1,477,000	80	%
2011	1,607,000	87	%

ROVA operated normally in 2013 with fewer unplanned outages than in 2012, and consequently ROVA's total megawatt hours and capacity factor returned to more normal levels.

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Coal Supply

ROVA purchases coal under long-term contracts from coal suppliers with identified reserves located in Central Appalachia, with contracts expiring in 2014 and 2015. Today’s open market price for Central Appalachia coal is significantly greater than the price in our coal supply agreements.

Customer

ROVA supplies all of the power it produces to Dominion and generates all of its revenues from such sales. In 2013, the sale of power by ROVA to Dominion accounted for approximately 13% of our consolidated revenues. We are impacted by seasonality due to the impact of weather on customer demand and scheduled maintenance outages typically performed in the spring and fall.

On December 23, 2013, Westmoreland Partners entered into a Consolidated Power Purchase and Operating Agreement (the “Consolidated Agreement”) with Dominion that provides for the exclusive sale to Dominion of all of ROVA’s net electrical output and dependable capacity. The Consolidated Agreement amends, restates and consolidates in their entirety the prior agreements governing the sale of capacity and electric energy from ROVA. Among other things, the Consolidated Agreement: (i) contains certain provisions that we believe will allow Westmoreland Partners to remain cash flow positive; (ii) continues to provide a right of first refusal in favor of Dominion for the purchase of ROVA; and (iii) terminates in March of 2019. Under the Consolidated Agreement, ROVA will run periodically for testing purposes and during some periods of peak electric energy demand. At other times when it is required to provide electric energy under the Consolidated Agreement, Westmoreland Partners may purchase such energy from one or more third party providers for sale to Dominion under the Consolidated Agreement. We have hedged and may hedge in the future the pricing of the electric energy to be acquired from third party providers and sold under the Consolidated Agreement.

Material Effects of Regulation Applicable to ROVA

With respect to our power segment, ROVA is among the newer and cleaner coal-fired power plants in the United States. Under Title IV of the Clean Air Act, ROVA is exempt from, but may opt-in to receive allocations of sulfur dioxide emission allowances. The plants are among the lowest coal-fired emitters of mercury in the country. We are evaluating whether ROVA could be a net consumer or seller of mercury allowances under new and pending regulations. Currently, ROVA is a consumer of sulfur dioxide allowances and nitrogen oxide credits, and we expect an increase in costs associated with nitrogen oxide allowances at ROVA. With regard to coal ash regulations, ROVA landfills its combustion waste. Landfills are lined and meet strict North Carolina Department of Solid Waste regulations.

An important factor relating to the impact of GHG-related legislation and regulations on our power segment will be our ability to recover the costs incurred to comply with any regulatory requirements that the government ultimately imposes. We may not recover the costs related to compliance with regulatory requirements imposed on us due to limitations in our power purchase agreements. If we are unable to pass through such costs incurred by ROVA to Dominion Virginia Power or recoup them in another manner such as through allowances, it could have a material adverse effect on our results of operations at ROVA.

For additional discussion of the extensive regulation with respect to environmental and other matters by federal, state and local authorities affecting our power segment, see Item 1 under “Coal Segment - Material Effects of Regulation.”

Heritage Segment

Our heritage segment costs consist primarily of payments to our retired workers for various types of postretirement medical benefits. Distributions from our operating subsidiaries fund these collective heritage obligations. We modernized how we provide prescription drug benefits to retirees in 2010 and have continued to reduce our heritage health benefit since then. We continue to explore ways to further reduce or eliminate other portions of our benefits costs incurred because of our former operations.

Corporate Segment

The corporate segment consists primarily of costs for our corporate administrative expenses and also includes business development expenses. In addition, the corporate segment contains our captive insurance company.

We have elected to retain some of the risks associated with operating our company through a wholly owned, consolidated insurance subsidiary, Westmoreland Risk Management Inc., or WRMI. WRMI, a Montana corporation, provides our primary layer of property and casualty insurance. We redomesticated WRMI from Bermuda to Montana in 2011, resulting in cost savings and administrative efficiencies. By using this insurance subsidiary, we have reduced the cost of our property and

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casualty insurance premiums and retained some economic benefits due to our excellent loss record. We reduce our major exposure by insuring for losses in excess of our retained limits with a number of third-party insurance companies.

We had no export sales and derived no revenues from outside the United States during the five-year period ended December 31, 2013.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may access and read our filings without charge through the SEC’s website, at www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information regarding the operation of its public reference room.

We also make our public reports available through our website, www.westmoreland.com, as soon as practicable after we file or furnish them with the SEC. You may also request copies of the documents, at no cost, by telephone at (303) 992-6463 or by mail at Westmoreland Coal Company, 9540 South Maroon Circle, Suite 200, Englewood, Colorado, 80112. The information on our website is not part of this Annual Report on Form 10-K.

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ITEM 1A — RISK FACTORS.

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operation, contains forward-looking statements that may be materially affected by numerous risk factors, including those summarized below.

Risks Relating to our Business and Operations

Risks associated with being leveraged.

At December 31, 2013, we had outstanding indebtedness of approximately $348.4 million and a net leverage ratio of 2.28. Following the issuance of the New Notes and the completion of the Sherritt Acquisition and the prepayment of the WML Notes, we expect to have outstanding indebtedness of approximately $859 million, and a net leverage ratio of 3.5 (calculated by subtracting available cash from gross debt and dividing by Adjusted EBITDA). We may also incur additional indebtedness in the future, including additional indebtedness of $60 - $70 million (which we may increase to $100 million at our discretion) under our Revolving Credit Facility if we complete our anticipated amendment of that facility. Our leverage position may, among other things:

• limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions, or other general corporate purposes;

• require us to dedicate a substantial portion of our cash flow from operations to service our debt, reducing the availability of cash flow for other purposes;

• increase our vulnerability to economic downturns, limit our ability to capitalize on significant business opportunities, and restrict our flexibility to react to changes in market or industry conditions; or

• make it more difficult to pay our debts, including payment on the Notes, which will mature in 2018.

While we have received credit upgrades from both S&P and Moody’s within the last two years, on December 26, 2013, following the announcement of the Sherritt Acquisition, Moody’s Investor Service placed our ratings on watch for potential downgrade and there can be no assurance that rating agencies will not downgrade the credit rating on the Notes in the future. Any such downgrade, or any perceived decrease in our creditworthiness, could impede our ability to refinance existing debt or secure new debt or otherwise increase our future cost of borrowing and could create additional concerns on the part of our customers, partners, investors and employees about our financial condition and results of operations.

If we fail to comply with certain covenants in our various debt arrangements, it could negatively affect our liquidity and ability to finance our operations.

Our lending arrangements contain, among other terms, events of default and various affirmative and negative covenants. Should we be unable to comply with any future debt-related covenant, we will be required to seek a waiver of such covenant to avoid an event of default. Covenant waivers and modifications may be expensive to obtain, or, potentially, unavailable. If we are in breach of any covenant and are unable to obtain covenant waivers and our lenders accelerate our debt, we could attempt to refinance the debt or repay the debt by selling assets and applying the proceeds from such sales to the debt. Sales of assets undertaken in response to such immediate needs may be prohibited under our lending arrangements without the consent of our lenders, may be made at potentially unfavorable prices, or asset sales may not be sufficient to refinance or repay the debt, and we may be unable to complete such transactions in a timely manner, on favorable terms, or at all.

We may not generate sufficient cash flow at our operating subsidiaries to pay our operating expenses, meet our debt service costs and pay our heritage and corporate costs.

Our WML subsidiary, which owns the Rosebud, Jewett, Beulah and Savage mines, is currently subject to its own credit facility that limits its ability to dividend funds to us. While we expect to terminate WML’s credit facility if we are successful in amending our Revolving Credit Facility to increase the amount of borrowings available thereunder, if we are not successful in doing so WML’s credit facility will remain in effect. In that event, WML may not be able to pay dividends to us in the amounts and in the time required for us to pay our heritage health costs and corporate overhead expenses. Ultimately, if WML’s operating cash flows are insufficient to support its operations, amortize its debt and provide dividends to us in the amounts and time required to pay our expenses, we may be required to expend cash on hand or further leverage our operations through our Revolving Credit Facility or other borrowings to fund our heritage liabilities and corporate overhead. Should we be required to expend cash on hand to fund such activities, such funds would be unavailable to grow our business through strategic acquisitions or ventures or support the business through reclamation bonding, capital and reserve acquisition.

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As a mine mouth operator, we provide coal to a small group of customers. This dependence could adversely affect our revenues if such customers reduce or suspend their coal purchases or if they become unable to pay for our coal.

In 2013, we derived approximately 67% of our total revenues from coal sales to five power plants: Colstrip Units 3&4 (17%), Naughton Power Station (17%), Limestone Generating Station (13%), Colstrip Units 1 & 2 (13%) and Coyote Station (7%). Similarly, for full-year 2013, the Sherritt Subsidiaries sold approximately 25% of their total aggregate coal production to two customers, SaskPower (13%) and Capital Power (12%). Interruption in the purchases of coal by our principal customers could significantly affect our revenues. Unscheduled maintenance outages or other outages at our customers’ power plants, unseasonably moderate weather, higher-than-anticipated hydro seasons or increases in the production of alternative clean-energy generation such as wind power, or decreases in the price of competing fossil fuels such as natural gas, could cause our customers to reduce their purchases. Five of our six mines are dedicated to supplying customers located adjacent to or near the mines, and these mines may have difficulty identifying alternative purchasers of their coal if their existing customers suspend or terminate their purchases.

Additionally, certain of our long-term contracts are set to expire in the next several years. Our contracts with the Sherburne County Station are three-year rolling contracts, with one-third of the tonnage expiring on an annual basis. Our contract with Coyote Station, located adjacent to our Beulah mine and averaging approximately 3.0 million tons of coal sold per year, expires in May 2016 and is not expected to be renewed. Our contract with Colstrip Units 3 & 4 expires in December 2019. Should we be unable to successfully renew any or all of these expiring contracts, the reduction in the sale of our coal would adversely affect our operating results and liquidity and could result in significant impairments to the affected mine should the mine be unable to execute a new long-term coal supply agreement. The long term agreements we are acquiring under the Sherritt Acquisition have long remaining terms with the exception of the contract applicable to Poplar River mine which is set to expire in 2015.

Similarly, interruption in the purchase of power by Dominion could also negatively affect our revenues. During the year ended December 31, 2013, the sale of power by ROVA to Dominion accounted for approximately 13% of our consolidated revenues. Although ROVA supplies power to Dominion under long-term power purchase agreements, if Dominion is unable or unwilling to pay for the power produced by ROVA in a timely manner, it could have a material adverse effect on our results of operations, financial condition, and liquidity.

Our ability to collect payments from our customers could be impaired if their creditworthiness deteriorates.

Our ability to receive payment for coal sold and delivered depends on the continued creditworthiness of our customers. If we determine that a customer is not creditworthy, we may not be required to deliver coal under the customer’s coal sales contract. If this occurs, we may decide to sell the customer’s coal on the spot market, which may be at prices lower than the contracted price, or we may be unable to sell the coal at all. Furthermore, the bankruptcy of any of our customers could materially and adversely affect our financial position. In addition, competition with other coal suppliers could cause us to extend credit to customers and on terms that could increase the risk of payment default.

Volatility in the equity markets or interest rate fluctuations could substantially increase our pension funding requirements and negatively impact our financial position.

At December 31, 2013, the projected benefit obligation under our defined benefit pension plans was $155.1 million and the fair value of plan assets was $134.1 million. The difference between plan obligations and assets, or the funded status of the plans, significantly affects the net periodic benefit cost and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost and increase our future funding requirements. During the fiscal year ended 2013, we made $0.6 million in contributions to these pension plans and accrued $3.2 million in expenses related thereto. The current economic environment increases the risk that we may be required to make even larger contributions in the future. Additionally, due to covenants in our WML Notes, we are required to maintain our pension plan funding at higher levels than would otherwise be required, increasing funding requirements and the chance that we will be required to make large contributions in the future.

If our assumptions regarding our future expenses related to employee benefit plans are incorrect, then expenditures for these benefits could be materially higher than we have assumed. In addition, we may have exposure under those plans that extend beyond what our obligations would be with respect to our own employees.

We provide various postretirement medical benefits and workers’ compensation benefits to current and former employees and their dependents. We calculate the total accumulated benefit obligations according to guidance provided by GAAP. We estimate the present value of our postretirement medical, black lung and workers’ compensation benefit obligations to be $284.3 million, $14.1 million and $7.5 million, respectively, at December 31, 2013. In addition, in connection with the Sherritt Acquisition, we expect to assume the obligation to provide postretirement health coverage for eligible current union

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employees, as described in greater detail below. We have estimated these unfunded obligations based on actuarial assumptions and if our assumptions do not materialize as expected, cash expenditures and costs that we incur could be materially different.

Moreover, regulatory changes could increase our obligations to provide these or additional benefits. We participate in defined benefit multi-employer funds that were established in connection with the Coal Industry Retiree Health Benefit Act of 1992, or Coal Act, which provides for the funding of health and death benefits for certain UMWA retirees. Our contributions to these funds totaled $2.2 million and $2.3 million for the years ended December 31, 2013 and 2012, respectively. Our contributions to these funds could increase as a result of a shrinking contribution base as a result of the insolvency of other coal companies that currently contribute to these funds, lower than expected returns on fund assets or other funding deficiencies.

We could also have obligations under the Tax Relief and Health Care Act of 2006, or 2006 Act. The 2006 Act authorized up to a maximum of $490 million in federal contributions to pay for certain benefits, including the healthcare costs under certain funds created by the Coal Act for “orphans,” i.e. retirees from companies that subsequently ceased operations, and their dependents. However, if Congress were to amend or repeal the 2006 Act or if the $490 million authorization were insufficient to pay for these healthcare costs, we, along with other contributing employers and certain affiliates, would be responsible for the excess costs.

We also contribute to a multi-employer defined benefit pension plan, the Central Pension Fund of the Operating Engineers, or Central Pension Fund, on behalf of employee groups at our Rosebud, Absaloka and Savage mines that are represented by the International Union of Operating Engineers. The Central Pension Fund is subject to certain funding rules contained in the Pension Protection Act of 2006, or PPA. Under the PPA, if the Central Pension Plan fails to meet certain minimum funding requirements, it would be required to adopt a funding improvement plan or rehabilitation plan. If the Central Pension Fund adopted a funding improvement plan or rehabilitation plan, we could be required to contribute additional amounts to the fund. As of January 31, 2013, its last completed fiscal year, the Central Pension Fund reported that it was underfunded. If we were to partially or completely withdraw from the fund at a time when the Central Pension Fund were underfunded, we would be liable for a proportionate share of the fund’s unfunded vested benefits, and this liability could have a material adverse effect on our financial position.

In connection with the Sherritt Acquisition, we are assuming responsibility for and accepting obligations under certain pension plans related to the Sherritt Assets.

We have evaluated these plans, and believe that certain of them may be underfunded by immaterial amounts. In the event the underfund amounts are larger than we anticipate, the Arrangement Agreement requires Sherritt to adjust the purchase price if such underfunded amount exceeds $3.0 million.

We are obligated to make contributions to these plans based upon agreement with the plan members and collective bargaining agreements with the representative unions. Our future contributions to these defined benefit plans are made in accordance with GAAP pursuant to applicable pension legislation and the Income Tax Act (Canada). Further contributions to the pension plans could be required based on actuarial valuations, agreements, the plan asset investment performance, and future legislated requirements.

Under Canadian provincial Workers’ Compensation legislation we remain obligated to fund workers’ compensation benefits arising from workplace injuries, disease and death of current and former employees. This obligation is based on premiums assessed by the applicable Workers’ Compensation Board which may vary based on the claims experience of the employer. We may be required to contribute additional premiums in the future depending on the number and amount of claims.

Our reserve estimates may prove to be incorrect.

The coal reserve estimates in this offering memorandum are estimates based on the interpretation of limited sampling and subjective judgments regarding the grade, continuity and existence of mineralization, as well as the application of economic assumptions, including assumptions as to operating costs, foreign exchange rates and future commodity prices. The sampling, interpretations or assumptions underlying any reserve estimate may be incorrect, and the impact on the amount of reserves ultimately proven to be recoverable may be material. Should the mineralization and/or configuration of a deposit ultimately turn out to be significantly different from that currently envisaged, then the proposed mining plan may have to be altered in a way that could affect the tonnage and grade of the reserves mined and rates of production and, consequently, could adversely affect the profitability of the mining operations. In addition, short term operating factors relating to the reserves, such as the need for orderly development of ore bodies or the processing of new or different ores, may cause reserve estimates to be modified or operations to be unprofitable in any particular fiscal period. There can be no assurance that our projects or operations will be, or will continue to be, economically viable, that the indicated amount of minerals will be recovered or that they will be recovered at the prices assumed for purposes of estimating reserves.

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Any inaccuracies in our estimates of our coal reserves could result in decreased profitability from lower than expected revenues or higher than expected costs.

Our future performance depends on, among other things, the accuracy of our estimates of our proven and probable coal reserves. Our reserve estimates are prepared by our engineers and geologists or by third-party engineering firms and are updated periodically. There are numerous factors and assumptions inherent in estimating the quantities and qualities of, and costs to mine, coal reserves, including many factors beyond our control, including the following:

• quality of the coal;

• geological and mining conditions, which may not be fully identified by available exploration data and/or may differ from our experiences in areas where we currently mine;

• the percentage of coal ultimately recoverable;

• the assumed effects of regulation, including the issuance of required permits, taxes, including severance and excise taxes and royalties, and other payments to governmental agencies;

• economic assumptions, including assumptions as to foreign exchange rates and future commodity prices;

• assumptions concerning the timing for the development of the reserves; and

• assumptions concerning equipment and productivity, future coal prices, operating costs, including for critical supplies such as fuel, tires and explosives, capital expenditures and development and reclamation costs.

As a result, estimates of the quantities and qualities of economically recoverable coal attributable to any particular group of properties, classifications of reserves based on risk of recovery, estimated cost of production, and estimates of future net cash flows expected from these properties may vary materially due to changes in the above factors and assumptions. Any inaccuracy in our estimates related to our reserves could result in decreased profitability from lower than expected revenues or higher than expected costs.

If the assumptions underlying our reclamation and mine closure obligations are materially inaccurate, we could be required to expend greater amounts than anticipated.

We are subject to stringent reclamation and closure standards for our mining operations. We calculated the total estimated reclamation and mine-closing liabilities according to the guidance provided by GAAP and current industry practice. Estimates of our total reclamation and mine-closing liabilities are based upon permit requirements and our engineering expertise related to these requirements. If our estimates are incorrect, we could be required in future periods to spend materially different amounts on reclamation and mine-closing activities than we currently estimate. Likewise, if our customers, some of whom are contractually obligated to pay certain reclamation costs, default on the unfunded portion of their contractual obligations to pay for reclamation, we could be forced to make these expenditures ourselves and the cost of reclamation could exceed any amount we might recover in litigation.

We estimate that our gross reclamation and mine-closing liabilities, which are based upon projected mine lives, current mine plans, permit requirements and our experience, were $279.9 million (on a present value basis) at December 31, 2013. Of these December 31, 2013 liabilities, our customers have assumed $96.8 million by contract. In addition, we held final reclamation deposits, received from customers, of approximately $74.9 million at December 31, 2013 to provide for these obligations. We estimate that our obligation for final reclamation that was not the contractual responsibility of others or covered by offsetting reclamation deposits was $108.2 million at December 31, 2013. We must recover this $108.2 million from revenues generated by coal sales. In addition, based on the conversion to GAAP of Sherritt’s historical IFRS financial statements, we estimate that in connection with the Sherritt Acquisition we will assume approximately $123.1 million of additional reclamation and mine-closing liabilities.

Although we update our estimated costs annually, our recorded obligations may prove to be inadequate due to changes in legislation or standards and the emergence of new restoration techniques. Furthermore, the expected timing of expenditures could change significantly due to changes in commodity costs or prices that might curtail the life of an operation. These recorded obligations could prove insufficient compared to the actual cost of reclamation. Any underestimated or unidentified close down, restoration or environmental rehabilitation costs could have an adverse effect on our reputation as well as our asset values, results of operations and liquidity.

If the cost of obtaining new reclamation bonds and renewing existing reclamation bonds increases or if we are unable to obtain additional bonding capacity, our operating results could be negatively affected.

We are required to provide bonds to secure our obligations to reclaim lands used for mining. We must post a bond before we obtain a permit to mine any new area. These bonds are typically renewable on a yearly basis. Bonding companies are

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requiring that applicants collateralize increasing portions of their obligations to the bonding company. In 2013, we paid approximately $6.4 million in premiums for reclamation bonds. We anticipate that, as we permit additional areas for our mines, our bonding and collateral requirements could increase. Any cash that we provide to collateralize our obligations to our bonding companies is not available to support our other business activities. Our results of operations could be negatively affected if the cost of our reclamation bonding premiums and collateral requirements were to increase. Additionally, if we are unable to obtain additional bonding capacity due to cash flow constraints, we will be unable to begin mining operations in newly permitted areas, which would hamper our ability to efficiently meet our current customer contract deliveries, expand operations, and increase revenues. We anticipate being required to use approximately $58.0 million to collateralize new bonds in connection with the Sherritt Acquisition.

Our coal mining operations are subject to external conditions that could disrupt operations and negatively affect our results of operations.

Our coal mining operations are all surface mines. These mines are subject to conditions or events beyond our control that could disrupt operations, affect production, and increase the cost of mining at particular mines for varying lengths of time. These conditions or events include: unplanned equipment failures, geological conditions such as variations in the quality of the coal produced from a particular seam, variations in the thickness of coal seams and variations in the amounts of rock and other natural materials that overlie the coal that we are mining; and weather conditions. For example, in our recent past, we have endured a major blizzard at the Beulah Mine, a trestle fire at the Beulah Mine, and an unanticipated replacement of boom suspension cables on one of our draglines, all of which interrupted deliveries. Major disruptions in operations at any of our mines over a lengthy period could adversely affect the profitability of our mines.

In addition, unplanned outages of draglines and extensions of scheduled outages due to mechanical failures or other problems occur from time-to-time and are an inherent risk of our coal mining business. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues because of selling fewer tons of coal. If properly maintained, a dragline can operate for 40 years or longer. As of December 31, 2013, the average age of Westmoreland’s draglines was 31 years. In addition, at our Kemmerer mine we use shovels instead of draglines. If properly maintained, a shovel can last for 30 years or longer. As of December 31, 2013, the average age of our shovels was 16 years. As our draglines, shovels and other major equipment ages, we may experience unscheduled maintenance outages or increased maintenance costs, which would adversely affect our operating results.

Unplanned outages and extensions of scheduled outages due to mechanical failures or other problems occur from time-to-time at our power plant customers and are an inherent risk of our business. Unplanned outages typically increase our operation and maintenance expenses and may reduce our revenues because of selling fewer tons of coal. For example, in November 2011, the Sherburne County station experienced an explosion and fire that has caused an extended outage. As a result, we lost approximately 50% of our coal sales in 2012 at our Absaloka Mine. While Sherburne County station initially indicated a start-up date of March 2013, it did not ultimately resume operations until October 2013, resulting in additional lost coal sales during 2013. We maintain business interruption insurance coverage to lessen the impact of events such as this, and have received $13.4 million of cash proceeds for the year ended December 31, 2013 in insurance compensation for lost sales to the Sherburne County station. While we believe our insurance did not fully compensate us for the impact of lost sales, we believe the shortfall was not material. However, business interruption insurance may not always provide adequate compensation for lost coal sales, and significant unanticipated outages at our power plant customers which result in lost coal sales could result in significant adverse effects on our operating results.

Our operations are vulnerable to natural disasters, operating difficulties and infrastructure constraints, not all of which are covered by insurance, which could have an impact on our productivity.

Mining and power operations are vulnerable to natural events, including blizzards, earthquakes, drought, floods, fire, storms and the possible effects of climate change. Operating difficulties such as unexpected geological variations could affect the costs and viability of our operations. Our operations also require reliable roads, rail networks, power sources and power transmission facilities, water supplies and IT systems to access and conduct operations. The availability and cost of infrastructure affects our capital expenditures, operating costs, and planned levels of production and sales.

We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Although we maintain insurance at levels we believe are appropriate and consistent with industry practice, we are not fully insured against all risks. In addition, pollution and environmental risks and consequences of any business interruptions such as equipment failure or labor disputes generally are not fully insurable. Losses and liabilities from

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uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition, results of operations and cash flows.

Long-term sales and revenues could be significantly affected by environmental regulations and the effects of the environmental lobby.

A consortium of environmental activists is actively pushing to shut down one-third of the nation’s coal plants by 2020. They are taking particular interest in Colstrip Units 1 and 2 and are actively lobbying the EPA to require cost-prohibitive pollution control equipment. In litigation filed in 2012, the activists stated that the EPA’s Best Available Retrofit Technology (“BART”) analysis for regional haze provides support for a determination that additional controls or upgrades to controls to improve regional haze are necessary to achieve BART. A decision in the case is pending. In 2013, environmental groups also filed a citizen suit complaint in Montana district court asserting that the owners and operators of Colstrip are in violation of Clean Air Act requirements. Trial in the case is set for late in 2014. If environmental groups are successful, Colstrip would be required to undergo new permitting and comply with more stringent emission limits applicable to a number of pollutants. If additional emissions controls and upgrades are required at Colstrip Units 1 and 2, it is possible the owners could elect to shut down the units in lieu of making the large capital expenditures required to comply. If such a decision were made, we could lose coal sales of approximately 3.0 million tons per year starting in approximately 2015. The loss of the sale of this tonnage at our Rosebud Mine could have a material adverse effect on the mine’s revenues and profitability.

Additionally, Rocky Mountain Power, the owner of the Naughton Power Station located adjacent to our Kemmerer Mine, which is our Kemmerer Mine’s primary customer, has sought regulatory approval to convert Unit 3 at Naughton to 100% natural gas fueling. When complete, the conversion of Unit 3 to natural gas will result in the loss of coal sales at our Kemmerer Mine. However, Rocky Mountain Power recently announced the conversion of Naughton Unit 3 will not occur until 2018. In addition, price protections built into the contract that are in effect from 2017 to 2021 will partially offset the effects of lowered volume following the conversion of Unit 3. Despite these price protections, the lost sales at the Kemmerer Mine could have a material adverse effect on the mine’s revenues and profitability and our operating results.

In September 2013, EPA reproposed new source performance standards for greenhouse gases (“GHG”) that would require new fossil-fuel fired power plants to install carbon capture and sequestration systems. EPA stated that it intends to finalize the rule by June of 2014. EPA also is developing GHG standards for existing power plants, initial draft proposals of which EPA has indicated it expects to release June 1, 2014.

Following the Sherritt Acquisition, we will also be subject to Canadian GHG emissions regulations. On September 12, 2012, the federal government of Canada released final regulations for reducing GHG emissions from coal-fired electricity generation: ‘‘Reduction of Carbon Dioxide Emissions from Coal-Fired Generation of Electricity’’ (the ‘‘Canadian CO2 Regulations’’). The Canadian CO2 Regulations will require certain Canadian coal-fired electricity generating plants, effective July 1, 2015, to achieve an average annual emissions intensity performance standard of 420 tons of CO2 per gigawatt hour. The impact of the Canadian CO2 Regulations on existing plants will vary by province and specific location. PMRL’s long-term sales could be reduced unless certain existing plants that it supplies or new plants built to replace such existing plants are equipped with carbon capture and sequestration or other technology that achieves the prescribed performance standard, the impact of the Canadian CO2 Regulations is altered by equivalency agreements, or the Canadian CO2 Regulations are changed to lower the performance standard.

In addition, various Canadian provincial governments and other regional initiatives are moving ahead with GHG reduction and other initiatives designed to address climate change. As it is unclear at this time what shape additional regulation in Canada will ultimately take, it is not yet possible to estimate the extent to which such regulations will impact the Sherritt Assets to be acquired by us. However, the Sherritt Assets to be acquired by us involve large facilities, so the setting of emissions targets (whether in the manner described above or otherwise) may well affect them and may have a material adverse effect on our business, results of operations and financial performance. In addition to directly emitting GHGs, the Sherritt Assets to be acquired by us require large quantities of power. Future taxes on or regulation of power producers or the production of coal, oil and gas or other products may also add to our operating costs.

A defect in title or the loss of a leasehold interest in certain property could limit our ability to mine our coal reserves or result in significant unanticipated costs.

We conduct a significant part of our coal mining operations on properties that we lease. A title defect or the loss of a lease could adversely affect our ability to mine the associated coal reserves. We may not verify title to our leased properties or associated coal reserves until we have committed to developing those properties or coal reserves. We may not commit to develop property or coal reserves until we have obtained necessary permits and completed exploration. As such, the title to property that we intend to lease or coal reserves that we intend to mine may contain defects prohibiting our ability to conduct mining operations. Similarly, our leasehold interests may be subject to superior property rights of other third parties. In order to

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conduct our mining operations on properties where these defects exist, we may incur unanticipated costs. In addition, some leases require us to produce a minimum quantity of coal and require us to pay minimum production royalties. Our inability to satisfy those requirements may cause the leasehold interest to terminate.

We are dependent on information technology and our systems and infrastructure face certain risks, including cybersecurity risks and data leakage risks.

We are dependent on information technology systems and infrastructure. Any significant breakdown, invasion, destruction or interruption of these systems by employees, others with authorized access to our systems, or unauthorized persons could negatively impact operations. There is also a risk that we could experience a business interruption, theft of information, or reputational damage as a result of a cyber-attack, such as an infiltration of a data center, or data leakage of confidential information either internally or at our third-party providers. While we have invested in the protection of our data and information technology to reduce these risks and periodically test the security of our information systems network, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.

Our Absaloka Mine benefited from the ICTC, the loss of which will adversely affect the financial condition of the operation.

The ICTC expired in December 2013 and has not been extended or renewed. There is no assurance that a renewal, if any is enacted, would be enacted with retroactive effect. The provisions regarding any future renewal may not be as favorable as those that previously existed. Additionally, the investment in Absaloka Coal LLC by the partner did not continue after December 31, 2013. While we are actively seeking a new partner, there can be no assurance that we will be able to find a new partner in a timely manner, or, if and when we are able to find a new partner, that they will agree to a partnership on the same terms. Since 2009, we have experienced a yearly average of $3.1 million of income and $6.1 million of cash receipts from Absaloka Coal LLC’s participation in ICTC transactions.

Our future success depends upon our ability to continue acquiring and developing coal reserves that are economically recoverable and to raise the capital necessary to fund our expansion.

Our recoverable reserves decline as we produce coal. We have not yet applied for the permits to use all of the coal deposits under our mineral rights, and the government agencies may not grant those permits in a timely manner or at all. Furthermore, we may not be able to mine all of our coal deposits as efficiently as we do at our current operations. Our future success depends upon conducting successful exploration and development activities and acquiring properties containing economically recoverable coal deposits. Our current strategy includes increasing our coal reserves through acquisitions of other mineral rights, leases, or producing properties and continuing to use our existing properties. Our ability to expand our operations may be dependent on our ability to obtain sufficient working capital, either through cash flows generated from operations, or financing activities, or both. As we mine our coal and deplete our existing reserves, replacement reserves may not be available when required or, if available, we may not be capable of mining the coal at costs comparable to those characteristic of the depleting mines. These factors could have a material adverse effect on our mining operations and costs, and our customers’ ability to use the coal we mine.

We may not be able to successfully replace our reserves or grow through future acquisitions.

In recent years, we have expanded our operations by adding new mines and reserves through strategic acquisitions, and we intend to continue expanding our operations and coal reserves through additional future acquisitions. Our future growth could be limited if we are unable to continue making acquisitions, or if we are unable to successfully integrate the companies, businesses or properties we acquire. We may not be successful in consummating any acquisitions and the consequences of undertaking these acquisitions are unknown. Our ability to make acquisitions in the future could be limited by restrictions under our existing or future debt agreements, competition from other coal companies for attractive properties or the lack of suitable acquisition candidates.

Transportation impediments may hinder our current operations or future growth.

Certain segments of our current business, principally our Absaloka Mine and the Coal Valley mine we are acquiring in the Sherritt Acquisition, rely on rail transportation for the delivery of coal product to customers and ports. Our ability to deliver our product in a timely manner could be adversely affected by the lack of adequate availability of rail capacity, whether because of work stoppages, union work rules, track conditions or otherwise. In 2011, flooding conditions disrupted rail service to the Absaloka Mine, resulting in lost revenue. Rail or shipping transportation costs represent a significant portion of the total cost of coal for our customers, and the cost of transportation is a key factor in a customer’s purchasing decision. In addition, the Coal Valley mine exports the majority of its production to the global seaborne market through port facilities in western Canada.

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The unavailability of rail capacity and port capacity could also hinder our future growth as we seek to sell coal into new markets. The current availability of rail cars is limited and at times unavailable because of repairs or improvements, or because of priority transportation agreements with other customers. Port capacity is also restricted in certain markets. If transportation is restricted or is unavailable, we may be unable to sell into new markets and, therefore, the lack of rail or port capacity would hamper our future growth. We currently have sufficient committed port capacity to operate our export business, and additional port capacity is expected to be constructed in western Canada in the future. However, increases in transportation costs or the lack of sufficient rail or port capacity or availability could make our coal less competitive, or could result in coal becoming a less competitive source of energy in general, which could lead to reduced coal sales and/or reduced prices we receive for the coal. Our inability to timely deliver product or fuel switching due to rising transportation costs could have a material adverse effect on our business, financial condition and results of operations.

Decreased availability or increased costs of key equipment and materials could impact our cost of production and decrease our profitability.

We depend on reliable supplies of mining equipment, replacement parts and materials such as explosives, diesel fuel, tires and magnetite. The supplier base providing mining materials and equipment has been relatively consistent in recent years, although there continues to be consolidation, which has resulted in a limited number of suppliers for certain types of equipment and supplies. Any significant reduction in availability or increase in cost of any mining equipment or key supplies could adversely affect our operations and increase our costs, which could adversely affect our operating results and cash flows.

In addition, the prices we pay for these materials are strongly influenced by the global commodities market. Coal mines consume large quantities of commodities such as steel, copper, rubber products, explosives and diesel and other liquid fuels. Some materials, such as steel, are needed to comply with regulatory requirements. A rapid or significant increase in the cost of these commodities could increase our mining costs because we have limited ability to negotiate lower prices, and in some cases, do not have a ready substitute.

Union represented labor creates an increased risk of work stoppages and higher labor costs.

At December 31, 2013, approximately 58% of our total workforce was represented by two labor unions, the International Union of Operating Engineers and the UMWA. Our unionized workforce is spread out amongst the majority of our surface mines. As a majority of our workforce is unionized, there may be an increased risk of strikes and other labor disputes, and our ability to alter labor costs is subject to collective bargaining. The collective bargaining agreement relating to the represented workforce at the Absaloka Mine expired in mid-2011. We were successful in negotiating a new agreement without any work stoppages or other disruptions. In 2012, we were successful in entering into agreements with our workforce at Savage, Kemmerer and Rosebud. If our Jewett Mine operations were to become unionized, we could be subject to additional risk of work stoppages, other labor disputes and higher labor costs, which could adversely affect the stability of production and our results of operations. While strikes are generally a force majeure event in long-term coal supply agreements, thereby exempting the mine from its delivery obligations, the loss of revenue for even a short time could have a material adverse effect on our financial results.

Congress has proposed legislation to enact a law allowing workers to choose union representation solely by signing election cards, which would eliminate the use of secret ballots to elect union representation. While the impact is uncertain, if the government enacts this proposal into law, which would make it administratively easier to unionize, it may lead to more coal mines becoming unionized.

The workforce of the Sherritt Subsidiaries is also unionized and will increase the percentage of our workforce represented by a labor union. There are labor agreements in place with one or more unions at each of the producing Sherritt mines we are acquiring other than the Genesee mine. One of the agreements at the Poplar River Mine recently expired. A new agreement was signed in February 2014, and expires in 2016. The agreement at the Coal Valley mine expires on February 28, 2014, and negotiations with the Union began in mid-January. We believe Sherritt has good relations with its unionized employees and representative unions. However, if we are not successful in negotiating new labor agreements with any of the Sherritt workforce unions or otherwise maintain strong partnerships with them following the Sherritt Acquisition, it could result in labor disputes, work stoppages or higher labor costs, any of which could have an adverse effect on our business and results of operations.

We face intense competition to attract and retain employees.

We are dependent on retaining existing employees and attracting additional qualified employees to meet current and future needs. We face intense competition for qualified employees, and there can be no assurance that we will be able to attract and retain such employees or that such competition among potential employers will not result in increasing salaries. We rely on employees with unique skill sets to perform our mining operations, including engineers, mechanics and other highly skilled

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individuals. An inability to retain existing employees or attract additional employees, especially with mining skills and background, could have a material adverse effect on our business, cash flows, financial condition and results of operations.

Risk Factors Relating to the Coal and Power Industries

The risk of prolonged recessionary conditions could adversely affect our financial condition and results of operations.

Because we sell substantially all of our coal to electric utilities, our business and results of operations remain closely linked to demand for electricity. Recent economic uncertainty has raised the risk of prolonged recessionary conditions. Historically, global demand for basic inputs, including electricity production, has decreased during periods of economic downturn. If demand for electricity production decreases, our financial condition and results of operations could be adversely affected.

Competition in the North American coal industry may adversely affect our revenues and results of operations.

Many of our competitors in the North American coal industry are major coal producers who have significantly greater financial resources than we do. The intense competition among coal producers may impact our ability to retain or attract customers and may therefore adversely affect our future revenues and results of operations. Among other things, competitors could develop new mines that compete with our mines, have higher quality coal than our mines or build or obtain access to rail lines that would adversely affect the competitive position of our mines.

Any change in consumption patterns by utilities away from the use of coal could affect our ability to sell the coal we produce or the prices that we receive.

The electric utility industry currently accounts for approximately 93% of coal consumption in the U.S. and 80% of coal consumption in Canada. The demand for electricity, environmental and other governmental regulations, and the price and availability of competing fuels for power plants such as nuclear, hydro, natural gas and fuel oil as well as alternative sources of energy affects the amount of coal consumed by the electric utility industry. A decrease in coal consumption by the electric utility industry could adversely affect the price of coal, which could negatively impact our results of operations and liquidity. We do not have the right to sell fixed quantities of coal, so revenue can fall even though we have long-term contracts.

Some power plants are fueled by natural gas because of the relatively lower construction costs of such plants compared to coal-fired plants and because natural gas is a cleaner burning fuel. In addition, some states have adopted or are considering legislation that encourages domestic electric utilities to switch from coal-fired power generation plants to natural gas powered plants. Similar legislation has been implemented or is under consideration in several Canadian provinces. Passage of these and other state or federal laws or regulations limiting carbon dioxide emissions could result in fuel switching, from coal to other fuel sources, by purchasers of our coal. Such laws and regulations could also mandate decreases in carbon dioxide emissions from coal-fired power plants, impose taxes on carbon emissions or require certain technology to capture and sequester carbon dioxide from coal-fired power plants. If these or similar measures are ultimately imposed by federal or state governments or pursuant to international treaty, our reserves and operating costs may be materially and adversely affected. Similarly, alternative fuels (non-fossil fuels) could become more attractive than coal in order to reduce carbon emissions, which could result in a reduction in the demand for coal and, therefore, our revenues.

Recently, the supply of natural gas has reached record highs and the price of natural gas has remained at depressed levels for sustained periods, making it an attractive competing fuel. A continuing decline in the price of natural gas, or continuing periods of sustained low natural gas prices, could cause demand for coal to decrease, result in fuel switching and decreased coal consumption by electricity-generating utilities and adversely affect the price of our coal. Sustained low natural gas prices may cause utilities to phase-out or close existing coal-fired power plants or reduce construction of any new coal-fired power plants, which could have a material adverse effect on demand and prices received for our coal.

Changes in the export and import markets for coal products could affect the demand for our coal, our pricing and our profitability.

Although our mines and the majority of our customers are located in North America, we compete in a worldwide market for coal and coal products. The pricing and demand for our products is affected by a number of global economic factors that are beyond our control and difficult to predict. These factors include:

• currency exchange rates;

• growth of economic development;

• price of alternative sources of electricity or steel;

• worldwide demand for coal and other sources of energy; and

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• ocean freight rates.

Any decrease in the aggregate amount of coal exported from the United States and Canada, or any increase in the aggregate amount of coal imported into the United States and Canada, could have a material adverse impact on the demand for our coal, our pricing and our profitability. Ongoing uncertainty in European economies and slowing economies in China, India and Brazil have reduced and may continue to reduce near-term pricing and demand for coal exported from the United States and Canada. The Sherritt Assets include a mine in western Canada that primarily supplies premium thermal coal to the Asian export market. Ownership of this mine will increase our exposure to price fluctuations in the international coal market, and a substantial downturn in demand in the Asian market could have a material adverse effect on our financial condition and results of operations.

Extensive government regulations impose significant costs on our mining operations, and future regulations could increase those costs or limit our ability to produce and sell coal.

The coal mining industry is subject to increasingly strict regulation by federal, state and local authorities with respect to matters such as:

• limitations on land use;

• employee health and safety;

• mandated benefits for retired coal miners;

• mine permitting and licensing requirements;

• reclamation and restoration of mining properties after mining is completed;

• air quality standards;

• discharges to water;

• construction and permitting of facilities required for mining operations, including valley fills and other structures constructed in water bodies and wetlands;

• protection of human health, plant life and wildlife;

• discharge of materials into the environment;

• effects of mining on groundwater quality and availability; and

• remediation of contaminated soil, surface and groundwater.

The costs, liabilities and requirements associated with these and other regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. Failure to comply with these regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of cleanup and site restoration costs and liens, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits and other enforcement measures that could have the effect of limiting production from our operations. We may also incur costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations. We must compensate employees for work-related injuries. If we do not make adequate provision for our workers’ compensation liabilities, it could harm our future operating results. If we are pursued for any sanctions, costs and liabilities, our mining operations and, as a result, our results of operations, could be adversely affected.

New legislation or regulations and orders may be adopted that may materially adversely affect our mining operations, our cost structure or our customers’ ability to use coal. New legislation or administrative regulations (or new judicial interpretations or administrative enforcement of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us or our customers to change operations significantly or incur increased costs. These regulations, if proposed and enacted in the future, could have a material adverse effect on our financial condition and results of operations. For additional information regarding specific regulations that impact our operations, see Item 1 under “Coal Segment - Material Effects of Regulation.”

Concerns regarding climate change are, in many of the jurisdictions in which we operate, leading to increasing interest in, and in some cases enactment of, laws and regulations governing greenhouse gas emissions, which affect the end-users of coal and could reduce the demand for coal as a fuel source and cause the volume of our sales and/or the prices we receive to decline. These laws and regulations also have imposed, and will continue to impose, costs directly on us.

Greenhouse gas, or GHG, emissions have increasingly become the subject of international, national, state and local attention. Coal-fired power plants can generate large amounts of carbon and other GHG emissions. Accordingly, legislation or regulation intended to limit GHGs will likely indirectly affect our coal operations by limiting our customers’ demand for our

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products and/or reducing the prices we can obtain, and also may directly affect our own power operations. In the United States, the EPA has issued a notice of finding and determination that emissions of carbon dioxide, methane, nitrous oxide and other GHGs present an endangerment to human health and the environment, which allows the EPA to begin regulating emissions of GHGs under existing provisions of the federal Clean Air Act. The EPA has begun to implement GHG-related reporting and permitting rules. Similarly, the U.S. Congress has considered, and in the future may again consider, “cap and trade” legislation that would establish a cap on emissions of GHGs covering much of the economy in the United States and would require most sources of GHG emissions to obtain GHG emission “allowances” corresponding to their annual emissions of GHGs. In addition, coal-fired power plants, including new coal-fired power plants or capacity expansions of existing plants, have become subject to opposition by environmental groups seeking to curb the environmental effects of GHG emissions. Most recently, President Obama in June 2013 announced a Climate Action Plan, which included a Presidential Memorandum directing the EPA to issue standards for GHG emissions from existing, modified and reconstructed fossil-fuel fired power plants, and the EPA issued a revised proposal with standards for new fossil fuel-fired plants, including coal-fired plants, in September 2013. See “Our Business - Material Effects of Regulation - Regulation in United States.”

In Canada, in September 2012 the federal government released final regulations for reducing GHG emissions from coal-fired electricity generation through the Canadian CO2 Regulations. The Canadian CO2 Regulations will require certain Canadian coal-fired electricity generating units, effective July 1, 2015, to achieve an average annual emissions intensity performance standard of 420 tons of CO2 per gigawatt hour. According to Sherritt’s public filings, this performance standard represents approximately one-half of the annual average CO2 emissions intensity of the customer generating assets currently served by the Prairie Operations. The performance standard will apply to new units commissioned after July 1, 2015 and to units that are considered to have reached the end of their useful life, generally between 45 and 50 years from the unit’s commissioning date. New and end-of-life units that incorporate technology for carbon capture and sequestration may apply for a temporary exemption from the performance standard that would remain in effect until 2025, provided that certain implementation milestones are met. Provincial equivalency agreements, under which the Canadian CO2 Regulations would stand down, are being negotiated or discussed with the provinces of Alberta and Saskatchewan. The Prairie coal production in the long-term could be reduced unless certain existing units or new units of the customers served by the Prairie operations are equipped with carbon capture and storage or other technology that achieves the prescribed performance standard, the impact of the Regulations is altered by equivalency agreements, or the Canadian CO2 Regulations are changed to lower the performance standard. The impact of the Canadian CO2 Regulations on existing units will vary by location and province.

In addition, various Canadian provincial governments and other regional initiatives are moving ahead with GHG reduction and other initiatives designed to address climate change. For example, under the Climate Change and Emissions Management Act (the “CCEM”), the Province of Alberta enacted the “Specified Gas Emitters Regulation.” As of January 1, 2008, this enactment requires certain existing facilities with direct emissions of 100,000 tons or more of certain specified gases to ensure that the net emissions intensity for a year for an established facility must not exceed 88% of the baseline emissions intensity for the facility. For the 2011 compliance period, CVRI’s Coal Valley operations exceeded the 100,000 ton emissions threshold established under the Specified Gas Emitters Regulation, and Coal Valley was required to contribute to the Climate Change and Emissions Management Fund. According to Sherritt’s public filings, for the 2012 compliance period, the preliminary calculations indicate Coal Valley will be required to purchase fund credits. It is anticipated that for the next several years, emissions intensity at Coal Valley will increase as the distance between the coal being mined and the processing plant increases. The Government of Alberta has also introduced a complementary Specified Gas Reporting Regulation, which came into force on October 20, 2004. This legislation requires all industrial emitters emitting 50,000 tons or more of CO2e to report their annual GHG emissions in accordance with the specified Gas Reporting Standard published by the Government of Alberta. In Saskatchewan, Bill 126, The Management and Reduction of Greenhouse Gases Act, was passed in 2010 but is not yet proclaimed in force. The legislation provides a framework for the control of GHG emissions by regulated emitters and will be proclaimed once accompanying draft regulations are finalized.

As it is unclear at this time what shape additional regulation in Canada will ultimately take, it is not yet possible to estimate the extent to which such regulations will impact the Sherritt Assets to be acquired by us. However, those assets involve large facilities, so the setting of emissions targets (whether in the manner described above or otherwise) may well affect them and may have a material adverse effect on our business, results of operations and financial performance. These developments in both Canada and the United States could have a variety of adverse effects on demand for the coal we produce. For example, laws or regulations regarding GHGs could result in fuel switching from coal to other fuel sources by electricity generators, or require us, or our customers, to employ expensive technology to capture and sequester carbon dioxide. Political and environmental opposition to capital expenditure for coal-fired facilities could affect the regulatory approval required for the retrofitting of existing power plants. For example, the Naughton power facility, which is located adjacent to the Kemmerer Mine, announced in April 2012 that it is seeking regulatory approval to switch Unit 3 to natural gas from coal. The conversion of Naughton Unit 3 to natural gas would result in significant reduction in coal sales from our Kemmerer Mine, and could have a material adverse effect on our results of operation. However, Rocky Mountain Power, the owner of the Naughton facility, recently announced that the conversion will not take place until at least 2018. Political opposition to the development of new

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coal-fired power plants, or regulatory uncertainty regarding future emissions controls, may result in fewer such plants being built, which would limit our ability to grow in the future.

In addition to directly emitting GHGs, the Sherritt Assets to be acquired by us require large quantities of power. Future taxes on or regulation of power producers or the production of coal, oil and gas or other products may also add to our operating costs. And many of the developments in the U.S. discussed above that may affect our customers and demand for our coal could also affect us directly through adverse impacts on ROVA.

Depending on how they evolve, such developments, individually or in the aggregate, may have a material adverse effect on our business, results of operations, and financial performance.

Extensive environmental laws, including existing and potential future legislation, treaties and regulatory requirements relating to air emissions other than GHGs, affect our customers and could reduce the demand for coal as a fuel source and cause coal prices and sales of our coal to materially decline, and could impose additional costs on ROVA.

Our customers, as well as ROVA, are subject to extensive environmental regulations particularly with respect to air emissions other than GHG. Coal contains impurities, including but not limited to sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned. The emission of these and other substances is extensively regulated at the federal, state, provincial and local level, and these regulations significantly affect our customers’ ability to use the coal we produce and, therefore, the demand for that coal. For example, the purchaser of coal produced from the Jewett Mine blends our lignite with compliance coal from Wyoming. Tightened nitrogen oxide and new mercury emission standards could result in the customer purchasing an increased blend of the Wyoming coal in order to reduce emissions. Further, increased market prices for sulfur dioxide emissions allowances and increased coal ash management costs could also favor an increased blend of the lower ash Wyoming compliance coal. In such a case, the customer has the option to increase its purchases of other coal and reduce purchases of our coal or terminate our contract. A termination of the contract or a significant reduction in the amount of our coal that is purchased by the customer could have a material adverse effect on our results of operations and financial condition.

The EPA intends to issue or has issued a number of significant regulations that will impose more stringent requirements relating to air, water and waste controls on electric generating units. These rules include the EPA’s pending new requirements for coal combustion residue (“CCR”) management that may further regulate the handling of wastes from the combustion of coal. In addition, in February 2012, the EPA signed a rule to reduce emissions of mercury and toxic air pollutants from new and existing coal- and oil-fired electric utility steam generating units, often referred to as the MATS Rule. See “Our Business - Potential Effects of Regulation - Regulation in United States.”

Considerable uncertainty is associated with air emissions initiatives. New regulations are in the process of being developed, and many existing and potential regulatory initiatives are subject to review by federal or state agencies or the courts. Stringent air emissions limitations are either in place or are likely to be imposed in the short to medium term, and these limitations will likely require significant emissions control expenditures for many coal-fired power plants. For example, the owners of Units 3 and 4 at Colstrip, adjacent to our Rosebud Mine, are getting considerable pressure from environmental groups to install Selective Catalytic Reduction (“SCR”) technology. Should the owners be forced by the EPA to install such technology, the capital requirements could make the continued operation of the two units unsustainable. As a result, Colstrip and other similarly-situated power plants may switch to other fuels that generate fewer of these emissions or may install more effective pollution control equipment that reduces the need for low-sulfur coal. Any switching of fuel sources away from coal, closure of existing coal-fired power plants, or reduced construction of new coal-fired power plants could have a material adverse effect on demand for, and prices received for, our coal. Alternatively, less stringent air emissions limitations, particularly related to sulfur, to the extent enacted, could make low-sulfur coal less attractive, which could also have a material adverse effect on the demand for, and prices received for, our coal.

The regulation of air emissions in Canada may also reduce the demand for the products of the Sherritt Assets to be acquired by us. Specifically, the Alberta Environmental Protection and Enhancement Act (“EPEA”) and the Canadian Environmental Protection Act, 1999 (“CEPA, 1999”) and the provision for the reporting of pollutants via the National Pollutant Release Inventory (“NPRI”), could also have a significant effect on the customers of the Sherritt Assets, which in turn could, over time, significantly reduce the demand for the coal produced from the Sherritt Assets.

The customers of the Sherritt Assets in Canada must also comply with a variety of environmental laws that regulate and restrict air emissions, including the EPEA and its regulations, and the CEPA, 1999. Because many of these customers’ activities generate air emissions from various sources, compliance with these laws requires our customers in Canada to make investments in pollution control equipment and to report to the relevant government authorities if any emissions limits are exceeded or are made in contravention of the applicable regulatory requirements.

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These laws restrict the amount of pollutants that our Canadian customer’s facilities can emit or discharge into the environment. The NPRI, for example, is created under authority of the CEPA, 1999 and is a Canada-wide, legislated, and publicly accessible inventory of specific substances that are released into the air, water, and land. The purpose of the NPRI was to provide comprehensive national data on releases of specified substances, and assists with, identifying priorities for action, encouraging voluntary action to reduce releases, tracking the progress of reductions in releases, improving public awareness and understanding of substances released into the environment, and supporting targeted initiatives for regulating the release of substances.

Regulatory authorities can enforce these and other environmental laws through administrative orders to control, prevent or stop a certain activity; administrative penalties for violating certain environmental laws; and judicial proceedings. If environmental regulatory burdens continue to increase for our Canadian customers, as a result of policy changes or increased regulatory reform relating to the substances reported, it could potentially affect customer operations and future demand for coal. See “Our Business - Potential Effects of Regulation - Regulation in Canada.”

Risk Factors Relating to our Equity

Provisions of our certificate of incorporation, bylaws, and Delaware law may have anti-takeover effects that could prevent a change of control of our company that stockholders may consider favorable, and the market price of our common stock may be lower as a result.

Provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Provisions of our bylaws impose various procedural and other requirements that could make it more difficult for stockholders to bring about some types of corporate actions such as electing individuals to the board of directors. Our ability to issue preferred stock in the future may influence the willingness of an investor to seek to acquire our company. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control. Provisions in the indenture governing the 10.75% Senior Notes regarding certain change of control events could have a similar effect.

Future sales of our common stock by our major stockholder may depress our share price and influence our management policies.

Mr. Jeffrey L. Gendell, directly and indirectly through various entities, currently owns approximately 11.6% of our common stock. We have granted Mr. Gendell and his various affiliated entities registration rights with respect to our common stock held by them, which we registered on a selling stockholder registration statement in May 2009. Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, if Mr. Gendell or his various affiliated entities were to sell their entire holdings to one person, that person could have significant influence over our management policies.

Risks Related to the Sherritt Acquisition

We cannot be assured that the Sherritt Acquisition will be completed.

There can be no assurance that the Sherritt Acquisition will be completed, or will be completed in the time frame, on the terms or in the manner currently anticipated, as a result of a number of factors, including, among other things, the failure of one or more of the conditions to closing in the Arrangement Agreement. The conditions to closing of the Sherritt Acquisition, including approval in Canada under the Competition Act (which was obtained at the end of January) and under the Investment Canada Act, as well as a court order from the Court of Queen’s Bench of Alberta and a waiver or consent of a right of first refusal applicable to certain of the Sherritt Assets, may not be satisfied or waived or other events may intervene to delay or result in the failure to close the Sherritt Acquisition. The Arrangement Agreement may be terminated by the parties under certain circumstances, including, without limitation, if the Sherritt Acquisition has not been completed by June 30, 2014 (subject to extension in certain limited circumstances and exceptions). Any delay in closing or a failure to close could have a negative impact on our business.

If the Sherritt Acquisition does not close by June 30, 2014, the New Notes will be subject to a special mandatory redemption at a redemption price equal to 101% of their offering price, plus accrued and unpaid interest up to the mandatory redemption date.

We and Sherritt will be subject to business uncertainties while the Sherritt Acquisition is pending that could adversely affect our and its business.

Uncertainty about the effect of the Sherritt Acquisition on employees and customers may have an adverse effect on us and the Sherritt Subsidiaries. Although we and Sherritt intend to take actions to reduce any adverse effects, these uncertainties may impair our and their ability to attract, retain and motivate key personnel until the Sherritt Acquisition is completed and for

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a period of time thereafter. These uncertainties could cause customers, suppliers and others that deal with us and the Sherritt Subsidiaries to seek to change existing business relationships with us and them. Employee retention could be reduced during the pendency of the Acquisition, as employees may experience uncertainty about their future roles. If, despite our and Sherritt’s retention efforts, key employees depart because of concerns relating to the uncertainty and difficulty of the integration process or a desire not to remain with us, our business could be harmed.

The Sherritt Acquisition is subject to receipt of consent or approval from governmental authorities that could delay or prevent the completion of the Sherritt Acquisition or that could cause the abandonment of the Sherritt Acquisition.

To complete the Sherritt Acquisition, we and Sherritt are required to obtain approvals or consents from, or make filings with, certain applicable governmental authorities, including approval in Canada under the Competition Act and under the Investment Canada Act , as well as a court order from the Court of Queen’s Bench of Alberta. Clearance under the Competition Act was obtained on January 28th.While we and Sherritt each believe that we will receive all required approvals, there can be no assurance as to the receipt or timing of receipt of these approvals. Furthermore, the receipt of such approvals may be conditional upon actions that the parties are not obligated to take under the Arrangement Agreement and other related agreements, which could result in the termination of the Arrangement Agreement by us or the other party, or, if such approvals are received, their terms could have a detrimental impact on us following the completion of the Sherritt Acquisition. A substantial delay in obtaining any required authorizations, approvals or consents, or the imposition of unfavorable terms, conditions or restrictions contained in such authorizations, approvals or consents, could prevent the completion of the Sherritt Acquisition or have an adverse effect on the anticipated benefits of the Sherritt Acquisition, thereby adversely impacting our business, financial condition or results of operations.

We may not have uncovered all risks associated with the Sherritt Acquisition and significant liabilities of which we are not aware may exist now or arise in the future.

Upon consummation of the Sherritt Acquisition, we will assume the risk of unknown, and certain known, liabilities at the Sherritt Subsidiaries. The Sherritt Acquisition is structured as a stock purchase in which we will purchase all of the stock and equity interests of the Sherritt Subsidiaries. Once we own the Sherritt Subsidiaries, we will be responsible for all of the liabilities of the Sherritt Subsidiaries other than those for which we are being indemnified by Sherritt. Many of the representations and warranties given by Sherritt in the Arrangement Agreement are limited in scope and limited to the knowledge of certain Sherritt employees. Additionally, many of the representations and warranties are made only with respect to liabilities that would cause a material adverse effect to the Sherritt Subsidiaries. There may be significant liabilities that do not meet this threshold, and therefore are not required to be disclosed to us by Sherritt and for which we will not be indemnified.

We may become responsible for unexpected liabilities that we failed or were unable to discover in the course of performing due diligence in connection with the Sherritt Acquisition or for costs associated with known liabilities that exceed our estimates. A portion of the consideration in the Sherritt Acquisition consists of the assumption of liabilities; accordingly, if those liabilities are greater than we expect, the effective cost of the acquisition could increase significantly. In accordance with the terms of the Arrangement Agreement, we will assume all liabilities attributable to the ownership of the Sherritt Subsidiaries and operation of the Sherritt Assets, regardless of whether incurred before or after the closing date, other than certain specified liabilities retained by Sherritt or for which we are indemnified by Sherritt. Furthermore, although the Arrangement Agreement requires that Sherritt indemnify us for certain losses we may incur in connection with the Sherritt Acquisition, we may not be able to recover all or any portion of such losses if we should elect to pursue any claims we may have against Sherritt pursuant to such indemnification provisions or otherwise.

The Sherritt Acquisition will substantially expand our business, making it difficult to evaluate our business based upon our historical financial information.

The Sherritt Acquisition will significantly increase our size, expand our geographic market, enter us into new lines of business and result in material changes to our revenues and expenses. As a result of the Sherritt Acquisition and our continued goal of targeted reserve acquisitions, our financial results for any period or changes in our results across periods may continue to dramatically change. Our historical financial results, therefore, may not provide an accurate prediction of our future operating results. Accordingly, an evaluation of our business going forward may be difficult.

We may not be able to determine the actual financial condition of the Sherritt Assets until after we complete the Sherritt Acquisition and take control of the Sherritt Assets.

Although we conducted what we believe to be a reasonable level of investigation and diligence regarding the Sherritt Subsidiaries and the Sherritt Assets, a certain level of risk remains regarding the actual operating and financial condition of the Sherritt Assets. For example, the financial information provided to us with respect to the Sherritt Subsidiaries was prepared by Sherritt’s management and any financial statements provided (which form the basis of the pro forma financial statements in this

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offering memorandum), were originally prepared in accordance with IFRS. We may not, therefore, have a fully accurate understanding of the historical financial condition and performance of the Sherritt Subsidiaries until we actually assume control of the Sherritt Assets and their operations, and may not be able to ascertain the actual value or understand the potential liabilities of the Sherritt Assets until such time as we incorporate them into our operations.

We face challenges with the mine plan at certain of the Sherritt mines that we may not be able to resolve.

We intend to implement mine plan revisions and operational improvements at certain of the Sherritt mines being acquired. There are risks and uncertainties associated with these changes that could result in the planned operational improvements and mine plan revisions being less successful than anticipated, or impossible altogether. For instance, we may be unable to acquire regulatory approvals to initiate mine plan changes that would make operations at certain mines more efficient or profitable. In addition, we may not be able to acquire permit approvals to continue to operate in certain areas, or to mine new areas that would extend the lives of certain Sherritt mines. Finally, the demand and pricing for coal, which we do not control, could affect our ability to sell coal currently produced at certain Sherritt mines, which could result in changes to our plans for mining and developing those properties. Any delay or failure to implement the operational changes we intend to make at the Sherritt mines could adversely impact our anticipated results of operations and business.

We may not realize the anticipated benefits of our acquisition of the Sherritt Assets, including potential synergies, due to challenges associated with integrating the Sherritt Assets or other factors.

The Sherritt Acquisition constitutes a significant acquisition for us. The success of the Sherritt Acquisition will depend in part on the success of our management in efficiently integrating the operations, technologies and personnel of the Sherritt Assets. Our management’s inability to meet the challenges involved in successfully integrating the Sherritt Assets or to otherwise realize the anticipated benefits of the transaction could harm our results of operations.

The challenges involved in the integration of the Sherritt Assets include:

• integrating the operations, processes, people and technologies relating to the Sherritt Assets;

• coordinating and integrating regulatory, benefits, operations and development functions;

• demonstrating to customers that the Sherritt Acquisition will not result in adverse changes in coal quality, delivery schedules and other relevant deliverables;

• managing and overcoming the unique characteristics of the Sherritt Assets, such as the specific mining conditions at each of the acquired mines;

• assimilating and retaining the personnel of the Sherritt Subsidiaries and integrating the business cultures, operations, systems and clients of the Sherritt Subsidiaries with our own;

• consolidating corporate and administrative infrastructures and eliminating duplicative operations and administrative functions; and

• identifying the potential unknown liabilities associated with the Sherritt Subsidiaries and Sherritt Assets.

In addition, the overall integration of the Sherritt Assets will require substantial attention from our management, particularly in light of the geographically dispersed operations of the acquired mines relative to our other mines and operations and the unique characteristics of the Sherritt Assets. If our senior management team is required to devote considerable amounts of time to the integration process, it will decrease the time they will have to manage our business, develop new strategies and grow our business. If our senior management is not able to manage the integration process effectively, or if any significant business activities are interrupted as a result of the integration process, our business could suffer.

Furthermore, the anticipated benefits and synergies of the Sherritt Acquisition are based on assumptions and current expectations, with limited actual experience, and assume that we will successfully integrate and reallocate resources without unanticipated costs and that our efforts will not have unforeseen or unintended consequences. In addition, our ability to realize the benefits and synergies of the Sherritt Acquisition could be adversely impacted to the extent that relationships with existing or potential customers, suppliers or the Sherritt workforce is adversely affected as a consequence of the Sherritt Acquisition, as a result of further weakening of global economic conditions, or by practical or legal constraints on our ability to successfully integrate the operations of the Sherritt Assets.

We cannot assure you that we will successfully or cost-effectively integrate the Sherritt Assets into our operations in a timely manner, or at all, and we may not realize the anticipated benefits of the acquisition, including potential synergies or growth opportunities, to the extent or in the time frame anticipated. The failure to do so could have a material adverse effect on our financial condition, results of operations and business.

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We incurred and expect to continue to incur significant costs related to the Sherritt Acquisition that could have a material adverse effect on our operating results.

We expect to incur financial, legal, consulting and accounting costs of approximately $8.5 million in connection with the Sherritt Acquisition, and expect to incur approximately $17.5 million in fees and costs in connection with this offering of the New Notes, the net proceeds of which will finance the Sherritt Acquisition. We also anticipate that we will incur significant costs in connection with the integration of the Sherritt Assets which cannot be reasonably estimated at this time. These costs may have a material adverse effect on our cash flows and operating results in the periods in which they are recorded.

The acquisition of foreign companies and operations may subject us to additional risks.

We do not currently operate outside the United States. Upon consummation of the Sherritt Acquisition, a significant portion of our assets, operations and revenues will be located in Canada, and we will be subject to risks inherent in business operations outside of the United States. These risks include without limitation:

• impact of currency exchange rate fluctuations among the U.S. dollar, the Canadian dollar and foreign currencies relating to Sherritt’s export business, which may reduce the U.S. dollar value of the revenues, profits and cash flows we receive from non-U.S. markets or of our assets in non-U.S. countries or increase our supply costs, as measured in U.S. dollars in those markets;

• exchange controls and other limits on our ability to repatriate earnings from other countries;

• political or economic instability, social or labor unrest or changing macroeconomic conditions or other changes in political, economic or social conditions in the respective jurisdictions;

• different regulatory structures (including creditor rights that may be different than in the United States) and unexpected changes in regulatory environments, including changes resulting in potentially adverse tax consequences or imposition of onerous trade restrictions, price controls, industry controls, safety controls, employee welfare schemes or other government controls;

• increased financial accounting and reporting burdens and complexities resulting from the conversion and integration of the Sherritt Subsidiaries’ Canadian dollar denominated, non-GAAP results of operations and statement of financial condition into GAAP-complaint financial statements that can be consolidated with our historical financial reports;

• tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements or that may be subject to tax in the United States prior to repatriation and incremental taxes upon repatriation;

• difficulties and costs associated with complying with, and enforcement of remedies under, a wide variety of complex domestic and international laws, treaties and regulations;

• distribution costs, disruptions in shipping or reduced availability of freight transportation; and

• imposition of tariffs, quotas, trade barriers and other trade protection measures, in addition to import or export licensing requirements imposed by various foreign countries.

In addition, our management has limited experience managing foreign operations, and may be required to devote significant time and resources to adapting our systems, policies and procedures in order to successfully manage the integration and operation of foreign assets.

The Sherritt Assets include an export business, and the Sherritt Acquisition will therefore increase our exposure to the global coal market and the risks associated with exporting into that market.

Currently, we sell our coal production to United States customers, and do not have any significant export operations. The Sherritt Assets include a mine in western Canada that produces premium thermal coal for the Asian export market, and delivers that coal through committed port capacity in western Canada. There are significant financial and operational risks associated with the movement and delivery of coal in international markets with which we have limited experience. Our management team has limited operational experience managing an international coal export business or complying with regulations in multiple jurisdictions. See “-Risk Factors Relating to the Coal and Power Industries - Changes in the export and import markets for coal products could affect the demand for our coal, our pricing and our profitability” for a discussion of the additional financial and market risks we will be exposed to as a result of our increased participation in the international coal market. In addition, ownership and operation of an export business may result in an increasing amount of our cash and cash equivalents being held outside the U.S. Repatriation of these funds could be subject to delay for local country approvals and could have potentially adverse tax consequences.

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Economic conditions in Canada will have a direct impact on our business, financial condition, results of operations and cash flows.

Foreign economies, including the Canadian economy, may differ favorably or unfavorably from the United States economy in growth of gross national product, rate of inflation, market development, rate of savings, and capital investment, resource self-sufficiency and balance of payments positions, and in other respects. As a result of the Sherritt Acquisition, we will own and operate seven producing coal mines in Canada which sell a substantial majority of their aggregate production to Canadian utilities and other Canadian customers. Fluctuations in the Canadian economy will therefore directly and indirectly impact both the revenues and cost structure of these Canadian assets. As a result of the foregoing, our business, financial condition, results of operations and cash flows will be in part dependent on economic conditions in Canada.

Upon consummation of the Sherritt Acquisition, we will be subject to foreign exchange risk as a result of exposures to changes in currency exchange rates between the U.S. and Canada.

Upon consummation of the Sherritt Acquisition, we will be exposed to exchange rate fluctuations between the Canadian dollar and U.S. dollar. We will realize revenues from sales made from the Sherritt Assets in Canadian dollars, and many of the expenses incurred by the Sherritt Assets will also be recognized in Canadian Dollars. The exchange rate of the Canadian dollar to the U.S. dollar has been at or near historic highs in recent years. In the event that the Canadian dollar weakens in comparison to the U.S. dollar, earnings generated from Canadian operations will translate into reduced earnings in our consolidated statements of comprehensive loss reported in U.S. dollars. In addition, our Canadian subsidiaries also record certain accounts receivable and accounts payable, which are denominated in Canadian dollars. Foreign currency transactional gains and losses are realized upon settlement of these assets and obligations.

Following the Sherritt Acquisition, fluctuations in the U.S. dollar relative to the Canadian dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations. For purposes of accounting, the assets and liabilities of our Canadian operations will be translated using period-end exchange rates, and the revenues and expenses of our Canadian operations will be translated using average exchange rates during each period. Translation gains and losses are reported in accumulated other comprehensive loss as a component of stockholders’ equity.

The historical financial statements and resource reserve reporting of the Sherritt Subsidiaries differ from financial and reserve reporting in the United States.

The historical financial statements of the Sherritt Subsidiaries and the historical reserve and resource estimates and reports regarding the Sherritt Assets are not directly comparable to our financial statement and reserve report filings that are subject to SEC reporting and disclosure requirements. Sherritt and the Sherritt Subsidiaries have historically produced their financial statements and reports and reported reserves and resources in accordance with Canadian practices. Those practices are different from the practices used by us. In particular, we use GAAP as our primary set of financial reporting standards, whereas Sherritt has historically produced its financial statements under IFRS. The SEC also has specific rules applicable to the measurement and reporting of resource reserves of U.S. companies that differ from the Canadian reserve reporting requirements applicable to Sherritt. Accordingly, the financial information and statements and reserves and resources information contained in the reports filed by Sherritt with Canadian securities regulators and provided to our management in connection with the Sherritt Acquisition, are not directly comparable to our reserve and resources reporting information that is subject to the reporting and disclosure requirements of the SEC.

The Obed Mine Release into the Athabasca River prior to the Sherritt Acquisition may result in significant liability arising after closing of the Sherritt Acquisition.

On October 31, 2013, a breach of an onsite water containment pond occurred at Sherritt’s Obed Mountain Mine near Hinton, Alberta (the “Obed Mine Release”). The contents of the release included 670,000 cubic meters of process water and low concentrations of suspended solids, mainly, clay, soil, shale and particles of coal. The released sediment, including organic debris it collected in its path, entered the Athabasca River. Sherritt notified the environmental regulators immediately upon discovery of the breach. On November 19, 2013, Alberta Environment and Sustainable Resource Development issued an environmental protection order. The order requires Sherritt to develop and implement assessment, management and remediation plans relating to the impact of the Obed Mine Release. Such plans will include short- and long-term plans for impact assessment, the recovery of solids, wildlife mitigation, waste management and mine wastewater management. Current work continues on impact assessment, next-stage remediation activities and the finalization of short-, medium- and long-term monitoring plans. After closing of the Sherritt Acquisition, Sherritt will work with the regulators and us on the remediation plan. Although the Arrangement Agreement requires that Sherritt indemnify us for losses resulting from the Obed Mine Release, we may not be able to recover all of such losses if we should elect to pursue any claims we may have against Sherritt pursuant to such indemnification provisions or otherwise.

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Canadian  licenses, permits and other authorizations may be subject to challenges based on Aboriginal or Treaty rights.

Section 35 of the Canadian Constitution Act of 1982, the Natural Resources Transfers Agreements of 1930 and certain Canadian judicial decisions have recognized and affirmed the continued existence of Aboriginal and Treaty rights in Canada, including in some circumstances title to lands continuously used or occupied by Aboriginal groups, as well as harvesting and other rights relating to Aboriginal groups’ traditional territories. In most cases, the precise nature and contours of these rights as well as their geographic scope remain undefined at this time, and are or may be the subject to ongoing or future claims, court cases and negotiations of significant complexity.

Pending resolution of such claims, the Supreme Court of Canada has also recognized a Crown obligation to consult with and, in some circumstances, accommodate Aboriginal interests where the Crown undertakes actions or contemplates decisions that could adversely affect claimed or established Aboriginal or Treaty rights. While this duty lies with the federal and provincial Crowns, it may have a significant impact on private mineral and other proprietary interests.

Mineral and other proprietary interests held by the Sherritt Subsidiaries may now or in the future be the subject of Aboriginal land or rights claims. The impact of any such claims on the Sherritt Subsidiaries’ mineral and other proprietary cannot be predicted with any degree of certainty and no assurance can be given that a recognition of Aboriginal rights in the area in which such mineral and other proprietary rights are located, by way of a negotiated settlement or judicial pronouncement, would not have an adverse effect on the Sherritt Subsidiaries’ activities.

As issues relating to Aboriginal and Treaty rights and consultation continue to be argued, developed and resolved in Canadian courts, we will continue to cooperate, communicate and exchange information and views with Aboriginal groups and government, and participate with the Crown in its consultation processes with Aboriginal groups in order to foster good relationships and minimize risks to mineral rights and operational plans. Due to their complexity, it is not expected that the issues regarding Aboriginal and Treaty rights or consultation will be finally resolved in the short term and, accordingly, the impact of these issues on mineral and other proprietary rights and on mining operations is unknown at this time.

Should a dispute arise between one or more Aboriginal groups and the Crown, it could significantly affect the Sherritt Subsidiaries’ mineral and other proprietary interests and operations and could have a detrimental impact on our financial condition and results of operations.

ITEM 1B — UNRESOLVED STAFF COMMENTS.

None

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ITEM 2 — PROPERTIES.

See “Coal Segment-Properties” and “Power Segment” under Item 1 for information relating to our properties and reserves.

ITEM 3 — 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 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-K.

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PART II

ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is listed and traded on the NASDAQ Global Market under the symbol WLB.

Holders

As of February 26, 2014, based on inquiry there were 1,114 holders of record of our common stock.

The following table shows the range of sales prices for our common stock for the past two years, as reported by the NASDAQ Global Market.

	Sales Prices Common Stock
	High		Low
2012
First Quarter	$	13.47	$	9.78
Second Quarter	11.39		6.94
Third Quarter	10.00		7.00
Fourth Quarter	10.85		7.91
2013
First Quarter	$	12.00	$	9.40
Second Quarter	12.30		10.77
Third Quarter	13.79		10.96
Fourth Quarter	19.75		12.91

Dividend Policy

Holders of our common stock are entitled to receive such dividends as our Board may declare from time to time from any surplus that we may have. We have not paid dividends on our common stock for some time and we do not anticipate paying any common stock dividends in the foreseeable future. In addition, the Indenture governing the 10.75% Senior Notes restricts our ability to pay dividends on, or make other distributions in respect of, our capital stock unless we are able to meet certain ratio tests or other financial requirements. Should we be permitted to pay dividends pursuant to such Indenture, the payment of such dividends will be dependent upon earnings, financial condition and other factors considered relevant by our Board and will be subject to limitations imposed under Delaware law.

Issuer Purchase of Equity Securities

None.

Stock Performance Graph

This performance graph compares the cumulative total stockholder return on our common stock for the five-year period December 31, 2008 through December 31, 2013 with the cumulative total return over the same period of the NASDAQ Index and a peer group index, which consists of Alliance Resource Partners, L.P., Cloud Peak Energy, Inc., James River Coal Company, Rhino Resource Partners, L.P., and Patriot Coal Corporation. The graph assumes that:

• You invested $100 in Westmoreland Coal common stock and in each index at the closing price on December 31, 2008;

• All dividends were reinvested;

• Annual reweighting of the peer groups; and

• You continued to hold your investment through December 31, 2013.

You are cautioned against drawing any conclusions from the data contained in this graph, as past results are not necessarily indicative of future performance. The indices used are included for comparative purposes only and do not indicate an opinion of management that such indices are necessarily an appropriate measure of the relative performance of our common stock.

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	At December 31,
Company/Market/Peer Group	2008		2009		2010		2011		2012		2013
Westmoreland Coal Company	$	100.00	$	80.27	$	107.57	$	114.86	$	84.14	$	173.78
NYSE MKT Composite Index	$	100.00	$	135.54	$	170.14	$	180.78	$	192.88	$	205.73
NASDAQ Financial Index	$	100.00	$	104.72	$	118.91	$	108.61	$	130.37	$	183.49
Peer Group Index	$	100.00	$	164.98	$	235.72	$	189.52	$	137.16	$	164.23

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ITEM 6 —SELECTED FINANCIAL DATA.

Westmoreland Coal Company and Subsidiaries

Five-Year Review

Consolidated Statements of Operations Information	2013			2012 (2)			2011			2010			2009
	(In thousands; except per share data)
Revenues	$	674,686		$	600,437		$	501,713		$	506,057		$	443,368
Operating income (loss)	25,362			28,872			10,626			20,521			(31,774		)
Loss from continuing operations(1)	(8,127		)	(13,662		)	(36,875		)	(3,170		)	(29,162		)
Less net loss attributable to noncontrolling interest	(3,430		)	(6,436		)	(3,775		)	(2,645		)	(1,817		)
Less preferred stock dividend requirements	1,360			1,360			1,360			1,360			1,360
Net loss applicable to common shareholders	$	(6,057	)	$	(8,586	)	$	(34,460	)	$	(1,885	)	$	(28,705	)
Per common share (basic and diluted):
Loss from continuing operations	$	(0.42	)	$	(0.61	)	$	(2.61	)	$	(0.17	)	$	(2.88	)
Net loss applicable to common shareholders	$	(0.42	)	$	(0.61	)	$	(2.61	)	$	(0.17	)	$	(2.88	)
Balance Sheet Information (end of period)
Working capital deficit	$	(7,989	)	$	(11,600	)	$	(21,669	)	$	(35,793	)	$	(74,976	)
Net property, plant and equipment	490,036			512,840			396,732			416,955			456,184
Total assets	946,685			936,115			759,172			750,306			772,728
Total debt	339,837			360,989			282,269			242,104			254,695
Shareholders’ deficit	(187,879		)	(286,231		)	(249,858		)	(162,355		)	(141,799		)
Other Data:
Net cash provided by (used in):
Operating activities	$	80,717		$	57,144		$	44,735		$	45,353		$	29,448
Investing activities	(21,897		)	(123,534		)	(33,639		)	(29,180		)	(38,597		)
Financing activities	(29,320		)	67,217			13,912			(20,917		)	(20,273		)
Capital expenditures	28,591			21,032			27,594			22,814			34,546
Adjusted EBITDA(3)	116,265			105,432			73,116			81,616			30,301
Tons sold	24,927			21,745			21,816			25,152			24,252

____________________ 

(1) Includes a loss on extinguishment of debt of $0.1 million, $2.0 million and $17.0 million in 2013, 2012 and 2011, respectively. Includes a non-cash tax benefit of $4.9 million in 2013 and $17.1 million in 2009. Includes restructuring charges of $5.1 million in 2013.

(2) On January 31, 2012, we acquired the Kemmerer Mine. Our results of operations include Kemmerer’s results of operations from the date of acquisition. Kemmerer's results are reflected in our Coal Segment. In addition, on January 31, 2012, we completed the issuance and sale of $125.0 million aggregate principal amount of 10.75% Senior Notes due 2018 at a price equal to approximately 95.5% of their face value (the "Add-On Notes"). The majority of the proceeds from the sale of the Add-On Notes were used to finance the acquisition of the Kemmerer Mine. See Note 2 to our consolidated financial statements for additional details.

(3) Adjusted EBITDA , a non-GAAP measure, is defined and reconciled to net loss at the end of this “Selected Financial Data" section.

We did not declare cash dividends on common shares for the five years ended December 31, 2013. The financial data presented above should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operation in Part II, Item 7 of this report, which includes a discussion of factors that materially affect the comparability of the information presented, and in conjunction with our consolidated financial statements included in this report.

Reconciliation of Adjusted EBITDA to Net Loss

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

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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.

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.

	December 31,
	2013			2012			2011			2010		2009
	(In thousands)
Reconciliation of Adjusted EBITDA to Net loss
Net loss	$	(8,127	)	$	(13,662	)	$	(36,875	)	(3,170	)	(29,162	)
Income tax (benefit) expense from continuing operations	(4,782		)	90			(426		)	(141	)	(17,136	)
Other (income) loss	(364		)	(723		)	2,572			2,587		(5,991	)
Interest income	(1,366		)	(1,496		)	(1,444		)	(1,747	)	(3,218	)
Loss on extinguishment of debt	64			1,986			17,030			—		—
Interest expense	39,937			42,677			29,769			22,992		23,733
Depreciation, depletion and amortization	67,231			57,145			45,594			44,690		44,254
Accretion of ARO and receivable	12,681			12,189			10,878			11,540		9,974
Amortization of intangible assets and liabilities	665			658			657			590		279
EBITDA	105,939			98,864			67,755			77,341		22,733
Restructuring charges	5,078			—			—			—		—
Customer reclamation claim	—			—			—			—		4,825
(Gain)/loss on sale of assets	(74		)	528			640			226		191
Share-based compensation	5,322			6,040			4,721			4,049		2,552
Adjusted EBITDA	$	116,265		$	105,432		$	73,116		81,616		30,301

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ITEM 7 —MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis contains forward-looking statements and estimates that involve risks and uncertainties. Actual results could differ materially from these estimates. Factors that could cause or contribute to differences from estimates include those discussed under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” contained in Item 1 above.

Overview

Westmoreland Coal Company is an energy company employing approximately 1,370 employees 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 24.9 million tons of coal in 2013. Our two principal operating segments are our coal segment and our power segment, in addition to two non-operating segments.

One of the major factors affecting the volume of coal that we sell in any given year is the domestic demand for coal-generated electric power, as well as the specific demand for coal by our customers. Numerous factors affect the domestic demand for electric power and the specific demands of customers including weather patterns, the presence of hydro or wind in our particular energy grids, environmental and legal challenges, political influences, energy policies, international and domestic economic conditions, power plant outages and other factors discussed herein.

We sell almost all of our coal and electricity production under long-term agreements. Our long-term coal contracts typically contain either full pass-through of our costs or price escalation and adjustment provisions, pursuant to which the price for our coal may be periodically revised in line with broad economic indicators such as the consumer price index, commodity-specific indices such as the PPI-light fuel oils index, and/or changes in our actual costs. We refer to these contracts as “cost protected” contracts.

For our contracts that are not cost protected in nature, we have exposure to inflation and price risk for supplies used in the normal course of production such as diesel fuel and explosives. In line with the worldwide mining industry, we have experienced increased operating costs for mining equipment, diesel fuel and other supplies, such as tires. We manage these items through strategic sourcing contracts in normal quantities with our suppliers and may use derivatives from time-to-time.

Recent Developments

Sherritt Acquisition

As we have previously announced, on December 24, 2013, we entered into an agreement to acquire the coal operations of Sherritt International Corporation, or Sherritt, which consist of its Prairie and Mountain coal mining operations. These operations included seven producing thermal coal mines in the Canadian provinces of Alberta and Saskatchewan, a 50% interest in an activated carbon plant and a Char production facility. The purchase price of $435 million will be made up of $293 million of cash consideration and the assumption of an estimated $142 million of capital lease liabilities, subject to certain adjustments provided for in the agreement, relating to, among other things, working capital, indebtedness, pension plan funding and coal inventory. Acquisition-related costs of $2.9 million have been expensed for the year ended December 31, 2013, and are included in Selling and administrative costs. We expect this acquisition to be completed by the end of the first quarter of 2014.

On February 7, 2014, we closed on a private offering of $425 million in aggregate principal amount of 10.75% Senior Secured Notes due 2018 at a price of 106.875% plus accrued interest from February 1, 2014. The net proceeds of the offering of the new notes will finance the approximately $293 million cash portion of the purchase price, an estimated $58 million to satisfy the cash bonding obligations for the Sherritt mines and cash transaction costs associated with the acquisition and this offering of new notes of approximately $26 million. The remaining balance of the proceeds will be used to fund the prepayment of the WML Notes and for other general corporate purposes. The proceeds will be held in escrow pending the completion of the acquisition.

In connection with the acquisition, we intend to amend our existing corporate revolving credit agreement to increase the maximum available borrowing amount to approximately $60 - $70 million (which we may increase to $100 million at our discretion), with a subfacility for letters of credit in an amount of up to $30 million. The acquisition is not contingent on our increasing such available borrowing capacity and it is possible that such increase will not be implemented until after the consummation of the acquisition.

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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.

Our partner did not extend the ICTC monetization transaction, and it expired on December 31, 2013. As a result, we have unwound the transaction as of December 31, 2013 and concerning our balance sheet have decreased Other liabilities by $19.1 million and decreased Noncontrolling interest by $18.1 million. As a result, as of December 31, 2013, the noncontrolling interest was eliminated. Since 2009, we have experienced a yearly average of $3.1 million of income and $6.1 million of cash receipts from the ICTC. We are currently pursuing future monetization of the ICTC in the event that the IRS extends the ICTC beyond December 31, 2013.

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. Unit 3 resumed operations during October 2013. WRI, our wholly owned subsidiary that operates the Absaloka Mine, maintains business interruption insurance coverage and has recognized $16.2 million of income for the year ended December 31, 2013 and $17.3 million of income for the year ended December 31, 2012. We received $13.4 million of cash proceeds for the year ended December 31, 2013. Insurance proceeds are included in Net cash provided by operating activities. At the time Unit 3 resumed operations, we no longer recorded income from business interruption insurance. Subsequent to December 31, 2013, we have collected all cash proceeds due to us.

ROVA Restructuring

On December 23, 2013, we entered into an agreement with Dominion Virginia Power, a subsidiary of Dominion, to restructure the remaining five years of the ROVA I and ROVA II contracts. From January 2014 through March 2019, we will keep ROVA ready to operate and expect to run the plants during high demand energy periods, but will likely not operate it for Dominion. We will additionally buy power from a power provider at a fixed price, and will supply Dominion that power. We can also operate the plant and sell power to the open market if we choose. At current marker conditions, we expect increased power segment revenues, but slightly decreased power segment profits and operating cash flows due to the restructuring.

We incurred restructuring charges of $5.1 million for the year ended December 31, 2013 primarily related to consulting and legal fees. The restructuring plan is expected to be complete by March 31, 2014. We expect that the aggregate $5.1 million of expenditures will be cash expenditures paid out of operating cash flows in the first quarter of 2014.

Results of Operations

Items that Affect Comparability of Our Results

For 2013 and each of the prior two years, our results have included items that do not relate directly to ongoing operations. The income (expense) components of these items were as follows:

Year Ended December 31,	2013			2012			2011
	(In thousands)
Loss on extinguishment of debt	$	(64	)	$	(1,986	)	$	(17,030	)
Restructuring charges	(5,078		)	—			—
Fair value adjustment on derivative and related amortization of debt discount	—			—			(3,215		)
Impact (pre-tax)	$	(5,142	)	$	(1,986	)	$	(20,245	)
Tax effect of other comprehensive income gains	$	4,892		$	—		$	—

Items recorded in 2013

• We recorded $0.1 million of loss on extinguishment of debt related to repurchases of 10.75% Senior Notes with a principal amount of $0.5 million. The loss on the repurchases was measured based on the carrying value of the repurchased portion of the 10.75% Senior Notes, which included a portion of the unamortized debt issue costs and the debt discount on the dates of repurchase.

• We recorded $5.1 million of restructuring charges related to the ROVA restructuring.

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• We recorded an income tax benefit of $4.9 million related to a tax effect of other comprehensive income gains, primarily related to decreases in our pension and postretirement medical obligations.

Items recorded in 2012

• We recorded $2.0 million of loss on extinguishment of debt related to repurchases of 10.75% Senior Notes with a principal amount of $23.0 million. The loss on the repurchases was measured based on the carrying value of the repurchased portion of the 10.75% Senior Notes, which included a portion of the unamortized debt issue costs and the debt discount on the dates of repurchase.

Items recorded in 2011

• We recorded $17.0 million of loss on extinguishment of debt as a result of the initial offering of the 10.75% Senior Notes. The loss included a $9.1 million make-whole payment for ROVA’s debt and $7.9 million of non-cash write-offs of unamortized discount on debt and related capitalized debt costs and convertible debt conversion expense.

• Upon the initial offering of the 10.75% Senior Notes and subsequent retirement of our convertible debt, we recorded an expense of $3.1 million resulting from the mark-to-market accounting for the conversion feature in the notes with $0.1 million of interest expense of a related debt discount.

2013 Compared to 2012

Summary

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

	Year Ended December 31,
							Increase / (Decrease)
	2013			2012			$		%
	(In millions)
Revenues	$	674.7		$	600.4		$	74.3	12.4	%
Net loss applicable to common shareholders	(6.1		)	(8.6		)	2.5		29.1	%
Adjusted EBITDA(1)	116.3			105.4			10.9		10.3	%

____________________

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

Our revenues for 2013 increased primarily due to stronger power demand, favorable weather conditions and one additional month of Kemmerer operations. A new customer and Unit 3 resuming operations at our Absaloka Mine also contributed to increased revenues. In addition, our ROVA power plant experienced improved performance and fewer unplanned outages.

Our net loss applicable to common shareholders for 2013 decreased by $0.8 million, excluding $0.2 million of expense during 2013 and $2.0 million of expense during 2012 discussed in Items that Affect Comparability of Our Results. The primary factors, in aggregate, driving this decrease in net loss were:

	2013
	(In millions)
Decrease in interest expense due to lower debt levels.	$	2.7
Decrease in our corporate segment operating expenses due primarily to improved performance at our captive insurance entity and one-time recruiting and compensation expenses.	1.9
Increase in our power segment operating income due improved performance and fewer unplanned outages.	1.7
Decrease in our coal segment primarily due to costs incurred to increase production levels at the Absaloka Mine, higher royalty coal mined at the Kemmerer Mine, a contract adjustment related to employee benefit costs, depreciation adjustments and acquisition costs.	(5.3		)
Decrease due to other factors	(0.2		)
Total	$	0.8

44

Coal Segment Operating Results

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

	Year Ended December 31,
					Increase / (Decrease)
	2013		2012		$			%
	(In thousands, expect per ton data)
Revenues	$	587,119	$	519,152	$	67,967		13.1	%
Operating income	44,471		48,235		(3,764		)	(7.8	)%
Adjusted EBITDA(1)	116,604		110,835		5,769			5.2	%
Tons sold—millions of equivalent tons	24.9		21.7		3.2			14.7	%

____________________

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

Our 2013 coal segment revenues increased primarily due to stronger power demand, favorable weather conditions and one additional month of Kemmerer operations. A new customer and Unit 3 resuming operations at our Absaloka Mine also contributed to increased revenues. These positive factors allowed us to overcome the impact of two significant unplanned customer outages which occurred during 2013. Operating income decreased due to higher costs at the Absaloka Mine in preparation for new contracts and higher production levels, higher royalty coal mined at the Kemmerer Mine, a contract adjustment related to employee benefit costs, depreciation adjustments, and acquisition costs. These decreases in operating income were partially offset with increased revenues described above.

Power Segment Operating Results

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

	Year Ended December 31,
					Increase / (Decrease)
	2013		2012		$			%
	(In thousands)
Revenues	$	87,567	$	81,285	$	6,282		7.7	%
Operating income	4,907		8,244		(3,337		)	(40.5	)%
Adjusted EBITDA(1)	20,886		19,054		1,832			9.6	%
Megawatts hours	1,566		1,477		89			6.0	%

____________________ 

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

Our 2013 power segment revenues, operating income (excluding $5.1 million of expenses discussed in Items that Affect Comparability of Our Results) and megawatt hours increased due to improved performance and fewer unplanned outages at our ROVA power plant.

Heritage Segment Operating Results

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

	Year Ended December 31,
					Increase / (Decrease)
	2013		2012		$			%
	(In thousands)
Heritage segment operating expenses	$	14,498	$	14,711	$	(213	)	(1.4	)%

Our 2013 heritage segment operating expenses were comparable to 2012.

45

Corporate Segment Operating Results

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

	Year Ended December 31,
					Increase / (Decrease)
	2013		2012		$			%
	(In thousands)
Corporate segment operating expenses	$	9,518	$	12,896	$	(3,378	)	(26.2	)%

Our 2013 corporate segment operating expenses decreased primarily due to a 2012 deductible on a claim paid by our captive insurance entity related to the business interruption claim at our Absaloka Mine, 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 improved performance at our captive insurance entity and one-time recruiting and compensation expenses.

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

Our interest expense for 2013 decreased to $39.9 million compared with $42.7 million for 2012 primarily due to lower overall debt levels.

Our interest income and other income for 2013 was comparable to 2012.

Our income tax benefit for 2013 was comparable to 2012, excluding $4.9 million of income discussed in Items that Affect Comparability of Our Results.

Our loss attributable to noncontrolling interest for 2013 decreased to $3.4 million compared with $6.4 million for 2012 related to decreased losses from a partially owned consolidated subsidiary.

2012 Compared to 2011

Summary

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

	Year Ended December 31,
							Increase / (Decrease)
	2012			2011			$		%
	(In millions)
Revenues	$	600.4		$	501.7		$	98.7	19.7	%
Net loss applicable to common shareholders	(8.6		)	(34.5		)	25.9		75.1	%
Adjusted EBITDA(1)	105.4			73.1			32.3		44.2	%

____________________ 

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

Our revenues for 2012 increased due primarily to the Kemmerer acquisition, which was partially offset by unplanned customer shutdowns at our Beulah and Absaloka Mines, as well as reduced tonnage demand due to increased wind generation and mild weather conditions. Our revenues also decreased due to ROVA having a large planned maintenance outage during the second quarter and increased unplanned outages.

Our net loss applicable to common shareholders for 2012 decreased by $7.6 million, excluding $2.0 million of expense during 2012 and $20.2 million of expense during 2011 discussed in Items that Affect Comparability of Our Results. The primary factors, in aggregate, driving this decrease in net loss were:

46

	2012
	(In millions)
Increase in our coal segment operating income primarily due to the Kemmerer acquisition	$	19.3
Decrease in our heritage segment operating expenses due to favorable claims experience related to our black lung and workers' compensation benefits	5.0
Increased noncontrolling interest losses from a partially owned consolidated subsidiary	2.7
Increase in interest expense resulting from the Add-On Notes	(13.0		)
Decrease in our power segment operating income due to a large planned maintenance outage and increased unplanned outages	(3.9		)
Increase in our corporate segment operating expenses primarily due to one-time executive recruiting and higher long-term compensation expenses	(2.1		)
Decrease due to other factors	(0.4		)
Total	$	7.6

Coal Segment Operating Results

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

	Year Ended December 31,
					Increase / (Decrease)
	2012		2011		$			%
	(In thousands, expect per ton data)
Revenues	$	519,152	$	414,928	$	104,224		25.1	%
Operating income	48,235		27,453		20,782			75.7	%
Adjusted EBITDA(1)	110,835		76,821		34,014			44.3	%
Tons sold—millions of equivalent tons	21.7		21.8		(0.1		)	(0.5	)%

____________________ 

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

Our 2012 coal segment revenues and operating income increased primarily due to the Kemmerer acquisition, which was partially offset by unplanned customer shutdowns at our Beulah and Absaloka Mines, as well as reduced tonnage demand due to increased wind generation and mild weather conditions. Business interruption insurance proceeds have reduced most of the Absaloka Mine's decrease in operating income that was due to the fire and have been reported in Other operating income. Overall tons sold decreased primarily due to lower sales at our Absaloka Mine, which was partially offset with tons sold at our Kemmerer Mine.

Power Segment Operating Results

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

	Year Ended December 31,
					Increase / (Decrease)
	2012		2011		$			%
	(In thousands)
Revenues	$	81,285	$	86,785	$	(5,500	)	(6.3	)%
Operating income	8,244		12,119		(3,875		)	(32.0	)%
Adjusted EBITDA(1)	19,054		23,191		(4,137		)	(17.8	)%
Megawatts hours	1,477		1,607		(130		)	(8.1	)%

____________________ 

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

Our 2012 power segment revenues, operating income and megawatt hours decreased due to a large planned maintenance outage during the second quarter and the significant extent of unplanned outages at ROVA.

47

Heritage Segment Operating Results

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

	Year Ended December 31,
					Increase / (Decrease)
	2012		2011		$			%
	(In thousands)
Heritage segment operating expenses	$	14,711	$	19,675	$	(4,964	)	(25.2	)%

Our 2012 heritage segment operating expenses decreased primarily due to favorable claims experience related to our black lung and workers' compensation benefits.

Corporate Segment Operating Results

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

	Year Ended December 31,
					Increase / (Decrease)
	2012		2011		$		%
	(In thousands)
Corporate segment operating expenses	$	12,896	$	9,271	$	3,625	39.1	%

Our 2012 corporate segment operating expenses increased partly 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. Additionally, corporate segment operating expenses increased due to one-time executive recruiting and higher long-term compensation expenses.

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

Our interest expense for 2012 increased to $42.7 million compared with $29.8 million for 2011 primarily due to the higher overall debt levels resulting from the offering of the Add-On Notes.

Our interest income for 2012 was comparable to 2011.

Our other income (loss) for 2012 was comparable to 2011, excluding the $3.1 million impact of the mark-to-market accounting discussed in Items that Affect Comparability of Our Results.

Our income tax expense for 2012 increased to $0.1 million compared with $0.4 million tax benefit for 2011 due to higher taxable income.

Our loss attributable to noncontrolling interest for 2012 increased to $6.4 million compared with $3.8 million for 2011 related to increased losses from a partially owned consolidated subsidiary.

Reconciliation of Adjusted EBITDA to Net Loss and from Adjusted EBITDA to net cash provided by operating activities

The discussion in “Results of Operations” in 2013, 2012 and 2011 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.

48

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 and from Adjusted EBITDA to net cash provided by operating activities, the most directly comparable GAAP financial measures.

	For the Years Ended December 31,
	2013			2012			2011
	(In thousands)
Reconciliation of Adjusted EBITDA to Net loss
Net loss	$	(8,127	)	$	(13,662	)	$	(36,875	)
Income tax (benefit) expense from continuing operations	(4,782		)	90			(426		)
Other (income) loss	(364		)	(723		)	2,572
Interest income	(1,366		)	(1,496		)	(1,444		)
Loss on extinguishment of debt	64			1,986			17,030
Interest expense	39,937			42,677			29,769
Depreciation, depletion and amortization	67,231			57,145			45,594
Accretion of ARO and receivable	12,681			12,189			10,878
Amortization of intangible assets and liabilities	665			658			657
EBITDA	105,939			98,864			67,755
Restructuring charges	5,078			—			—
(Gain)/loss on sale of assets	(74		)	528			640
Share-based compensation	5,322			6,040			4,721
Adjusted EBITDA	$	116,265		$	105,432		$	73,116

49

	For the Years Ended December 31,
	2013			2012			2011
	(In thousands)
Reconciliation from Adjusted EBITDA to Net cash provided by operating activities
Adjusted EBITDA	$	116,265		$	105,432		$	73,116
Restructuring charges	(5,078		)	—			—
Interest expense	(39,937		)	(42,677		)	(29,769		)
Interest income	1,366			1,496			1,444
Other income (loss)	364			723			(2,572		)
Income tax benefit (expense)	4,782			(90		)	426
Non-cash tax benefits	(4,892		)	—			—
Amortization of deferred financing costs	3,731			4,358			2,515
Other	(1,001		)	—			—
Gain on sales of investment securities	(3		)	(165		)	(150		)
Loss on derivative instruments	—			—			3,079
Changes in operating assets and liabilities	5,120			(11,933		)	(3,354		)
Net cash provided by operating activities	$	80,717		$	57,144		$	44,735

	For the Years Ended December 31,
	2013			2012			2011
	(In thousands)
Adjusted EBITDA by Segment
Coal	$	116,604		$	110,835		$	76,821
Power	20,886			19,054			23,191
Heritage	(14,498		)	(14,711		)	(19,675		)
Corporate	(6,727		)	(9,746		)	(7,221		)
Total	$	116,265		$	105,432		$	73,116

	For the Years Ended December 31,
	2013		2012		2011
	(In thousands)
Adjusted EBITDA
Guarantor and Issuer	$	55,281	$	57,496	$	11,572
Non-Guarantor	60,984		47,936		61,544
Total	$	116,265	$	105,432	$	73,116

Significant Anticipated Variances between 2013 and 2014 and Related Uncertainties

We expect a number of factors to result in differences in our base business in our results of operation, financial condition and liquidity in 2014 relative to 2013, including the following:

• We expect increased coal ton deliveries primarily due to unexpected shutdowns in 2013 and new customers. This is anticipated to result in increased revenues and operating cash flows;

• We expect increased power revenues but slightly decreased power profits and cash flows due to the ROVA restructuring;

• We expect to make additional capital investments during 2014 in the range of $26.0 million to $31.0 million to improve our mining and power operations and decrease our equipment maintenance costs;

• We expect our pension and postretirement medical expenses to decrease as a result of increases in discount rates; and

• We expect our pension contributions to increase due to minimum contribution requirements.

50

Upon closing of the Sherritt Acquisition, we expect higher revenues and costs, capital investments and financing costs to produce positive net cash flows.

Liquidity and Capital Resources

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

	December 31,
	2013		2012
	(In millions)
Cash and cash equivalents	$	61.1	$	31.6
WML revolving line of credit	23.1		23.1
Corporate revolving line of credit	20.0		20.0
Total	$	104.2	$	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 credit agreement governing WML's credit facility requires a debt service account and imposes timing and other restrictions on the ability of WML to distribute funds to us. Upon closing of the Sherritt Acquisition and expected prepayment of the WML Notes, the debt service account will no longer be required and the funds in the account will be released from restriction. 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. While we did repurchase $23.0 million of 10.75% Senior Notes during 2012, we did not have Excess Cash Flow for the years ended December 31, 2012 or 2011. We did have $29.5 million of Excess Cash Flow for the year ended December 31, 2013 and will be required to offer $22.1 million for repurchase by April 30, 2014. We do not expect any of the notes to be repurchased as a result of this offer. In addition to the Excess Cash Flow offer, the Company may continue to use available cash to repurchase these notes on the open market, as permitted by the indenture. Also, the Company has the option on or after February 1, 2015 to repurchase these notes, in whole or in part, at the redemptions prices (expressed as percentages of principal amount) set forth below, if redeemed during the twelve-month period beginning February 1 of the years indicated:

Year	Optional Redemption Price
2015	103.583	%
2016	101.792	%
2017 and thereafter	100.000	%

In July 2013, we began contributing cash to our 401(k) plan instead of Company stock. Annual requirements for this funding approximates $3.5 million dollars.

51

Debt Obligations

10.75% Senior Notes

The 10.75% Senior Notes were outstanding in the principal amount of $251.5 million at December 31, 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 year ended December 31, 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 December 31, 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 December 31, 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 has $85.5 million of fixed rate term debt outstanding at December 31, 2013, referred to as the WML Notes. 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):

2014	$	18.0
2015	20.0
2016	20.0
2017	22.0
2018	5.5

In March 2013, we amended WML's revolving credit facility to extend the maturity date from June 26, 2013 to December 31, 2017. WML's credit facility has a borrowing limit of $25.0 million. The interest rate under the revolving credit facility at December 31, 2013 was 3.75% per annum. At December 31, 2013, WML had no outstanding balance under its credit facility and the credit facility supports a letter of credit of $1.9 million, leaving it with $23.1 million of borrowing availability. WML's credit facility 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 December 31, 2013 was 2.00 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 quarters then ended to be greater than a specified amount. The leverage ratio as of December 31, 2013 was 1.13, which did not exceed the maximum amount of 1.50. WML met all of its covenant requirements as of December 31, 2013.

52

The WML Notes and WML's 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.

Upon closing of the Sherritt Acquisition, the WML Notes will expect to be prepaid using a portion of the $425 million in proceeds from the offering of the New Notes and the WML credit facility will expect to be terminated.

Capital Leases

During the year ended December 31, 2013, we paid $2.7 million to purchase equipment under capital leases prior to their maturities 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 and from Adjusted EBITDA to net cash provided by operating activities.

	December 31,
	2013		2012
	(In millions)
Gross debt	$	339.8	$	361.0
Less:
Cash and cash equivalents	61.1		31.6
WML debt reserve account	13.1		13.1
Net debt	265.6		316.3
Adjusted EBITDA	116.3		105.4
Gross leverage ratio	2.92		3.43
Net leverage ratio	2.28		3.00

Heritage Health Costs and Pension Contributions

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

	2014 Expected		2013 Actual		2012 Actual		2011 Actual
	(In millions)
Postretirement medical benefits	$	13.8	$	12.0	$	12.0	$	12.0
CBF premiums	2.0		2.2		2.3		2.6
Workers’ compensation benefits	0.6		0.6		0.5		0.6
Total heritage health payments	16.4		14.8		14.8		15.2
Pension contributions (1)	4.3		0.6		0.2		7.5

____________________ 

(1) Of the 2011 pension contributions we made $4.3 million through the contribution of company stock.

53

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:

	Years Ended December 31,
	2013			2012
	(In thousands)
Cash provided by (used in):
Operating activities	$	80,717		$	57,144
Investing activities	(21,897		)	(123,534		)
Financing activities	(29,320		)	67,217

Cash provided by operating activities increased $23.6 million in 2013 compared to 2012, primarily due to stronger power demand, favorable weather conditions, the Kemmerer acquisition and a new customer at our Absaloka Mine. In addition, our ROVA power plant had fewer unplanned outages.

Cash used in investing activities decreased $101.6 million in 2013 compared to 2012 primarily due to the Kemmerer acquisition. Capital expenditures were $28.6 million and $21.0 million for 2013 and 2012, respectively.

Cash provided by financing activities decreased $96.5 million for 2013 compared to 2012, primarily due to the Kemmerer acquisition debt. Debt repayments were $28.1 million and $44.8 million for 2013 and 2012, respectively.

Our working capital deficit at December 31, 2013 decreased by $3.6 million to $8.0 million compared to a $11.6 million at December 31, 2012 primarily due to increased cash from operations described above.

Ratio of Earnings to Fixed Charges

The following table sets forth our ratio of earnings to fixed charges for the periods indicated:

	Year Ended December 31,
	2013		2012		2011		2010		2009
	(In thousands)
Deficiency of earnings to fixed charges	$	12,909	$	13,572	$	37,301	$	3,311	$	46,298

For purposes of calculating the ratio of earnings to fixed charges:

• “earnings” consist of loss from continuing operations before income taxes and fixed charges; and

• “fixed charges” consist of interest (expensed), amortization of premiums, discounts and deferred financing costs, and an estimate of the interest expense within rental expense.

Contractual Obligations and Commitments

The following table presents information about our contractual obligations and commitments as of December 31, 2013, and the effects we expect such obligations to have on liquidity and cash flow in future periods. Some of the amounts below are estimates. We discuss these obligations and commitments elsewhere in this filing.

	Payments Due by Period
	Total		2014		2015-2016		2017-2018		After 2018
	(In thousands)
Long-term debt obligations (principal and interest)	$	476,221	$	51,862	$	103,070	$	321,289	$	—
Capital lease obligations (principal and interest)	10,727		5,949		3,967		811		—
Operating lease obligations	17,407		7,896		7,740		1,771		—
Purchase obligations(1)	20,785		17,872		2,913		—		—
Other long-term liabilities(2)	1,247,951		46,112		104,740		111,283		985,816
Totals	$	1,773,091	$	129,691	$	222,430	$	435,154	$	985,816

_____________________

(1) Our purchase obligations relate to coal supply agreements for our power plants. See Note 15 to our consolidated financial statements for details.

54

(2) Represents benefit payments for our postretirement medical benefits, black lung, workers’ compensation, and combined benefit fund plans, as well as contributions for our defined benefit pension plans and final reclamation costs.

Critical Accounting Policies

Postretirement Medical Benefits

We have an obligation to provide postretirement medical benefits to our former employees and their dependents. Detailed information related to this liability is included in Note 6 to our consolidated financial statements.

Our liability for our employees’ postretirement medical benefit costs is recorded on our consolidated balance sheets in amounts equal to the actuarially determined liability, as this obligation is not funded. We use various assumptions including the discount rate and future cost trends, to estimate the cost and obligation for this item. Our discount rate for postretirement medical benefit is determined by utilizing a hypothetical bond portfolio model, which approximates the future cash flows necessary to service our liability. This model is calculated using a yield curve that is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields. Our discount rates at December 31, 2013 ranged from 4.50% - 5.05% compared to a range of 3.60% - 4.15% at December 31, 2012. In 2013, our postretirement medical benefit liability decreased $49.5 million primarily due to increases in discount rates.

We make assumptions related to future trends for medical care costs in the estimates of retiree health care obligations. Our medical trend assumption is developed by annually examining the historical trend of our cost per claim data and projecting forward the participant claims and our current benefit coverage. These projections include the continuation of cost savings we achieved in 2010 from the modernization of how we provide prescription drug benefits to retirees. If our assumptions do not materialize as expected, actual cash expenditures and costs that we incur could differ materially from our current estimates. Moreover, regulatory changes could increase our obligation to satisfy these or additional obligations.

The PPACA could potentially impact these benefits. The PPACA has both short-term and long-term implications on healthcare benefit plan standards. Implementation of this legislation is planned to occur in phases, with plan standard changes taking effect beginning in 2010, but to a greater extend with the 2011 benefit plan year and extending through 2018. We will continue to evaluate the impact of the PPACA in future periods as additional information, interpretations and guidance becomes available.

Below we have provided a sensitivity analysis to demonstrate the significance of the health care cost trend rate assumptions in relation to reported amounts.

	Postretirement Medical Benefits
Health Care Cost Trend Rate	1% Increase		1% Decrease
	(In thousands)
Effect on service and interest cost components	$	3,148	$	(2,442	)
Effect on postretirement medical benefit obligation	$	35,464	$	(30,096	)

Asset Retirement Obligations, Final Reclamation Costs and Reserve Estimates

Our asset retirement obligations primarily consist of cost estimates for final reclamation of surface land and support facilities at both surface mines and power plants in accordance with federal and state reclamation laws. Asset retirement obligations are based on projected pit configurations at the end of mining and are determined for each mine using estimates and assumptions including estimates of disturbed acreage as determined from engineering data, estimates of future costs to reclaim the disturbed acreage, the timing of these cash flows, and a credit-adjusted, risk-free rate. As changes in estimates occur such as mine plan revisions, changes in estimated costs, or changes in timing of the final reclamation activities, the obligation and asset are revised to reflect the new estimate after applying the appropriate credit-adjusted, risk-free rate to the changes. If our assumptions do not materialize as expected, actual cash expenditures and costs that we incur could be materially different from currently estimated. Moreover, regulatory changes could increase our obligation to perform final reclamation and mine closing activities.

Certain of our customers have either agreed to reimburse us for final reclamation expenditures as they are incurred or have pre-funded a portion of the expected reclamation costs. See additional information regarding our asset retirement obligations in Note 9 to our consolidated financial statements.

Income Taxes and Deferred Income Taxes

As of December 31, 2013, we had significant deferred tax assets. Our deferred tax assets include federal and state regular net operating losses (NOLs), alternative minimum tax (AMT), credit carryforwards, Indian Coal Tax Credits (ICTC)

55

carryforwards, and net deductible reversing temporary differences related to on-going differences between book and taxable income.

We believe we will be taxed under the AMT system for the foreseeable future due to the significant amount of statutory tax depletion in excess of book depletion expected to be generated by our mining operations. As a result, we have determined that a valuation allowance is required for all of our regular federal net operating loss carryforwards and AMT credit carryforwards since they are only available to offset future regular taxes.

We have recorded a full valuation allowance for all of our state NOLs since we believe they will not be realized.

We have determined that a full valuation allowance is required for all of our ICTC carryforward. The ICTC can generally be used to offset AMT liability. We do not believe we have sufficient positive evidence to substantiate that our deferred tax asset for the ICTC carryforward is realizable at a more-likely-than-not level of assurance. As a result, we will continue to record a full valuation allowance on our ICTC carryforward.

We have determined that since our net deductible temporary differences will not reverse for the foreseeable future, and we are unable to forecast when we will have regular taxable income when they do reverse, a full valuation allowance is required for these deferred tax assets.

The tax effect of pretax income or loss from continuing operations is generally determined by a computation that does not consider the tax effects of items that are not included in continuing operations. The exception to that incremental approach is that all items (for example, items recorded in other comprehensive income, extraordinary items, and discontinued operations) be considered in determining the amount of tax benefit that results from a loss from continuing operations and that shall be allocated to continuing operations.

Recent Accounting Pronouncements

The accounting standards adopted in 2013 did not have a material impact on our consolidated financial statements. See Note 1 to our consolidated financial statements for a discussion of recently adopted accounting pronouncements.

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.

We use a combination of surety bonds and letters of credit to secure our financial obligations for reclamation, workers’ compensation, postretirement medical benefit and other obligations as follows as of December 31, 2013:

	Reclamation Obligations		Workers’ Compensation Obligations		Post Retirement Medical Benefit Obligations		Other		Total
	(In thousands)
Surety bonds	$	298,562	$	9,113	$	9,068	$	7,435	$	324,178
Letters of credit	—		—		—		8,556		8,556
	$	298,562	$	9,113	$	9,068	$	15,991	$	332,734

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to market risk, which includes adverse changes in commodity prices and interest rates, and credit risk.

Commodity Price Risk

We manage our price risk for coal sales, electricity and steam production through the use of long-term agreements, rather than through the use of derivatives. Nearly all of our coal and our electricity production are sold under long-term agreements. These coal contracts typically contain price escalation and adjustment provisions, pursuant to which the price for our coal may be periodically revised. The price may be adjusted in accordance with changes in broad economic indicators such as the consumer price index, commodity-specific indices such as the PPI-light fuel oils index, and/or changes in our actual costs.

56

For our contracts which are not cost protected, we have exposure to price risk for supplies that are used in the normal course of production such as diesel fuel and explosives. We manage these items through strategic sourcing contracts in normal quantities with our suppliers and may use derivatives from time to time. At December 31, 2013, we had fuel supply contracts outstanding with a minimum purchase requirement of 4.0 million gallons of diesel fuel per year. These contracts qualify for the normal purchase normal sale exception under hedge accounting.

Interest Rate Risk

We are exposed to market risk associated with interest rates due to our existing indebtedness that is indexed to either prime rate or LIBOR. However, based on the balances outstanding as of December 31, 2013, our exposure to interest rate risk is not material as of such date. In the future, if we were to draw on our WML or Corporate revolving line of credit, or if we enter into a new credit facility indexed to a variable interest rate, such as the prime rate or LIBOR, then we would be exposed to market risk associated with interest rates. We have not historically used interest rate hedging instruments to manage our interest rate risk.

Credit Risk

We are exposed to credit loss in the event of non-performance by our counterparties. We attempt to manage this exposure by entering into agreements with counterparties that meet our credit standards and that are expected to fully satisfy their obligations under the contracts. These steps may not always be effective in addressing counterparty credit risk.

57

ITEM 8 —FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements	Page
Report of Independent Registered Public Accounting Firm	59
Consolidated Balance Sheets	60
Consolidated Statements of Operations	62
Consolidated Statements of Comprehensive Income (Loss)	63
Consolidated Statements of Shareholders’ Deficit	64
Consolidated Statements of Cash Flows	65
Notes to Consolidated Financial Statements	67

58

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Westmoreland Coal Company

        We have audited the accompanying consolidated balance sheets of Westmoreland Coal Company and subsidiaries (the "Company") as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ deficit, and cash flows for the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Westmoreland Coal Company and subsidiaries at December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 28, 2014 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Denver, Colorado

February 28, 2014

59

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

	December 31, 2013		December 31, 2012
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	61,110	$	31,610
Receivables:
Trade	66,196		60,037
Contractual third-party reclamation receivables	8,487		10,207
Other	5,086		3,220
	79,769		73,464
Inventories	39,972		37,734
Restricted investments and bond collateral	5,998		—
Other current assets	18,190		16,504
Total current assets	205,039		159,312
Property, plant and equipment:
Land and mineral rights	278,188		261,741
Plant and equipment	657,696		635,720
	935,884		897,461
Less accumulated depreciation, depletion and amortization	445,848		384,621
Net property, plant and equipment	490,036		512,840
Advanced coal royalties	7,311		4,316
Reclamation deposits	74,921		72,718
Restricted investments and bond collateral	69,235		87,209
Contractual third-party reclamation receivables, less current portion	88,303		84,158
Intangible assets, net of accumulated amortization of $14.1 million and $12.4 million at December 31, 2013 and December 31, 2012, respectively	1,520		3,203
Other assets	10,320		12,359
Total Assets	$	946,685	$	936,115

See accompanying Notes to Consolidated Financial Statements.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets (Continued)

	December 31, 2013			December 31, 2012
	(In thousands)
Liabilities and Shareholders’ Deficit
Current liabilities:
Current installments of long-term debt	$	44,343		$	23,791
Accounts payable and accrued expenses:
Trade	57,507			52,093
Production taxes	41,905			33,228
Workers’ compensation	717			820
Postretirement medical benefits	13,955			14,068
SERP	390			390
Deferred revenue	14,068			12,822
Asset retirement obligations	23,353			22,238
Other current liabilities	16,790			11,462
Total current liabilities	213,028			170,912
Long-term debt, less current installments	295,494			337,198
Workers’ compensation, less current portion	6,744			8,710
Excess of black lung benefit obligation over trust assets	8,675			8,356
Postretirement medical benefits, less current portion	270,374			319,775
Pension and SERP obligations, less current portion	24,176			54,250
Deferred revenue, less current portion	46,567			56,891
Asset retirement obligations, less current portion	256,511			241,609
Intangible liabilities, net of accumulated amortization of $12.4 million at December 31, 2013 and $11.4 million at December 31, 2012, respectively	5,606			6,625
Other liabilities	7,389			18,020
Total liabilities	1,134,564			1,222,346
Shareholders’ deficit:
Preferred stock of $1.00 par value
Authorized 5,000,000 shares; Issued and outstanding 159,960 shares at December 31, 2013 and 2012	160			160
Common stock of $2.50 par value
Authorized 30,000,000 shares; Issued and outstanding 14,592,231 shares at December 31, 2013 and 14,201,411 shares at December 31, 2012, respectively	36,479			35,502
Other paid-in capital	134,861			130,852
Accumulated other comprehensive loss	(63,595		)	(148,345		)
Accumulated deficit	(295,784		)	(289,727		)
Total Westmoreland Coal Company shareholders’ deficit	(187,879		)	(271,558		)
Noncontrolling interest	—			(14,673		)
Total deficit	(187,879		)	(286,231		)
Total Liabilities and Shareholders’ Deficit	$	946,685		$	936,115

See accompanying Notes to Consolidated Financial Statements.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations

	Years Ended December 31,
	2013			2012			2011
	(In thousands, except per share data)
Revenues	$	674,686		$	600,437		$	501,713
Cost, expenses and other:
Cost of sales	535,320			466,521			392,787
Depreciation, depletion and amortization	67,231			57,145			45,594
Selling and administrative	50,721			49,908			40,276
Heritage health benefit expenses	13,418			13,388			18,575
Loss (gain) on sales of assets	(74		)	528			640
Restructuring charges	5,078			—			—
Other operating income	(22,370		)	(15,925		)	(6,785		)
	649,324			571,565			491,087
Operating income	25,362			28,872			10,626
Other income (expense):
Interest expense	(39,937		)	(42,677		)	(29,769		)
Loss on extinguishment of debt	(64		)	(1,986		)	(17,030		)
Interest income	1,366			1,496			1,444
Other income (loss)	364			723			(2,572		)
	(38,271		)	(42,444		)	(47,927		)
Loss before income taxes	(12,909		)	(13,572		)	(37,301		)
Income tax expense (benefit)	(4,782		)	90			(426		)
Net loss	(8,127		)	(13,662		)	(36,875		)
Less net loss attributable to noncontrolling interest	(3,430		)	(6,436		)	(3,775		)
Net loss attributable to the Parent company	(4,697		)	(7,226		)	(33,100		)
Less preferred stock dividend requirements	1,360			1,360			1,360
Net loss applicable to common shareholders	$	(6,057	)	$	(8,586	)	$	(34,460	)
Net loss per share applicable to common shareholders:
Basic and diluted	$	(0.42	)	$	(0.61	)	$	(2.61	)
Weighted average number of common shares outstanding:
Basic and diluted	14,491			14,033			13,192

See accompanying Notes to Consolidated Financial Statements.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

	Years Ended December 31,
	2013			2012			2011
	(In thousands)
Net loss	$	(8,127	)	$	(13,662	)	$	(36,875	)
Other comprehensive income (loss)
Pension and other postretirement plans:
Amortization of accumulated actuarial gains or losses, pension	3,490			2,960			1,647
Adjustments to accumulated actuarial losses, pension	28,974			(9,812		)	(15,798		)
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	4,005			2,572			(288		)
Adjustments to accumulated actuarial gains, postretirement medical benefits	53,230			(22,342		)	(49,136		)
Tax effect of other comprehensive income gains	(4,892		)	—			—
Unrealized and realized gains and losses on available-for-sale securities	(57		)	(268		)	(200		)
Other comprehensive income (loss)	84,750			(26,890		)	(63,775		)
Comprehensive income (loss) attributable to Westmoreland Coal Company	$	76,623		$	(40,552	)	$	(100,650	)

See accompanying Notes to Consolidated Financial Statements.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Deficit

Years Ended December 31, 2011, 2012 and 2013

	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, 2010	160,129		$	160	11,160,798	$	27,901	$	98,466		$	(57,680	)	$	(226,740	)	$	(4,462	)	$	(162,355	)
Preferred dividends declared	—		—		—	—		—			—			(21,301		)	—			(21,301		)
Common stock issued as compensation	—		—		240,118	600		4,121			—			—			—			4,721
Common stock options exercised	—		—		31,200	78		344			—			—			—			422
Conversion of convertible notes and securities	(169	)	—		1,879,098	4,698		20,787			—			—			—			25,485
Common stock issued to pension plan assets	—		—		450,000	1,125		3,132			—			—			—			4,257
Issuance of restricted stock	—		—		50,165	125		(562		)	—			—			—			(437		)
Net loss	—		—		—	—		—			—			(33,100		)	(3,775		)	(36,875		)
Other comprehensive loss	—		—		—	—		—			(63,775		)	—			—			(63,775		)
Balance at December 31, 2011	159,960		160		13,811,379	34,527		126,288			(121,455		)	(281,141		)	(8,237		)	(249,858		)
Preferred dividends declared	—		—		—	—		—			—			(1,360		)	—			(1,360		)
Common stock issued as compensation	—		—		323,432	808		5,232			—			—			—			6,040
Issuance of restricted stock	—		—		66,600	167		(668		)	—			—			—			(501		)
Net loss	—		—		—	—		—			—			(7,226		)	(6,436		)	(13,662		)
Other comprehensive loss	—		—		—	—		—			(26,890		)	—			—			(26,890		)
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	—		—		—	—		—			—			(1,360		)	—			(1,360		)
Common stock issued as compensation	—		—		224,129	560		4,762			—			—			—			5,322
Assumption of noncontrolling interest of subsidiary	—		—		—	—		—			—			—			18,103			18,103
Issuance of restricted stock	—		—		166,691	417		(753		)	—			—			—			(336		)
Net loss	—		—		—	—		—			—			(4,697		)	(3,430		)	(8,127		)
Other comprehensive income	—		—		—	—		—			84,750			—			—			84,750
Balance at December 31, 2013	159,960		$	160	14,592,231	$	36,479	$	134,861		$	(63,595	)	$	(295,784	)	$	—		$	(187,879	)

See accompanying Notes to Consolidated Financial Statements.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2013			2012			2011
	(In thousands)
Cash flows from operating activities:
Net loss	$	(8,127	)	$	(13,662	)	$	(36,875	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization	67,231			57,145			45,594
Accretion of asset retirement obligation and receivable	12,681			12,189			10,878
Non-cash tax benefits	(4,892		)	—			—
Amortization of intangible assets and liabilities, net	665			658			657
Share-based compensation	5,322			6,040			4,721
Loss (gain) on sales of assets	(74		)	528			640
Amortization of deferred financing costs	3,731			4,358			2,515
Other	(1,001		)	—			—
Loss on extinguishment of debt	64			1,986			17,030
Gain on sales of investment securities	(3		)	(165		)	(150		)
Loss on derivative instruments	—			—			3,079
Changes in operating assets and liabilities:
Receivables, net	(7,636		)	(12,855		)	5,491
Inventories	(2,512		)	(2,164		)	(2,125		)
Excess of black lung benefit obligation over trust assets	319			1,791			4,319
Accounts payable and accrued expenses	13,579			17,399			4,128
Deferred revenue	(9,078		)	(8,198		)	(9,918		)
Income tax payable	(1		)	—			—
Accrual for workers’ compensation	(2,069		)	(2,096		)	1,248
Asset retirement obligations	(9,410		)	(6,943		)	(6,510		)
Accrual for postretirement medical benefits	7,721			6,191			(1,643		)
Pension and SERP obligations	2,388			2,802			(1,278		)
Other assets and liabilities	11,819			(7,860		)	2,934
Net cash provided by operating activities	80,717			57,144			44,735
Cash flows from investing activities:
Additions to property, plant and equipment	(28,591		)	(21,032		)	(27,594		)
Change in restricted investments and bond collateral and reclamation deposits	1,434			(33,892		)	(5,986		)
Cash payments related to acquisitions	—			(72,522		)	(4,000		)
Net proceeds from sales of assets	902			480			687
Proceeds from the sale of restricted investments	8,287			4,106			3,350
Receivable from customer for property and equipment purchases	(389		)	(674		)	(96		)
Other	(3,540		)	—			—
Net cash used in investing activities	(21,897		)	(123,534		)	(33,639		)
Cash flows from financing activities:
Change in book overdrafts	310			(253		)	(724		)
Borrowings from long-term debt, net of debt discount	—			119,364			142,500
Repayments of long-term debt	(28,088		)	(44,846		)	(73,566		)

65

Borrowings on revolving lines of credit	7,000			16,500			87,200
Repayments on revolving lines of credit	(7,000		)	(16,500		)	(105,600		)
Debt issuance costs and other refinancing costs	(182		)	(5,688		)	(15,019		)
Preferred dividends paid	(1,360		)	(1,360		)	(21,301		)
Exercise of stock options	—			—			422
Net cash provided by (used in) financing activities	(29,320		)	67,217			13,912
Net increase in cash and cash equivalents	29,500			827			25,008
Cash and cash equivalents, beginning of year	31,610			30,783			5,775
Cash and cash equivalents, end of year	$	61,110		$	31,610		$	30,783
Supplemental disclosures of cash flow information:
Cash paid for interest	$	36,252		$	34,380		$	21,199
Cash paid (received) for income taxes	111			(73		)	(250		)
Non-cash transactions:
Accrued purchases of property and equipment	1,112			634			570
Capital leases and other financing sources	5,371			1,828			531

See accompanying Notes to Consolidated Financial Statements.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Westmoreland Coal Company, or the Company, Westmoreland, WCC, or the Parent, is an energy company. 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 power plants in North Carolina. The Company’s activities are primarily conducted through wholly owned subsidiaries.

The Company's Kemmerer Mine is owned by its subsidiary Westmoreland Kemmerer, Inc., or Kemmerer. The Company’s Absaloka Mine is owned by its wholly owned subsidiary Westmoreland Resources, Inc., or WRI. The right to mine coal at the Absaloka Mine had been subleased to an affiliated entity whose operations the Company controls, under which the sublease expired December 31, 2013; and as a result the right to mine coal at the Absaloka Mine reverts to WRI beginning in 2014. The Rosebud, Jewett, Beulah and Savage Mines are owned through the Company’s wholly owned subsidiary Westmoreland Mining LLC, or WML.

Sherritt Acquisition

On December 24, 2013, the Company entered into an agreement to acquire the coal operations of Sherritt International Corporation, or Sherritt, which consist of its Prairie and Mountain coal mining operations. These operations included seven producing thermal coal mines in the Canadian provinces of Alberta and Saskatchewan, a 50% interest in an activated carbon plant and a Char production facility. The purchase price of $435.0 million will be made up of $293.0 million of cash consideration and the assumption of an estimated $142 million of capital lease liabilities, subject to certain adjustments provided for in the agreement, relating to, among other things, working capital, indebtedness, pension plan funding and coal inventory. Acquisition-related costs of $2.9 million have been expensed for the year ended December 31, 2013, and are included in Selling and administrative costs. The Company expects this acquisition to be completed by the end of the first quarter of 2014.

On February 7, 2014, the Company closed on a private offering of $425.0 million in aggregate principal amount of 10.75% Senior Secured Notes due 2018 at a price of 106.875% plus accrued interest from February 1, 2014; referred to as the New Notes. The net proceeds of the offering of the new notes will finance the approximately $293 million cash portion of the purchase price, an estimated $58 million to satisfy the cash bonding obligations for the Sherritt mines and cash transaction costs associated with the acquisition and this offering of new notes of approximately $26.0 million. The remaining balance of the proceeds will be used to fund the prepayment of the WML Notes and for other general corporate purposes. The proceeds will be held in escrow pending the completion of the acquisition.

In connection with the acquisition, the Company intends to amend the existing corporate revolving credit agreement to increase the maximum available borrowing amount to approximately $60 - $70 million (which the Company may increase to $100 million at their discretion), with a subfacility for letters of credit in an amount of up to $30 million. The acquisition is not contingent on the Company increasing such available borrowing capacity and it is possible that such increase will not be implemented until after the consummation of the acquisition.

Consolidation Policy

The Consolidated Financial Statements of Westmoreland Coal Company include the accounts of the Company and its controlled subsidiaries. The Company consolidates any variable interest entity, or VIE, for which the Company is considered the primary beneficiary. The Company provides for noncontrolling interests in consolidated subsidiaries, in which the Company’s ownership is less than 100 percent. All intercompany accounts and transactions have been eliminated.

A VIE is an entity that is unable to make significant decisions about its activities or does not have the obligation to absorb losses or the right to receive returns generated by its operations. If the entity meets one of these characteristics, then the Company must determine if it is the primary beneficiary of the VIE. The party exposed to the majority of the risks and rewards with the VIE is the primary beneficiary and must consolidate the entity.

The Company has determined for all periods presented, it was the primary beneficiary in Absaloka Coal LLC, a VIE, in which it held less than a 50% ownership through December 31, 2013. As a result, the Company has consolidated this entity within the coal segment. The investment in Absaloka Coal LLC by its outside partner did not continue after December 31, 2013, and beginning in 2014, Absaloka Coal LLC will be 100% owned by the Company, but will cease to have operations. As a result, the Company has unwound the transaction as of December 31, 2013 and concerning our balance sheet have decreased

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Other liabilities by $19.1 million and decreased Noncontrolling interest by $18.1 million. As a result, as of December 31, 2013, the noncontrolling interest was eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less.

Trade Receivables

Trade receivables are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on a review of collectability. The Company has determined that no allowance is necessary for trade receivables as of December 31, 2013 and 2012.

Inventories

Inventories, which include materials and supplies as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs.

Exploration and Mine Development

Exploration expenditures are charged to Cost of sales as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves.

At existing surface operations, additional pits may be added to increase production capacity in order to meet customer requirements. These expansions may require significant capital to purchase additional equipment, relocate equipment, build or improve existing haul roads and create the initial pre-production box cut to remove overburden for new pits at existing operations. If these pits operate in a separate and distinct area of the mine, the costs associated with initially uncovering coal for production are capitalized and amortized over the life of the developed pit consistent with coal industry practices. Once production has begun, mining costs are then expensed as incurred.

Where new pits are routinely developed as part of a contiguous mining sequence, the Company expenses such costs as incurred. The development of a contiguous pit typically reflects the planned progression of an existing pit, thus maintaining production levels from the same mining area utilizing the same employee group and equipment.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and includes long-term spare parts inventory. Expenditures that extend the useful lives of existing plant and equipment or increase productivity of the assets are capitalized. Maintenance and repair costs that do not extend the useful life or increase productivity of the asset are expensed as incurred. Coal reserves are recorded at cost, or at fair value originally in the case of acquired businesses.

Coal reserves, mineral rights and mine development costs are depleted based upon estimated recoverable proven and probable reserves. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as follows:

	Years
Buildings and improvements	15 to 30
Machinery and equipment	3 to 36

Long-term spare parts inventory begins depreciation when placed in service.

The Company assesses the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by

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comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to fair value. When an asset is retired or sold, its cost and related accumulated depreciation and depletion are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and equipment still in use is not eliminated from the accounts. Amortization of capital leases is included in Depreciation, depletion and amortization.

Reclamation Deposits and Contractual Third-Party Reclamation Receivables

Certain of the Company’s customers have either agreed to reimburse the Company for reclamation expenditures as they are incurred or have pre-funded a portion of the expected reclamation costs. Amounts received from customers and held on deposit are recorded as reclamation deposits. Amounts that are reimbursable by customers are recorded as third-party reclamation receivables when the related reclamation obligation is recorded.

Financial Instruments

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

Held-to-maturity financial instruments consist of non-derivative financial assets with fixed or determinable payments and a fixed term, which the Company has the ability and intent to hold until maturity, and, therefore, accounts for them as held-to-maturity 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.

The Company has securities classified as available-for-sale, which are recorded at fair value. The changes in fair values are recorded as unrealized gains (losses) as a component of Accumulated other comprehensive income (loss) in shareholders’ deficit.

The Company reviews its securities routinely for other-than-temporary impairment. The primary factors used to determine if an impairment charge must be recorded because a decline in value of the security is other than temporary include (i) whether the fair value of the investment is significantly below its cost basis, (ii) the financial condition of the issuer of the security, (iii) the length of time that the cost of the security has exceeded its fair value and (iv) the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. Other-than-temporary impairments are recorded as a component of Other income (expense).

Fair Value

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 a given measurement date. Valuation techniques used must maximize the use of observable inputs and minimize the use of unobservable inputs.

Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and is defined as:

• Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities generally valued based on independent third-party market prices.

• 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 Company’s non-recurring fair value measurements include asset retirement obligations and the purchase price allocations for the fair value of assets and liabilities acquired through business combinations.

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

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dates of reclamation. The asset retirement liability is accreted to its present value each period and the associated mineral rights are 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.

See Notes 4, 7, 9, 10 and 11 for further disclosures related to the Company’s fair value estimates.

Intangible Assets and Liabilities

Identifiable intangible assets or liabilities acquired in a business combination must be recognized and reported separately from goodwill. The Company has determined that its most significant acquired identifiable intangible assets and liabilities are related to sales and purchase agreements. Intangible assets result from more favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. Intangible liabilities result from less favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. The majority of these intangible assets and liabilities are amortized on a straight-line basis over the respective period of the sales and purchase agreements, while the remainder are amortized on a unit-of-production basis.

Amortization of intangible assets recognized in Cost of sales was $1.7 million in 2013, 2012, and 2011. Amortization of intangible liabilities recognized in Revenues was $1.0 million in 2013, 2012, and 2011.

The estimated aggregate amortization amounts from intangibles assets and liabilities for each of the next five years as of December 31, 2013 are as follows:

	Amortization Expense (Revenue)
	(In thousands)
2014	$	17
2015	(791		)
2016	(953		)
2017	(953		)
2018	(953		)

Workers’ Compensation Benefits

The Company is self-insured for workers’ compensation claims incurred prior to 1996. The liabilities for workers’ compensation claims are actuarially determined estimates of the ultimate losses incurred based on the Company’s experience. Adjustments to the probable ultimate liabilities are made annually based on subsequent developments and experience and are included in operations at the time of the revised estimate.

The Company insures its current employees through third-party insurance providers and state arrangements.

Pneumoconiosis (Black Lung) Benefits

The Company is self-insured for federal and state black lung benefits for former heritage employees and has established an independent trust to pay these benefits. The Company accounts for these benefits on the accrual basis. An independent actuary annually calculates the present value of the accumulated black lung obligation. The underfunded status in 2013 and 2012 of the Company’s obligation is included as Excess of black lung benefit obligation over trust assets in the accompanying consolidated balance sheets. Actuarial gains and losses are recognized in the period in which they arise.

The Company insures its current represented employees through arrangements with its unions and its current non-represented employees are insured through third-party insurance providers.

Postretirement Health Care Benefits

The Company accrues the cost to provide the benefits over the employees’ period of active service for postretirement benefits other than pensions. These costs are determined on an actuarial basis. The Company’s consolidated balance sheet reflects the unfunded status of postretirement benefit obligations.

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Pension and SERP Plans

The Company accrues the cost to provide the benefits over the employees’ period of active service for the non-contributory defined benefit pension and SERP plans it sponsors. These costs are determined on an actuarial basis. The Company’s consolidated balance sheet reflects the unfunded status of the defined benefit pension and SERP plans.

Deferred Revenue

Deferred revenues represent funding received upon the negotiation of long-term contracts. The deferred revenues for coal will be recognized as deliveries of the reserved coal are made in accordance with the long-term coal contracts. Deferred power revenues are recognized on a pro rata basis, based on the payments estimated to be received over the remaining term of the power sales agreements.

Asset Retirement Obligations

The Company’s asset retirement obligation, or ARO, liabilities primarily consist of estimated costs to reclaim surface land and support facilities at its mines and power plants in accordance with federal and state reclamation laws as established by each mining permit.

The Company estimates its ARO liabilities for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the future costs for a third party to perform the required work. These estimates are based on projected pit configurations at the end of mining and are escalated for inflation, and then discounted at a credit-adjusted risk-free rate. The Company records mineral rights associated with the initial recorded liability. Mineral rights are amortized based on the units of production method over the estimated recoverable, proven and probable reserves at the related mine, and the ARO liability is accreted to the projected settlement date. Changes in estimates could occur due to revisions of mine plans, changes in estimated costs, and changes in timing of the performance of reclamation activities.

Income Taxes

Deferred income taxes are provided for temporary differences arising from differences between the financial statement amount and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates anticipated to be in effect when the related taxes are expected to be paid or recovered. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the need for a valuation allowance, the Company considers projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies and its overall deferred tax position.

Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Guidance is also provided on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company includes interest and penalties related to income tax matters in Income tax expense.

The tax effect of pretax income or loss from continuing operations is generally determined by a computation that does not consider the tax effects of items that are not included in continuing operations. The exception to that incremental approach is that all items (for example, items recorded in other comprehensive income, extraordinary items, and discontinued operations) be considered in determining the amount of tax benefit that results from a loss from continuing operations and that shall be allocated to continuing operations.

Deferred Financing Costs

The Company capitalizes costs incurred in connection with borrowings or establishment of credit facilities and issuance of debt securities. These costs are amortized as an adjustment to interest expense over the life of the borrowing or term of the credit facility using the effective interest method. These amounts are recorded in Other assets in the accompanying consolidated balance sheets.

Coal Revenues

The Company recognizes coal sales revenue at the time title passes to the customer in accordance with the terms of the underlying sales agreements and after any contingent performance obligations have been satisfied. Coal sales revenue is recognized based on the pricing contained in the contracts in place at the time that title passes.

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Power Revenues

ROVA supplies power under long-term power sales agreements. Under these agreements, ROVA invoices and collects capacity payments based on kilowatt-hours produced if the units are dispatched or for the kilowatt-hours of available capacity if the units are not fully dispatched.

A portion of the capacity payments under the agreements is considered to be an operating lease. The Company is recognizing amounts invoiced under the power sales agreements as revenue on a pro rata basis, based on the weighted average per kilowatt hour capacity payments estimated to be received over the remaining term of the power sales agreements. Under this method of recognizing revenue, $8.7 million and $8.3 million of previously deferred revenue was recognized during 2013 and 2012, respectively.

On December 23, 2013, the Company entered into an agreement with Dominion Virginia Power, a subsidiary of Dominion, to restructure the remaining five years of the ROVA I and ROVA II contracts. From January 2014 through March 2019, the Company will keep ROVA ready to operate and expects to run the plants during high demand energy periods. The Company will additionally buy power from a power provider at a fixed price, and will supply Dominion that power. The Company can also operate the plant and sell power on the open market if it it chooses.

The Company incurred restructuring charges of $5.1 million for the year ended December 31, 2013 primarily related to legal and consulting fees. The restructuring plan is expected to be complete by March 31, 2014. The Company expects that the aggregate $5.1 million of expenditures will be cash expenditures paid out in the first quarter of 2014.

The table below represents the restructuring provision activity during the year ended December 31, 2013 (in millions):

Beginning Balance		Restructuring Charges		Restructuring Payments		Ending Balance
$	—	$	5.1	$	—	$	5.1

Other Operating Income (Loss)

Other operating income in the accompanying Consolidated Results of Operations reflects income from sources other than coal or power revenues. Income from the Company’s Indian Coal Tax Credit monetization transaction is recorded as Other operating income. The Company recognizes income as business interruption losses are incurred and reimbursement is virtually assured and has recognized $16.2 million and $17.3 million of income during 2013 and 2012, respectively; which is included in Other operating income. Insurance proceeds are included in Net cash provided by operating activities.

Share-Based Compensation

Share-based compensation expense is generally measured at the grant date and recognized as expense over the vesting period of the entire award. These costs are recorded in Cost of sales and Selling and administrative expenses in the accompanying consolidated results of operations.

Earnings (Loss) per Share

Basic earnings (loss) per share have 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, stock options, stock appreciation rights, restricted stock and warrants. No such items were included in the computation of diluted loss per share for the years ended 2013, 2012 or 2011 because the Company incurred a loss from operations in each of these periods and the effect of inclusion would have been anti-dilutive.

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

	Years Ended December 31,
	2013	2012	2011
	(In thousands)
Convertible notes and securities	1,093	1,093	1,093
Restricted stock units, stock options, and SARs	805	978	634
Total shares excluded from diluted shares calculation	1,898	2,071	1,727

Recently Adopted Accounting Pronouncements

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 only affects the Company's disclosures.

Liquidity and Capital Resources

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

The Company anticipates that its cash from operations, cash on hand and available borrowing capacity will be sufficient to meet its investing, financing, and working capital requirements for the foreseeable future.

In March 2013, the Company 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 December 31, 2013 was 3.75% per annum. At December 31, 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.

On June 29, 2012, the Company and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit permitted under the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit (which was increased to $10.0 million on January 10, 2014), which would reduce the balance available under the revolver. At December 31, 2013, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. 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. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a subordinate lien on these assets.

2. ACQUISITION

On December 23, 2011, the Company, through Westmoreland Kemmerer, Inc., entered into a purchase and sale agreement with Chevron Mining Inc., a Missouri corporation (the “Seller”), pursuant to which the Company agreed to purchase from Seller 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.

On January 31, 2012, the Company closed on the acquisition of the Kemmerer Mine from the Seller. In addition, on January 31, 2012, the Company completed the issuance and sale of $125.0 million aggregate principal amount of 10.75% senior secured notes due 2018 (the “Add-On Notes”) at a price equal to approximately 95.5% of their face value.

The purchase consideration for the Kemmerer Mine was $164.5 million, which included $76.5 million paid in cash, plus the assumption of approximately $88.0 million of liabilities. The net proceeds of the Add-On Notes financed the $76.5 million cash portion of the purchase consideration, $24.7 million of cash bonding obligations for the Kemmerer Mine and paid

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cash transaction costs for the Kemmerer acquisition and the Add-On Notes. Acquisition-related costs of $1.6 million have been expensed and are included in Selling and administrative costs. Issuance costs related to the Add-On Notes of $5.1 million have been capitalized. The balance of the net proceeds of the Add-On Notes was used to fund working capital requirements necessary to integrate the Kemmerer operations with the Company's operations.

The Kemmerer acquisition has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value.

The Company has finalized the purchase price allocation for the Kemmerer acquisition. No significant goodwill or other intangible assets were evident in the acquisition.

A summary of the purchase consideration and allocation of the purchase consideration follow (in millions):

	Final as of December 31, 2012
Purchase consideration:
Cash paid	$	76.5
Fair value of liabilities assumed:
Postretirement medical cost obligations	49.2
Asset retirement obligations	19.4
Pension obligations	15.6
Deferred revenue	2.2
Accrued liabilities	1.6
Total fair value of liabilities assumed	88.0
Total purchase consideration	$	164.5
Allocation of purchase consideration:
Inventories	$	9.6
Land and mineral rights	65.5
Plant and equipment	89.4
Total	$	164.5

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.

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	Years Ended
	December 31, 2012			December 31, 2011
	(In thousands)
Total Revenues
As reported	$	600,437		$	501,713
Pro forma	$	614,550		$	645,595
Operating Income
As reported	$	28,872		$	10,626
Pro forma	$	31,146		$	13,275
Net income (loss) applicable to common shareholders
As reported	$	(8,586	)	$	(34,460	)
Pro forma	$	(7,524	)	$	(46,260	)
Net income (loss) per share applicable to common shareholders
As reported	$	(0.61	)	$	(2.61	)
Pro forma	$	(0.54	)	$	(3.51	)

3. INVENTORIES

Inventories consisted of the following:

	December 31,
	2013			2012
	(In thousands)
Coal stockpiles	$	543		$	989
Coal fuel inventories	6,161			3,048
Materials and supplies	34,233			34,954
Reserve for obsolete inventory	(965		)	(1,257		)
Total	$	39,972		$	37,734

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4. RESTRICTED INVESTMENTS AND BOND COLLATERAL

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

	December 31,
	2013			2012
	(In thousands)
Coal Segment:
WML debt reserve account	$	13,067		$	13,062
Reclamation bond collateral:
Kemmerer Mine	24,966			24,702
Absaloka Mine	11,653			14,507
Rosebud Mine	3,145			12,495
Beulah Mine	1,270			1,270
Power Segment:
Letter of credit account	5,998			5,990
Corporate Segment:
Postretirement medical benefit bonds	8,467			8,593
Workers’ compensation bonds	6,667			6,590
Total restricted investments and bond collateral	75,233			87,209
Less current portion	(5,998		)	—
Total restricted investments and bond collateral, less current portion	$	69,235		$	87,209

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at December 31, 2013 are as follows:

	Carrying Value		Fair Value
	(In thousands)
Cash and cash equivalents	$	40,605	$	40,605
Time deposits	2,444		2,444
Held-to-maturity securities	32,184		32,046
	$	75,233	$	75,095

In 2013, 2012, and 2011, the Company recorded a gain of less than $0.1 million, $0.1 million, and $0.1 million, respectively, on the sale of available-for-sale securities held as restricted investments and bond collateral.

In 2013, $3.0 million and $9.4 million of reclamation bond collateral has been released from restriction regarding the Absaloka and Rosebud Mines, respectively.

The $6.0 million letter of credit account in the power segment has been released from restriction in February, 2014 and as a result is included as current portion.

Coal Segment

Pursuant to the terms of the Note Purchase Agreement dated June 26, 2008, WML must maintain a debt service reserve account. The debt service reserve account is required to contain funds sufficient to pay the principal, interest, and collateral agent’s fees scheduled to be paid in the following six months. The debt service reserve account was fully funded at December 31, 2013.

As of December 31, 2013, the Company had reclamation bond collateral in place for its Kemmerer, Absaloka, Rosebud and Beulah Mines. Bond collateral is not required at the Jewett Mine as reclamation bonding is the responsibility of its customer. These government-required bonds assure that coal-mining operations comply with applicable federal and state regulations relating to the performance and completion of final reclamation activities. The amounts deposited in the bond collateral account secure the bonds issued by the bonding company.

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Power Segment

As of February, 2014, the Company will no longer be required to fund a letter of credit account for its power operations.

Corporate Segment

The Company is required to obtain surety bonds in connection with its self-insured workers’ compensation plan and certain health care plans. The Company’s surety bond underwriters require collateral to issue these bonds.

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

The amortized cost, gross unrealized holding gains and losses and fair value of held-to-maturity securities are as follows:

	December 31,
	2013			2012
	(In thousands)
Amortized cost	$	32,184		$	3,983
Gross unrealized holding gains	309			356
Gross unrealized holding losses	(447		)	—
Fair value	$	32,046		$	4,339

Maturities of held-to-maturity securities are as follows at December 31, 2013:

	Amortized Cost		Fair Value
	(In thousands)
Due within one year	$	1,111	$	1,143
Due in five years or less	17,839		17,944
Due after five years to ten years	6,769		6,665
Due in more than ten years	6,465		6,294
	$	32,184	$	32,046

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities are as follows:

	December 31,
	2013		2012
	(In thousands)
Cost basis	$	—	$	175
Gross unrealized holding gains	—		16
Fair value	$	—	$	191

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

5. 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 December 31,
	2013			2012
	(In thousands)
10.75% senior notes due 2018	$	251,500		$	252,000
WML term debt due 2018	85,500			103,500
Capital lease obligations	10,153			13,926
Other	1,209			1,654
Debt discount	(8,525		)	(10,091		)
Total debt outstanding	339,837			360,989
Less current portion	(44,343		)	(23,791		)
Total debt outstanding, less current portion	$	295,494		$	337,198

The following table presents aggregate contractual debt maturities of all long-term debt:

	As of December 31, 2013
	(In thousands)
2014	$	23,949
2015	22,662
2016	21,943
2017	22,492
2018	257,316
Thereafter	—
Total	348,362
Less: debt discount	(8,525		)
Total debt	$	339,837

Revolving Lines of Credit

Corporate Revolving Credit Agreement

On June 29, 2012, the Company and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit permitted under the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit (which was increased to $10.0 million on January 10, 2014), which would reduce the balance available under the revolver. At December 31, 2013, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. 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. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a subordinate lien on these assets. The Company capitalized debt issuance costs of $0.7 million in 2012 related to the revolver.

Two interest rate options exist under this revolver. The Base Rate option bears interest at the greater of the 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 December 31, 2013.

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WML Revolving Credit Agreement

At December 31, 2013, WML had a revolving credit agreement with a borrowing limit of $25.0 million and a maturity date of June 26, 2013. WML has two interest rate options to choose from on this revolver. The Base Rate option bears interest at a base rate plus 0.50% and is payable monthly (3.75% per annum at December 31, 2013). The LIBOR Rate option bears interest at the London Interbank Offering Rate, or LIBOR, rate plus 3.0% (3.53% per annum at December 31, 2013). In addition, a commitment fee of 0.50% of the average unused portion of the available revolver is payable quarterly. At December 31, 2013, the revolver had no outstanding balance and supported a $1.9 million letter of credit. The Company had $23.1 million of borrowing availability under this revolver at December 31, 2013.

In March 2013, the Company amended the 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.

The revolver is secured by substantially all assets of WML, Westmoreland Savage Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC; the Company’s membership interest in WML; and the stock of WSC, WECO and DWC. WECO, DWC, and WSC have guaranteed WML’s obligations with respect to the Revolver.

Upon closing of the Sherritt Acquisition, the WML revolving credit agreement will expect to be terminated. See Note 1 for additional information.

10.75% Senior Notes

On February 4, 2011 through a private placement offering, the Company issued $150.0 million of Parent Notes (the “Parent Notes”), which are senior secured notes. The Company’s subsidiary, Westmoreland Partners, was a co-issuer of the notes. The Parent Notes were issued at a 5% discount, mature February 1, 2018, and bear a fixed interest rate of 10.75%, payable semi-annually, in arrears, on February 1 and August 1 of each year, which began August 1, 2011. Proceeds from the Parent Notes were used to retire ROVA's term debt, WRI's term debt and revolving line of credit, and the convertible notes; as well as payment of preferred stock dividend arrearages. On July 29, 2011, the Company commenced an exchange offer for the Parent Notes for an equal principal amount of notes that have been registered under the Securities Act of 1933, which exchange was completed in September, 2011. As a result of this offering, the Company recorded a $17.0 million loss on extinguishment of debt in the year ended December 31, 2011. The loss included a $9.1 million make-whole payment for ROVA’s debt and $7.9 million of non-cash write-offs of unamortized discount on debt and related capitalized debt costs and convertible debt conversion expense.

On January 31, 2012, the Company completed the private placement of $125.0 million of senior secured notes due in 2018 (the “Add-On Notes”), which were additional notes issued pursuant to the existing Parent Notes indenture, collectively referred to as the “10.75% Senior Notes”. The Add-On Notes were issued at a 4.5% original issue discount. On June 22, 2012, the Company commenced an exchange offer for the Add-On Notes for an equal principal amount of notes that have been registered under the Securities Act of 1933, which exchange was completed in July, 2012. At this time, all of the outstanding 10.75% Senior Notes are traded under one CUSIP. In 2011, the Company capitalized $0.2 million of debt issuance costs related to the Add-On Notes offering and has capitalized debt issuance costs of $4.9 million in 2012. The Company funded the Kemmerer Mine acquisition through the net proceeds from the Add-On Notes.

The 10.75% Senior Notes mature February 1, 2018, and bear an annual fixed interest rate of 10.75%, payable semi-annually, in arrears, on February 1 and August 1 of each year. The 10.75% Senior Notes are fully and unconditionally guaranteed by ROVA, Westmoreland Kemmerer, Inc. (“Kemmerer”), WRI and their respective subsidiaries (other than Absaloka Coal, LLC) and by certain other subsidiaries. Substantially all of the assets of the Parent, ROVA, Kemmerer and WRI constitute collateral for the 10.75% Senior Notes as to which the holders of these notes have a lien securing the notes. The lien securing the 10.75% Senior Notes is subordinate to the lien securing our revolving credit agreement.

During the year ended December 31, 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.

Under the indenture governing the 10.75% Senior Notes, the Company is 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. While the Company did repurchase $23.0 million of 10.75% Senior Notes during 2012, we did not have Excess Cash Flow for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

the years ended December 31, 2012 or 2011. The Company did have $29.5 million of Excess Cash Flow for the year ended December 31, 2013 and will be required to offer $22.1 million for repurchase by April 30, 2014. As a result, the Company has reclassified $22.1 million of the outstanding 10.75% Senior Notes to Current installments of long-term debt.

The indenture governing the 10.75% Senior Notes contains, among other provisions, events of default and various affirmative and negative covenants. As of December 31, 2013, the Company was in compliance with all covenants for these notes.

WML Term Debt

The term debt bears interest at 8.02% per annum, payable quarterly. The principal payments required for the term debt are as follows:

	(In millions)
2014	$	18.0
2015	20.0
2016	20.0
2017	22.0
2018	5.5
Thereafter	—

The term debt is payable in full on March 31, 2018. The term debt is secured by substantially all assets of WML, Westmoreland Savage Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC; the Company’s membership interest in WML; and the stock of WSC, WECO and DWC. WECO, DWC, and WSC have guaranteed WML’s obligations with respect to the term debt. The credit agreement requires a debt service account and imposes timing and other restrictions on the ability of WML to distribute funds to the Parent.

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 must meet or exceed a specified minimum. 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 quarters then ended to be greater than a specified amount. WML met all of its covenant requirements as of December 31, 2013.

Upon closing of the Sherritt Acquisition, the WML term debt will expect to be prepaid using a portion of the $425.0 million in proceeds from the offering of the New Notes. See Note 1 for additional information.

Capital Leases

The Company engages in leasing transactions for equipment utilized in its mining operations. At December 31, 2013 and 2012, the capital leases outstanding had a weighted average interest rate of 6.40% and 7.57%, respectively and mature at various dates beginning in 2014 through 2018. During the year ended December 31, 2013, the Company paid $2.7 million to purchase equipment under capital leases prior to their maturities 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.

6. POSTRETIREMENT MEDICAL BENEFITS

The Company provides postretirement medical benefits to retired employees and their dependents, mandated by the Coal Industry Retiree Health 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. These benefits are provided through self-insured programs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The following table sets forth the actuarial present value of postretirement medical benefit obligations and amounts recognized in the Company’s financial statements:

	December 31,
	2013			2012
	(In thousands)
Change in benefit obligations:
Net benefit obligation at beginning of year	$	333,842		$	258,641
Liability acquired	—			49,241
Service cost	4,436			3,555
Interest cost	12,139			12,363
Plan participant contributions	132			129
Actuarial loss (gain)	(53,230		)	22,342
Gross benefits paid	(14,220		)	(13,544		)
Federal subsidy on benefits paid	1,230			1,115
Net benefit obligation at end of year	284,329			333,842
Change in plan assets:
Employer contributions	14,088			13,415
Plan participant contributions	132			129
Gross benefits paid	(14,220		)	(13,544		)
Fair value of plan assets at end of year	—			—
Unfunded status at end of year	$	(284,329	)	$	(333,842	)
Amounts recognized in the balance sheet consist of:
Current liabilities	$	(13,955	)	$	(14,068	)
Noncurrent liabilities	(270,374		)	(319,775		)
Accumulated other comprehensive loss	20,292			77,528
Net amount recognized	$	(264,037	)	$	(256,315	)
Amounts recognized in accumulated other comprehensive loss consists of:
Net actuarial loss	$	26,012		$	83,884
Prior service credit	(5,720		)	(6,356		)
	$	20,292		$	77,528

In 2013, the Company’s postretirement medical benefit liabilities decreased $49.5 million primarily due to increases in discount rates.

The Company has elected to amortize its transition obligations over a 20-year period. Prior service costs and credits and actuarial gains and losses are amortized over the average life expectancy or average future service of the plan’s participants. The following amounts will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2014 (in millions):

Actuarial loss	$	0.7
Prior service credit	0.6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

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

	Years Ended December 31,
	2013			2012			2011
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	4,436		$	3,555		$	493
Interest cost	12,139			12,363			10,510
Amortization of:
Transition obligation	—			93			93
Prior service credit	(636		)	(636		)	(636		)
Actuarial loss	4,641			3,116			255
Total net periodic benefit cost	$	20,580		$	18,491		$	10,715

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

	Years Ended December 31,
	2013		2012		2011
	(In thousands)
Former mining operations	$	12,475	$	11,314	$	9,259
Current operations	8,105		7,177		1,456
Total net periodic benefit cost	$	20,580	$	18,491	$	10,715

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

Assumptions

The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows:

	December 31,
	2013	2012
Discount rate	4.50% - 5.05%	3.60% - 4.15%
Measurement date	December 31, 2013	December 31, 2012

The discount rate is adjusted annually based on an Aa corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields.

The weighted-average assumptions used to determine net periodic benefit cost were as follows:

	December 31,
	2013	2012	2011
Discount rate	3.60% - 4.15%	4.10%	5.15%
Measurement date	December 31, 2012	December 31, 2011	December 31, 2010

The following presents information about the assumed health care trend rate:

	December 31,
	2013		2012
Health care cost trend rate assumed for next year	6.75	%	7.00	%
Rate to which the cost trend is assumed to decline (ultimate trend rate)	5.00	%	5.00	%
Year that the trend rate reaches the ultimate trend rate	2021		2021

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The effect of a one percent change on the health care cost trend rate used to calculate periodic postretirement medical benefit costs and the related benefit obligation are summarized in the table below:

	Postretirement Medical Benefits
	1 % Increase		1 % Decrease
	(In thousands)
Effect on service and interest cost components	$	3,148	$	(2,442	)
Effect on postretirement medical benefit obligation	$	35,464	$	(30,096	)

Cash Flows

The following benefit payments and Medicare D subsidy (which the Company receives as a benefit partially offsetting its prescription drug costs for retirees and their dependents) are expected by the Company:

	Postretirement Medical  Benefits		Medicare D Subsidy			Net  Postretirement Medical Benefits
	(In thousands)
2014	$	13,955	$	(1,249	)	$	12,706
2015	14,522		(1,293		)	13,229
2016	14,975		(1,336		)	13,639
2017	15,408		(1,386		)	14,022
2018	16,191		(1,432		)	14,759
Years 2019 - 2023	85,342		(7,807		)	77,535

Combined Benefit Fund

Additionally, the Company makes payments to the UMWA Combined Benefit Fund, or CBF, which is a multiemployer health plan neither controlled by nor administered by the Company. The CBF is designed to pay health care benefits to UMWA workers (and dependents) who retired prior to 1976. The Company is required by the Coal Act to make monthly premium payments into the CBF. These payments are based on the number of the Company’s UMWA employees who retired prior to 1976, and the Company’s pro-rata assigned share of UMWA retirees whose companies are no longer in business. Contributions to the CBF have decreased over the past three years due to a declining population. The Company expenses payments to the CBF when they are due. The following payments were made to the CBF (in millions):

2013	$	2.2
2012	2.3
2011	2.6

Workers’ Compensation Benefits

The Company was self-insured for workers’ compensation benefits prior to January 1, 1996. Since 1996, the Company has purchased third-party insurance for workers’ compensation claims.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The following table shows the changes in the Company’s workers’ compensation obligation:

	December 31,
	2013			2012
	(In thousands)
Workers’ compensation, beginning of year (including current portion)	$	9,530		$	11,626
Accretion	166			204
Claims paid	(581		)	(475		)
Actuarial changes	(1,654		)	(1,825		)
Workers’ compensation, end of year	7,461			9,530
Less current portion	(717		)	(820		)
Workers’ compensation, less current portion	$	6,744		$	8,710

The discount rates used in determining the workers’ compensation benefit accruals are adjusted annually based on ten-year Treasury bond rates. At December 31, 2013 and 2012, the rates were 3.0% and 2.0%, respectively.

Black Lung Benefits

The Company is self-insured for federal and state black lung benefits for former heritage employees and has established an independent trust to pay these benefits.

The PPACA amended previous legislation related to black lung disease, providing automatic extension of awarded lifetime benefits to surviving spouses and providing changes to the legal criteria used to assess and award claims. Since the legislation passed in March 2010, the Company has experienced a significant increase in claims filed compared to the corresponding period in prior years. However, the Company has not been able to determine what, if any, additional impact may result from these claims due to lack of claims experience under the new legislation and court rulings interpreting the new provisions. The Company has not noted an increase in cash disbursements resulting from these new claims. The Company will continue to evaluate the impact of the PPACA in future periods as additional information, interpretations, guidance and claims experience becomes available.

The following table sets forth the funded status of the Company’s black lung obligation:

	December 31,
	2013		2012
	(In thousands)
Actuarial present value of benefit obligation:
Expected claims from terminated employees	$	876	$	1,139
Amounts owed to existing claimants	13,267		15,061
Total present value of benefit obligation	14,143		16,200
Plan assets at fair value, primarily government-backed securities	5,468		7,844
Excess of the black lung benefit obligation over trust assets	$	8,675	$	8,356

The discount rates used in determining the actuarial present value of the black lung benefit obligation are based on corporate bond yields and are adjusted annually. At December 31, 2013 and 2012, the rates used were 4.00% and 3.25%, respectively.

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Plan Assets

The fair value of the Company’s Black Lung trust assets by asset category is as follows:

	December 31, 2013
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
	Fair Value		Level 1		Level 2
	(In thousands)
U.S. treasury securities	$	5,280	$	—	$	5,280
Mortgage-backed securities	185		—		185
Cash and cash equivalents	3		3		—
	$	5,468	$	3	$	5,465

	December 31, 2012
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
	Fair Value		Level 1		Level 2
	(In thousands)
U.S. treasury securities	$	7,548	$	—	$	7,548
Mortgage-backed securities	269		—		269
Cash and cash equivalents	27		27		—
	$	7,844	$	27	$	7,817

The Black Lung Level 1 trust assets include cash and cash equivalents.

The Black Lung Level 2 trust assets include U.S. treasury bonds and notes where evaluators gather information from market sources and integrate relative credit information, observed market movements, and sector news into the evaluated pricing applications and models to value these assets. Level 2 trust assets also include mortgage-backed securities which are valued via model using various inputs such as daily cash flow, snapshots of US Treasury market, floating rate indices as a benchmark yield, spread over index, periodic and life caps, next coupon adjustment date, and convertibility of the bond.

7. PENSION AND OTHER SAVING PLANS

Defined Benefit Pension Plans

The Company provides defined benefit pension plans to qualified full-time employees pursuant to collective bargaining agreements. Benefits are generally based on years of service and the employee’s average annual compensation for the highest five continuous years of employment as specified in the plan agreement. The Company’s funding policy is to contribute annually the minimum amount prescribed, as specified by applicable regulations or loan covenants. The Company may make additional discretionary contributions. In 2009, the Company froze its pension plan for non-represented employees.

Supplemental Executive Retirement Plan

The Company maintains a Supplemental Executive Retirement Plan or SERP for former executives as a result of employment or severance agreements. The SERP is an unfunded non-qualified deferred compensation plan, which provides benefits to certain employees beyond the maximum limits imposed by the Employee Retirement Income Security Act and the Internal Revenue Code. The Company does not expect to add new participants to its SERP plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The following table provides a reconciliation of the changes in the benefit obligations of the plans and the fair value of assets of the qualified plans and the amounts recognized in the Company’s financial statements for both the defined benefit pension and SERP plans:

	Defined Benefit Pension December 31,						SERP December 31,
	2013			2012			2013			2012
	(In thousands)
Change in benefit obligation:
Net benefit obligation at beginning of year	$	172,289		$	100,582		$	4,241		$	4,511
Liability acquired	—			57,307			—			—
Service cost	2,346			2,139			—			—
Interest cost	6,209			6,330			152			172
Actuarial loss (gain)	(18,972		)	13,121			(359		)	(48		)
Benefits and expenses paid	(6,797		)	(7,190		)	(394		)	(394		)
Net benefit obligation at end of year	155,075			172,289			3,640			4,241
Change in plan assets:
Fair value of plan assets at the beginning of year	121,887			75,710			—			—
Assets acquired	—			41,704			—			—
Actual return on plan assets	18,414			11,502			—			—
Employer contributions	645			161			394			394
Benefits and expenses paid	(6,797		)	(7,190		)	(394		)	(394		)
Fair value of plan assets at end of year	134,149			121,887			—			—
Unfunded status at end of year	$	(20,926	)	$	(50,402	)	$	(3,640	)	$	(4,241	)
Amounts recognized in the accompanying balance sheet consist of:
Current liability	$	—		$	—		$	(390	)	$	(390	)
Noncurrent liability	(20,926		)	(50,401		)	(3,250		)	(3,850		)
Accumulated other comprehensive loss	11,045			43,037			1,209			1,679
Net amount recognized at end of year	$	(9,881	)	$	(7,364	)	$	(2,431	)	$	(2,561	)
Amounts recognized in accumulated other comprehensive loss consist of:
Net actuarial loss	$	11,045		$	43,037		$	1,209		$	1,679
	$	11,045		$	43,037		$	1,209		$	1,679

The accumulated benefit obligation for all plans was $158.7 million and $176.5 million at December 31, 2013 and 2012, respectively. The Company’s pension and SERP liabilities decreased $30.1 million in 2013 primarily from increases in discount rates.

Prior service costs and actuarial gains and losses are amortized over the expected future period of service of the plan’s participants. The following amounts will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2014 (in millions):

	Pension		SERP
Net actuarial loss	$	0.8	$	0.1

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The components of net periodic benefit cost are as follows:

	Defined Benefit Pension Years Ended December 31,									SERP Years Ended December 31,
	2013			2012			2011			2013		2012		2011
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	2,346		$	2,139		$	784		$	—	$	—	$	—
Interest cost	6,209			6,330			4,568			152		172		215
Expected return on plan assets	(8,770		)	(8,241		)	(5,218		)	—		—		—
Amortization of:
Prior service cost	—			—			—			—		—		5
Actuarial loss	3,377			2,867			1,578			112		95		64
Total net periodic pension cost	$	3,162		$	3,095		$	1,712		$	264	$	267	$	284

These costs are included in the accompanying statements of operations in Cost of sales and Selling and administrative expenses.

Assumptions

The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows:

	Defined Benefit Pension December 31,		SERP December 31,
	2013	2012	2013	2012
Discount rate	4.25% - 4.65%	3.35% - 3.75%	4.65%	3.75%
Measurement date	December 31, 2013	December 31, 2012	December 31, 2013	December 31, 2012

The discount rate is adjusted annually based on an Aa corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields.

The following table provides the assumptions used to determine net periodic benefit cost:

	Defined Benefit Pension Years Ended December 31,			SERP Years Ended December 31,
	2013	2012	2011	2013	2012	2011
Discount rate	3.35% - 3.75%	4.05% - 4.25%	5.15% - 5.40%	3.75%	4.25%	5.40%
Expected return on plan assets	7.40%	7.40%	7.40%	N/A	N/A	N/A
Rate of compensation increase	N/A	N/A	N/A	N/A	N/A	N/A
Measurement date	December 31, 2012	December 31, 2011	December 31, 2010	December 31, 2012	December 31, 2011	December 31, 2010

Plan Assets

The Company’s investment goals are to maximize returns subject to specific risk management policies. The Company sets the expected return on plan assets based on historical trends and forecasts provided by its third-party fund managers. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company invested in its common stock in 2011 in order to meet plan funding requirements. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in fixed income and equity securities, both domestic and international. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.

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The weighted-average target asset allocation of the Company’s pension trusts were as follows at December 31, 2013:

	Target Allocation
Asset category
Cash and equivalents	0% - 10%
Equity securities funds	20% - 60%
Debt securities funds	40% - 80%
Other	0% - 10%

The fair value of the Company’s pension plan assets by asset category is as follows:

	December 31, 2013
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Pooled separate accounts:
Large-cap	$	48,983	$	—	$	48,983	$	—
International blend	18,191		—		18,191		—
Fixed income domestic	40,944		—		40,944		—
Fixed income long term	17,797		—		17,797		—
Stable Value	5,267		—		5,267		—
Registered investment companies – growth fund	—		—		—		—
Limited partnerships and limited liability companies	250		—		—		250
Westmoreland Coal common stock	2,255		2,255		—		—
Cash and cash equivalents	462		462		—		—
	$	134,149	$	2,717	$	131,182	$	250

	December 31, 2012
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Pooled separate accounts:
Large-cap	$	50,589	$	—	$	50,589	$	—
International blend	10,294		—		10,294		—
Fixed income domestic	42,744		—		42,744		—
Stable value	3,850		—		3,850		—
Registered investment companies – growth fund	10,295		10,295		—		—
Limited partnerships and limited liability companies	614		—		—		614
Westmoreland Coal common stock	3,500		3,500		—		—
Cash and cash equivalents	1		1		—		—
	$	121,887	$	13,796	$	107,477	$	614

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The Company’s Level 1 assets include securities held by registered investment companies and its common stock, which are both typically valued using quoted market prices of an active market. Cash and cash equivalents and short-term investments are predominantly held in money market accounts.

The Company’s Level 2 assets include pooled separate accounts, which are valued based on the quoted market prices of the securities underlying the investments.

The Company’s Level 3 assets include interest in limited partnerships and limited liability companies that invest in privately held companies or privately held real estate assets. These assets are valued by the respective partnership or company manager using market and income approaches. The market approach consists of using comparable market transactions or values. The income approach consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and other risk factors. The inputs considered in the valuations include original transaction prices, recent transactions in the same or similar instruments, changes in financial ratios or cash flows, discounted cash flow valuations, and general economic and market conditions.

A summary of changes in the fair value of the Plan’s Level 3 assets is shown below:

	Limited partnerships and limited liability companies
	Year Ended December 31,
	2013			2012
	(In thousands)
Beginning balance	$	614		$	1,050
Unrealized gain	5			96
Settlements, net	(369		)	(532		)
Ending balance	$	250		$	614

Contributions

Previously, the Company was required by WML loan covenants to ensure that by 8.5 months after the end of the plan year, the value of its pension assets are at least 90% of each of the plan’s year end actuarially determined pension liability.On June 28, 2012, the loan covenant was amended to lower the requirement to 80%.

The Company contributed $0.6 million in cash to its retirement plans during 2013, in order to achieve the required 80% funding status. In 2014, the Company expects to make approximately $4.3 million of pension plan contributions.

Cash Flows

The following benefit payments are expected to be paid from its pension plan assets:

	Pension Benefits
	(In thousands)
2014	$	7,324
2015	7,772
2016	8,238
2017	9,066
2018	9,321
Years 2019 - 2023	50,340

The benefits expected to be paid are based on the same assumptions used to measure the Company’s pension benefit obligation at December 31, 2013 and include estimated future employee service.

Multi-Employer Pension

The Company contributes to the Central Pension Fund, or the Plan, a multiemployer defined benefit pension plan for its WECO, WRI and WSC entities pursuant to collective bargaining agreements. The Plan’s Employer Identification Number is 36-6052390. These employers contribute to the Plan based on a negotiated rate per hour worked per participating employee. For

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

the Plan’s year-end dates of January 31, 2013 and 2012, no single employer contributed more than 5% of total contributions to the Plan. As of the Plan’s year-end date January 31, 2013, it had a healthy or greater than 80% funding status.

The following table shows required information for each employer contributing to the Central Pension Fund:

	WECO		WRI		WSC
Employer plan number	9313		9243		4990
Minimum contributions per hour worked	$	5.75	$	5.70	$2.95 - $3.20
Expiration date of collective bargaining agreements	2/28/2019		5/31/2015		4/1/2016
Employer contributions (in millions):
2013	$	3.4	$	0.9	$	0.1
2012	3.2		0.5		0.1
2011	3.2		0.9		0.1

Other Plans

The Company sponsors 401(k) saving plans, which were established to assist eligible employees provide for their future retirement needs. The Company’s expense was $3.6 million, $2.9 million and $2.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. During 2013, the Company's expense of $3.6 million consisted of $1.2 million in cash contributions and $2.4 million in contributions of Company stock to the plans. During 2012 and 2011, the Company's expense were all from contributions of Company stock to the plans.

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:

	Years Ended December 31,
	2013			2012			2011
	(In thousands)
Health care benefits	$	12,579		$	11,367		$	9,507
Combined benefit fund payments	2,240			2,258			2,617
Workers’ compensation benefits (credit)	(1,212		)	(1,322		)	2,132
Black lung benefits (credit)	(189		)	1,085			4,319
Total	$	13,418		$	13,388		$	18,575

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

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 December 31, 2013 are summarized below:

	Asset Retirement Obligation		Contractual Third-Party Reclamation Receivable		Reclamation Deposits
	(In thousands)
Rosebud	$	126,965	$	21,186	$	74,921
Jewett	75,267		75,267		—
Absaloka	36,401		337		—
Beulah	17,785		—		—
Kemmerer	17,174		—		—
Savage	5,380		—		—
ROVA	892		—		—
Total	$	279,864	$	96,790	$	74,921

Asset Retirement Obligations

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

	Years Ended December 31,
	2013			2012
	(In thousands)
Asset retirement obligations, beginning of year (including current portion)	$	263,847		$	247,478
Accretion	21,905			21,909
Liabilities settled	(21,630		)	(17,342		)
Changes due to amount and timing of reclamation	15,742			(7,575		)
ARO acquired	—			19,377
Asset retirement obligations, end of year	279,864			263,847
Less current portion	(23,353		)	(22,238		)
Asset retirement obligations, less current portion	$	256,511		$	241,609

As permittee, the Company or its subsidiaries are responsible for the total amount of final reclamation costs for its mines and ROVA. The financial responsibility for a portion of final reclamation of the mines when they are closed has been transferred by contract to certain customers, while other customers have provided guarantees or funded escrow accounts to cover final reclamation costs. Costs of reclamation of mining pits prior to mine closure are recovered in the price of coal shipped.

As of December 31, 2013, the Company had $298.6 million in surety bonds outstanding to secure reclamation obligations.

Contractual Third-Party Reclamation Receivables

The Company has recognized as an asset $96.8 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.

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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 December 31, 2013 are as follows:

	Carrying Value		Fair Value
	(In thousands)
Cash and cash equivalents	$	63,525	$	63,525
Held-to-maturity securities	11,396		12,086
	$	74,921	$	75,611

In 2011, the Company recorded a gain of $0.1 million on the sale of available-for-sale securities held as reclamation deposits.

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 are as follows:

	Years Ended December 31,
	2013			2012
	(In thousands)
Amortized cost	$	11,396		$	19,832
Gross unrealized holding gains	764			1,190
Gross unrealized holding losses	(74		)	(9		)
Fair value	$	12,086		$	21,013

Maturities of held-to-maturity securities are as follows at December 31, 2013:

	Amortized Cost		Fair Value
	(In thousands)
Within one year	$	17	$	17
Due in five years or less	6,645		6,976
Due after five years to ten years	3,002		3,123
Due in more than ten years	1,732		1,970
	$	11,396	$	12,086

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities are as follows:

	December 31,
	2013		2012
	(In thousands)
Cost basis	$	—	$	1,000
Gross unrealized holding gains	—		39
Fair value	$	—	$	1,039

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

10. DERIVATIVE INSTRUMENTS

Derivative Liabilities

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

Convertible Debt

As a part of the Parent Notes offering in February 2011, the Company’s convertible notes were retired.

The effect of derivative instruments not designated as hedging instruments on the accompanying consolidated statements of operations was as follows (in thousands):

	Statement of Operations Location	Income Recognized in Earnings on Derivatives
		Years Ended December 31,
Derivative Instrument		2013		2012		2011
Convertible debt -conversion feature	Other income (loss)	$	—	$	—	$	3,079

11. 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. The Company is required to disclose the fair value of financial instruments where practicable. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the consolidated balance sheets approximate the fair value of these instruments due to the short duration to their maturities. 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 December 31, 2013 (Level 3).

The estimated fair value 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
December 31, 2013	$	328,473	$	364,329

The table below sets forth, by level, the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis:

	Year Ended December 31, 2012
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Available-for-sale investments included in Restricted investments and bond collateral	$	191	$	—	$	—	$	191
Available-for-sale investments included in Reclamation deposits	1,039		—		—		1,039
Total assets	$	1,230	$	—	$	—	$	1,230

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

As of December 31, 2013, the Company had restricted stock units, stock options, and stock-settled stock appreciation rights, or SARs, outstanding from three stock incentive plans. Two of these plans were terminated in October 2009. The Company grants employees and non-employee directors restricted stock units from the Amended and Restated 2007 Equity

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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 after each annual meeting.

The maximum number of remaining shares that can be issued under the 2007 Incentive Stock Plan is 49,050.

Compensation cost arising from share-based arrangements is shown in the following table:

	Years Ended December 31,
	2013		2012		2011
	(In thousands)
Recognition of fair value of restricted stock units, stock options and SARs over vesting period; and issuance of stock	$	2,967	$	3,088	$	1,969
Contributions of stock to the Company’s 401(k) plan	2,355		2,952		2,752
Total share-based compensation expense	$	5,322	$	6,040	$	4,721

Restricted Stock Units

The Company may issue restricted stock units, which requires no payment from the employee. Restricted stock units typically vest ratably over three years. Upon vesting, the Company can elect to settle the restricted stock units in either cash or the Company’s common stock. Compensation expense is based on the fair value on the grant date and is recorded ratably over the vesting period.

In April 2013, the Company granted 54,730 restricted stock units, 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.

A summary of restricted stock award activity for the year ended December 31, 2013 is as follows:

	Units		Weighted Average Grant-Date Fair Value		Unamortized Compensation Expense (In thousands)
Non-vested at December 31, 2012	680,185		$	8.88
Granted	103,730		$	11.70
Vested	(195,940	)	$	8.62
Forfeited	—		$	—
Non-vested at December 31, 2013	587,975		$	9.46	$	2,346	(1)

____________________ 

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

Additional information related to restricted stock units:

Years Ended December 31:	Weighted Average Grant-Date Fair Value		Total Grant- Date Fair Value of Restricted Stock Units that Vested (In thousands)
2013	$	11.70	$	1,689
2012	$	7.57	$	1,336
2011	$	14.99	$	1,757

Stock Options

Stock options generally vest over three years, expire ten years from the date of grant, and have an option price equal to the market value of the stock on the date of grant.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Information with respect to stock option activity for the year ended December 31, 2013, is as follows:

	Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In years)	Aggregate Intrinsic Value (In thousands)		Unamortized Compensation Expense (In thousands)
Outstanding at December 31, 2012	170,823		$	21.30
Expired	(25,017	)	$	17.41
Outstanding and exercisable at December 31, 2013	145,806		$	21.97	4.254	$	—	$	—

Additional information related to stock options:

Years Ended December 31:	Intrinsic Value of Stock Options Exercised		Total Grant-Date Fair Value of Stock Options that Vested
	(In thousands)
2013	$	—	$	—
2012	$	—	$	—
2011	$	86	$	538

There were no stock options granted during 2013, 2012 or 2011.

SARs

SARs generally vest over three years, expire ten years from the date of grant, and have a base price equal to the market value of the stock on the date of grant. Upon vesting, the holders may exercise the SARs and receive a number of shares of common stock having a value equal to the appreciation in the value of the common stock between the grant date and the exercise date.

Information with respect to SARs granted and outstanding for the year ended December 31, 2013 is as follows:

	SARs	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In years)	Aggregate Intrinsic Value (In thousands)		Unamortized Compensation Expense (In thousands)
Outstanding at December 31, 2012	70,734	$	22.60
Expired	—	$	—
Outstanding and exercisable at December 31, 2013	70,734	$	22.60	1.7	$	—	$	—

There were no SARs granted or exercised during 2013, 2012, or 2011.

The total grant-date fair value of SARs that vested was less than $0.1 million in 2011. No SARs vested during 2012 or 2013.

13. STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Preferred and Common Stock

The Company has two classes of capital stock outstanding, common stock, par value $2.50 per share, and Series A Convertible Exchangeable Preferred Stock on which cumulative dividends of $2.125 per share are payable quarterly. Each share of Series A Preferred Stock is represented by four Depositary Shares. Under the terms of the Series A Preferred Stock, the Company can redeem preferred shares at any time for the redemption value of $100.00 plus any accumulated dividends paid in cash. In February 2011, the Company paid $19.9 million of accumulated preferred stock dividends as of January 1, 2011. The Company is permitted to pay preferred stock dividends to the extent there is a surplus, defined by Delaware law. In June 2011, approximately 169 shares of preferred stock were converted into 1,152 shares of common stock.Subsequent to December 31, 2013 and through February 25, 2014, approximately 37,300 shares of preferred stock were converted into 254,822 shares of common stock. The Company paid $1.4 million of preferred stock dividends for the year ended December 31, 2013.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Accumulated Other Comprehensive Income (Loss)

The following is a summary of accumulated other comprehensive income (loss):

	Pension and Postretirement Medical Benefits			Available for Sale Securities			Tax Effect of Other Comprehensive Income Gains			Accumulated Other Comprehensive Loss
	(In thousands)
Balance at January 1, 2011	$	(32,049	)	$	525		$	(26,156	)	$	(57,680	)
2011 activity	(63,575		)	(200		)	—			(63,775		)
Balance at December 31, 2011	(95,624		)	325			(26,156		)	(121,455		)
2012 activity	(26,622		)	(268		)	—			(26,890		)
Balance at December 31, 2012	(122,246		)	57			(26,156		)	(148,345		)
2013 activity	89,699			(57		)	(4,892		)	84,750
Balance at December 31, 2013	$	(32,547	)	$	—		$	(31,048	)	$	(63,595	)

Pension and postretirement medical benefit adjustments relate to changes in the funded status of various benefit plans. The unrealized gains and losses associated with recognizing the Company’s “available-for-sale” securities at fair value are recorded through Accumulated other comprehensive loss.

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	$	(44,719	)	$	(77,527	)	$	57		$	(26,156	)	$	(148,345	)
Other comprehensive income before reclassifications	28,974			53,230			(45		)	(4,892		)	77,267
Amounts reclassified from accumulated other comprehensive income (loss)	3,490			4,005			(12		)	—			7,483
Balance at December 31, 2013	$	(12,255	)	$	(20,292	)	$	—		$	(31,048	)	$	(63,595	)

The following table reflects the reclassifications out of accumulated other comprehensive income (loss) for the year ended December 31, 2013 (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
Available-for sale securities
Realized gains and losses on available-for sale securities	$	(12	)	Other income (loss)
	$	(12	)	Total
Amortization of defined benefit pension items:
Actuarial losses	$	3,490		(2)
Amortization of postretirement medical items:
Prior service costs	$	(636	)	(3)
Actuarial losses	4,641			(3)
	$	4,005		Total

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

____________________

(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 - Pension and Other Savings Plans for additional details)

(3) These accumulated other comprehensive income components are included in the computation of net periodic postretirement medical cost. (See Note 6 - Postretirement Medical Benefits for additional details)

14. INCOME TAX

Income tax expense (benefit) attributable to net loss before income taxes consists of:

	Years Ended December 31,
	2013			2012			2011
	(In thousands)
Current:
Federal	$	(2	)	$	(8	)	$	(174	)
State	112			98			168
	110			90			(6		)
Deferred:
Federal	(4,189		)	—			—
State	(703		)	—			(420		)
	(4,892		)	—			(420		)
Income tax expense (benefit)	$	(4,782	)	$	90		$	(426	)

Income tax expense (benefit) attributable to net loss before income taxes differed from the amounts computed by applying the statutory Federal income tax rate of 34% to pre-tax income as a result of the following:

	Years Ended December 31,
	2013			2012			2011
	(In thousands)
Computed tax benefit at statutory rate	$	(4,389	)	$	(4,615	)	$	(12,683	)
Increase (decrease) in tax expense resulting from:
Tax depletion in excess of basis	(6,187		)	(4,782		)	(3,820		)
Non-deductible interest expense	—			—			3,717
Noncontrolling interest	1,167			2,188			1,283
State income taxes, net	(2,506		)	(3,427		)	(4,548		)
Change in valuation allowance for net deferred tax assets	15			8,571			2,923
Indian Coal Tax Credits	92			83			(122		)
Federal and state NOL expiration	—			153			11,226
Change in state effective tax rate	6,202			2,049			1,310
Other, net	824			(130		)	288
Income tax expense (benefit)	$	(4,782	)	$	90		$	(426	)

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For the year ended December 31, 2013, the Company recorded a tax benefit of approximately $4.9 million due to non-cash income tax expense related to gains recorded within other comprehensive income during 2013. Generally accepted accounting principles, or GAAP, requires all items be considered, including items recorded in other comprehensive income, in determining the amount of tax benefit that results from a loss from continuing operations that should be allocated to continuing operations. In accordance with GAAP, the Company recorded a tax benefit on its loss from continuing operations, which was exactly offset by income tax expense on other comprehensive income as follows:

	Loss From Continuing Operations			Other Comprehensive Income			Total Comprehensive Income
	(In thousands)
Pre-allocation	$	110		$	—		$	110
Tax allocation	(4,892		)	4,892			—
As presented	$	(4,782	)	$	4,892		$	110
Components of OCI gain:
	Gross			Tax Allocation
Pension	$	32,464		$	1,772
Post-retirement benefits	57,235			3,123
Unrealized gain (loss) on securities	(57		)	(3		)
Total	$	89,642		$	4,892

The PPACA reduces the tax benefits available to an employer that receives the Medicare Part D subsidy beginning in years ending after December 31, 2010. As a result of the PPACA, employers that receive the Medicare Part D subsidy will recognize the deferred tax effects of the reduced deductibility of the postretirement prescription drug coverage in the period the PPACA was enacted. On March 30, 2010, a companion bill, the Reconciliation Act, was signed into law. The Reconciliation Act reduces the effect of the PPACA on affected employers by deferring for two years (until years ending after December 31, 2012) the reduced deductibility of the postretirement prescription drug coverage. Accounting for income taxes requires that the effect of adjusting the deferred tax asset for the elimination of this deduction be included in income from continuing operations. However, entities that have a full valuation allowance for this deferred tax asset would recognize a related decrease in the valuation allowance. As the Company has a full valuation allowance against its related deferred tax asset, this change in tax law regarding the Medicare Part D subsidy will not have an effect on the Company’s income from continuing operations.

On September 13, 2013, the IRS issued T.D. 9636, Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property (the Repairs Regulations) under IRC Sections 162(a) and 263(a) with an effective date of January 1, 2014. These address when costs incurred to acquire, produce or improve tangible property must be capitalized or may be deducted as incurred. Management is currently reviewing and analyzing the final repair Regulations and have estimated the effect to be a reduction in the deferred tax asset of approximately $4.5 million, tax effected. The amount will be confirmed as new data is analyzed and when the companion Regulations governing general asset accounts and the disposition of depreciable property are finalized.

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31,
	2013			2012
	(In thousands)
Deferred tax assets:
Federal net operating loss carryforwards	$	89,698		$	84,330
State net operating loss carryforwards	26,509			28,700
Alternative minimum tax credit carryforwards	7,179			6,973
Charitable contribution carryforwards	146			132
Indian Coal Tax Credit carryforwards	25,499			25,591
Accruals for the following:
Workers’ compensation	2,726			3,592
Postretirement medical benefit and pension obligations	106,912			138,710
Incentive plans	1,606			1,995
Asset retirement obligations	68,989			77,698
Deferred revenues	18,919			22,500
Excess of pneumoconiosis benefit obligation over trust assets	3,262			3,185
Acquisition Costs	1,276			198
Restructuring	1,909			—
Other accruals	6,656			6,035
Total gross deferred assets	361,286			399,639
Less valuation allowance	(264,464		)	(293,504		)
Net deferred tax assets	96,822			106,135
Deferred tax liabilities:
Property, plant and equipment, differences due to depreciation and amortization	(94,868		)	(104,992		)
Other	(1,954		)	(1,143		)
Total gross deferred tax liabilities	(96,822		)	(106,135		)
Net deferred tax asset	$	—		$	—

As of December 31, 2013, the Company had significant deferred tax assets. The deferred tax assets include federal and state regular net operating losses, or NOLs, alternative minimum tax, or AMT, credit carryforwards, Indian Coal Tax Credit, or ICTC, carryforwards, charitable contribution carryforwards, and net deductible reversing temporary differences related to on-going differences between book and taxable income.

The Company believes it will be taxed under the AMT system for the foreseeable future due to the significant amount of statutory tax depletion in excess of book depletion expected to be generated by its mining operations. As a result, Westmoreland has determined that a valuation allowance is required for all of its regular federal net operating loss carryforwards and AMT credit carryforwards, since they are only available to offset future regular taxes. As of December 31, 2013, the Company has an estimated $7.2 million of AMT credit carryforwards, which have an indefinite carryover life, with no expiration.

As of December 31, 2013, the Company has an estimated $25.5 million in ICTC carryforwards that are available to offset the Company's regular tax and AMT liabilities. The Company has determined that a full valuation allowance is required for all its ICTC carryforward. The ICTC can generally be used to offset AMT liability. The Company does not believe it has sufficient positive evidence of significant magnitude to substantiate that its deferred tax asset for the ICTC carryforward is realizable at a more-likely-than-not level of assurance. As a result, the Company will continue to record a full valuation allowance on its ICTC carryforward; reversing valuation allowance only if utilized in a future year. ICTC credits are a general business credit with a 20-year carryforward period. The majority of the credits will expire in years 2020-2033.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

The Company has determined that since its net deductible temporary differences will not reverse for the foreseeable future, and it is unable to forecast that it will have regular taxable income when they do reverse, a full valuation allowance is required for these deferred tax assets.

As of December 31, 2013, the Company has available Federal net operating loss carryforwards to reduce future regular taxable income, which expire as follows:

Expiration Date	Regular Tax
	(In thousands)
2018	$	28
2019	88,429
2020	32
2021	20
after 2022	176,413
Total	$	264,922

As of December 31, 2013, the Company also has an estimated $701 million in state net operating loss carryforwards, expiring in years 2016 through 2033, to reduce future taxable income. The Company has recorded a full valuation allowance for all of its state net operating losses since it believes they will not be realized in the foreseeable future. A portion of our deferred tax assets include NOL benefits that if realized would result in an increase to other paid-in capital.

As of December 31, 2013, Westmoreland had no liability related to uncertain tax positions. The Company has elected under ASC 740-10-40 to recognize interest and penalties related to income tax matters in income tax expense.

The Company files tax returns in the U.S. federal jurisdiction and in various U.S. state jurisdictions, and is subject to examination by taxing authorities in all of these jurisdictions. From time to time, the Company's tax returns are reviewed or audited by various U.S. federal and state taxing authorities. The Company believes that adjustments, if any, resulting from these reviews or audits would not be material, individually or in the aggregate, to the Company's financial position, results of operations or liquidity. It is reasonably possible that the amount of unrecognized tax benefits related to certain of the Company's tax positions will increase or decrease in the next twelve months as audits or reviews are initiated and settled. At this time, an estimate of the range of a reasonably possible change cannot be made. With few exceptions, the Company is not subject to income tax examinations by U.S. federal or state jurisdictions for fiscal years prior to 2010.

15. COMMITMENTS AND CONTINGENCIES

Supply Agreements

Westmoreland Partners, which owns ROVA, has two coal supply agreements with TECO Coal Corporation, or TECO, that includes minimum purchase requirements. At the current pricing, Westmoreland Partners is obligated to pay TECO $17.9 million for 2014 and $2.9 million for 2015.

Leases

The following shows the gross value and accumulated amortization of property, plant and equipment and mine development assets under capital leases related primarily to the leasing of mining equipment:

	2013		2012
	(In thousands)
Gross value	$	24,982	$	34,677
Accumulated amortization	11,983		15,887

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Future minimum capital and operating lease payments as of December 31, 2013, are as follows:

	Capital Leases			Operating Leases
	(In thousands)
2014	$	5,949		$	7,896
2015	2,419			5,156
2016	1,548			2,584
2017	495			1,256
2018	316			515
Thereafter	—			—
Total minimum lease payments	10,727			$	17,407
Less imputed interest	(574		)
Present value of minimum capital lease payments	$	10,153

Rental expense under operating leases during the years ended December 31, 2013, 2012 and 2011 totaled $11.8 million, $9.5 million and $7.7 million, respectively.

The Company leases certain of its coal reserves from third parties and pays royalties based on either a per ton rate or as a percentage of revenues received. Royalties charged to expense under all such lease agreements amounted to $43.6 million, $40.1 million and $38.8 million in the years ended December 31, 2013, 2012 and 2011, respectively.

At December 31, 2013, the Company had fuel supply contracts outstanding with a minimum purchase requirement of 4.0 million gallons of diesel fuel per year. These contracts qualify for the normal purchase normal sale exception under hedge accounting.

Contingencies

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

16. 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. The coal reporting segment includes the aggregated operations of coal mines located in Wyoming, Montana, North Dakota and Texas. The power segment includes its ROVA operations located in North Carolina. The heritage segment costs primarily include benefits the Company provides to former mining operation employees as well as other administrative costs associated with providing those benefits and cost containment efforts. The corporate segment primarily consists of corporate administrative expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Summarized financial information by segment is as follows:

	Coal		Power		Heritage			Corporate			Consolidated
	(In thousands)
December 31, 2013
Revenues	$	587,119	$	87,567	$	—		$	—		$	674,686
Restructuring charges	—		5,078		—			—			5,078
Operating income (loss)	44,471		4,907		(14,498		)	(9,518		)	25,362
Depreciation, depletion, and amortization	56,698		10,179		—			354			67,231
Total assets	705,816		180,684		15,497			44,688			946,685
Capital expenditures	27,064		790		—			737			28,591
December 31, 2012
Revenues	$	519,152	$	81,285	$	—		$	—		$	600,437
Operating income (loss)	48,235		8,244		(14,711		)	(12,896		)	28,872
Depreciation, depletion, and amortization	46,639		10,085		—			421			57,145
Total assets	703,315		189,599		15,508			27,693			936,115
Capital expenditures	18,804		2,070		—			158			21,032
December 31, 2011
Revenues	$	414,928	$	86,785	$	—		$	—		$	501,713
Operating income (loss)	27,453		12,119		(19,675		)	(9,271		)	10,626
Depreciation, depletion, and amortization	35,112		10,176		—			306			45,594
Total assets	510,507		194,730		13,769			40,166			759,172
Capital expenditures	24,678		2,119		—			797			27,594

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

	Years Ended
	2013			2012			2011
	(In thousands)
Income from operations	$	25,362		$	28,872		$	10,626
Loss on extinguishment of debt	(64		)	(1,986		)	(17,030		)
Interest expense	(39,937		)	(42,677		)	(29,769		)
Interest income	1,366			1,496			1,444
Other income (loss)	364			723			(2,572		)
Loss before income taxes	$	(12,909	)	$	(13,572	)	$	(37,301	)

The Company derives its revenues from a few key customers. The customers from which more than 10% of total revenue has been derived and the percentage of total revenue from those customers is summarized as follows:

	2013			2012			2011
	(In thousands)
Customer A – coal	$	117,545		$	126,982		$	120,243
Customer B – coal (1)	112,061			96,718			—
Customer C – coal	89,266			81,981			81,353
Customer D – power	86,390			80,109			85,639
Customer E – coal	85,929			66,128			65,224
Customer F – coal (2)	25,958			26,525			52,835
Percentage of total revenue	77		%	80		%	81		%

____________________ 

(1) The revenue from Customer B did not exceed 10% in 2011.

(2) The revenue from Customer F did not exceed 10% in 2013 or 2012.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

17. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data is as follows:

	Three Months Ended
	March 31			June 30			September 30		December 31
	(In thousands; except per share data)
2013:
Revenues	$	161,448		$	162,499		$	176,792	$	173,947
Operating income (loss)	5,734			11,975			8,536		(883		)
Net income (loss) applicable to common shareholders	(2,725		)	(622		)	2,421		(5,131		)
Basic income (loss) per common share	$	(0.19	)	$	(0.04	)	$	0.17	$	(0.35	)
2012:
Revenues	$	147,236		$	132,842		$	161,332	$	159,027
Operating income (loss)	9,086			(4,262		)	15,451		8,597
Net income (loss) applicable to common shareholders	518			(12,423		)	7,282		(3,963		)
Basic income (loss) per common share	$	0.04		$	(0.89	)	$	0.52	$	(0.28	)

During the second quarter of 2012, the Company revised its preliminary allocation of the Kemmerer Mine 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, additional revenue of approximately $1.3 million was subsequently recorded in the first quarter of 2012, compared to what was originally reported in the Form 10-Q for the three months ended March 31, 2012. The information above for the three months ended March 31, 2012 reflects this additional revenue.

During the fourth quarter of 2013, as a result of a review of useful lives assigned to assets under capital leases and an evaluation of other operating income, the Company recorded $1.5 million of additional net expense related to prior years. In accordance with applicable U.S. GAAP, management quantitatively and qualitatively evaluated the impact and determined it to be immaterial to the Company's 2013 consolidated financial statements.

18. 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 the 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.

Certain amounts in prior periods have been reclassified to conform with the presentation of 2013. These reclassifications affected only the statements of cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING BALANCE SHEETS

December 31, 2013

(In thousands)

Assets	Parent/ Issuer			Co-Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Current assets:
Cash and cash equivalents	$	25,326		$	3,341	$	7,942	$	24,501		$	—		$	61,110
Receivables:
Trade	—			12,934		17,389		35,873			—			66,196
Contractual third-party reclamation receivables	—			—		44		8,443			—			8,487
Intercompany receivable/payable	(3,568		)	—		4,384		(33,681		)	32,865			—
Other	95			210		2,974		1,831			(24		)	5,086
	(3,473		)	13,144		24,791		12,466			32,841			79,769
Inventories	—			6,161		16,077		17,735			(1		)	39,972
Deferred income taxes	—			—		870		—			(870		)	—
Restricted investments and bond collateral	—			5,998		—		—			—			5,998
Other current assets	6,115			143		6,883		5,049			—			18,190
Total current assets	27,968			28,787		56,563		59,751			31,970			205,039
Property, plant and equipment:
Land and mineral rights	—			1,395		104,631		172,163			(1		)	278,188
Plant and equipment	3,939			220,872		229,998		202,886			1			657,696
	3,939			222,267		334,629		375,049			—			935,884
Less accumulated depreciation, depletion and amortization	2,705			71,653		132,189		239,302			(1		)	445,848
Net property, plant and equipment	1,234			150,614		202,440		135,747			1			490,036
Advanced coal royalties	—			—		3,000		4,311			—			7,311
Reclamation deposits	—			—		—		74,921			—			74,921
Restricted investments and bond collateral	15,134			—		36,619		17,482			—			69,235
Contractual third-party reclamation receivables	—			—		293		88,010			—			88,303
Intangible assets	—			1,283		—		238			(1		)	1,520
Investment in subsidiaries	266,847			—		—		3,770			(270,617		)	—
Other assets	8,636			—		586		3,098			(2,000		)	10,320
Total assets	$	319,819		$	180,684	$	299,501	$	387,328		$	(240,647	)	$	946,685

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING BALANCE SHEETS

December 31, 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	$	20,392		$	—		$	2,790	$	21,161		$	—		$	44,343
Accounts payable and accrued expenses:
Trade	4,122			10,119			12,522		30,743			1			57,507
Production taxes	—			3			17,429		24,472			1			41,905
Workers’ compensation	717			—			—		—			—			717
Postretirement medical benefits	12,042			—			329		1,583			1			13,955
SERP	390			—			—		—			—			390
Deferred revenue	—			9,024			3,969		1,075			—			14,068
Asset retirement obligations	—			—			3,104		20,250			(1		)	23,353
Other current liabilities	11,302			5,053			317		142			(24		)	16,790
Total current liabilities	48,965			24,199			40,460		99,426			(22		)	213,028
Long-term debt, less current installments	224,582			—			2,664		70,248			(2,000		)	295,494
Workers’ compensation, less current portion	6,744			—			—		—			—			6,744
Excess of black lung benefit obligation over trust assets	8,675			—			—		—			—			8,675
Postretirement medical benefits, less current portion	185,858			—			49,418		35,098			—			270,374
Pension and SERP obligations, less current portion	13,069			99			9,381		1,627			—			24,176
Deferred revenue, less current portion	—			41,297			—		5,271			(1		)	46,567
Asset retirement obligations, less current portion	—			892			50,472		205,147			—			256,511
Intangible liabilities	—			5,606			—		—			—			5,606
Other liabilities	5,939			—			6,220		1,450			(6,220		)	7,389
Intercompany receivable/payable	13,866			—			525		6,434			(20,825		)	—
Total liabilities	507,698			72,093			159,140		424,701			(29,068		)	1,134,564
Shareholders’ deficit
Preferred stock	160			—			—		—			—			160
Common stock	36,479			5			110		132			(247		)	36,479
Other paid-in capital	134,861			52,835			94,370		64,401			(211,606		)	134,861
Accumulated other comprehensive income (loss)	(63,595		)	(164		)	17,492		(14,153		)	(3,175		)	(63,595		)
Accumulated earnings (deficit)	(295,784		)	55,915			28,389		(87,753		)	3,449			(295,784		)
Total Westmoreland Coal Company shareholders’ deficit	(187,879		)	108,591			140,361		(37,373		)	(211,579		)	(187,879		)
Noncontrolling interest	—			—			—		—			—			—
Total equity (deficit)	(187,879		)	108,591			140,361		(37,373		)	(211,579		)	(187,879		)
Total liabilities and shareholders’ deficit	$	319,819		$	180,684		$	299,501	$	387,328		$	(240,647	)	$	946,685

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF OPERATIONS

Year Ended December 31, 2013

(In thousands)

	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	—		$	87,567		$	214,481		$	414,085		$	(41,447	)	$	674,686
Costs and expenses:
Cost of sales	—			63,794			174,204			338,769			(41,447		)	535,320
Depreciation, depletion and amortization	354			10,178			27,452			29,247			—			67,231
Selling and administrative	12,339			3,609			11,092			23,681			—			50,721
Heritage health benefit expenses	12,361			—			—			1,057			—			13,418
Loss (gain) on sales of assets	—			—			115			(189		)	—			(74		)
Restructuring charges	—			5,078			—			—			—			5,078
Other operating income	—			—			(22,367		)	(3		)	—			(22,370		)
	25,054			82,659			190,496			392,562			(41,447		)	649,324
Operating income (loss)	(25,054		)	4,908			23,985			21,523			—			25,362
Other income (expense):
Interest expense	(30,417		)	(39		)	(295		)	(9,221		)	35			(39,937		)
Loss on extinguishment of debt	(64		)	—			—			—			—			(64		)
Interest income	165			26			522			688			(35		)	1,366
Other income	1			—			328			35			—			364
	(30,315		)	(13		)	555			(8,498		)	—			(38,271		)
Income (loss) before income taxes and income of consolidated subsidiaries	(55,369		)	4,895			24,540			13,025			—			(12,909		)
Equity in income of subsidiaries	42,347			—			—			—			(42,347		)	—
Loss before income taxes	(13,022		)	4,895			24,540			13,025			(42,347		)	(12,909		)
Income tax expense (benefit)	(4,895		)	680			8,461			(47		)	(8,981		)	(4,782		)
Net income (loss)	(8,127		)	4,215			16,079			13,072			(33,366		)	(8,127		)
Less net loss attributable to noncontrolling interest	(3,430		)	—			—			—			—			(3,430		)
Net income (loss) attributable to the Parent company	$	(4,697	)	$	4,215		$	16,079		$	13,072		$	(33,366	)	$	(4,697	)

108

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF OPERATIONS

Year Ended December 31, 2012

(In thousands)

	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	—		$	81,285		$	184,506		$	366,105		$	(31,459	)	$	600,437
Costs and expenses:
Cost of sales	—			59,299			134,683			303,998			(31,459		)	466,521
Depreciation, depletion and amortization	421			10,085			19,571			27,068			—			57,145
Selling and administrative	13,748			3,657			9,993			24,037			(1,527		)	49,908
Heritage health benefit expenses	12,406			—			—			982			—			13,388
Loss on sales of assets	13			—			251			264			—			528
Other operating income	—			—			(17,452		)	—			1,527			(15,925		)
	26,588			73,041			147,046			356,349			(31,459		)	571,565
Operating income (loss)	(26,588		)	8,244			37,460			9,756			—			28,872
Other income (expense):
Interest expense	(31,301		)	(39		)	(378		)	(11,039		)	80			(42,677		)
Loss on extinguishment of debt	(1,986		)	—			—			—			—			(1,986		)
Interest income	253			15			294			1,014			(80		)	1,496
Other income	190			—			395			138			—			723
	(32,844		)	(24		)	311			(9,887		)	—			(42,444		)
Income (loss) before income taxes and income of consolidated subsidiaries	(59,432		)	8,220			37,771			(131		)	—			(13,572		)
Equity in income of subsidiaries	45,762			—			—			—			(45,762		)	—
Income (loss) before income taxes	(13,670		)	8,220			37,771			(131		)	(45,762		)	(13,572		)
Income tax expense (benefit)	(8		)	107			—			4,410			(4,419		)	90
Net income (loss)	(13,662		)	8,113			37,771			(4,541		)	(41,343		)	(13,662		)
Less net loss attributable to noncontrolling interest	(6,436		)	—			—			—			—			(6,436		)
Net income (loss) attributable to the Parent company	$	(7,226	)	$	8,113		$	37,771		$	(4,541	)	$	(41,343	)	$	(7,226	)

109

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF OPERATIONS

Year Ended December 31, 2011

(In thousands)

	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	—		$	86,785		$	58,544		$	411,908		$	(55,524	)	$	501,713
Costs and expenses:
Cost of sales	—			60,243			49,439			338,629			(55,524		)	392,787
Depreciation, depletion and amortization	306			10,175			7,936			27,177			—			45,594
Selling and administrative	10,616			4,059			4,566			21,508			(473		)	40,276
Heritage health benefit expenses	17,754			—			—			821			—			18,575
Gain (loss) on sales of assets	3			189			59			389			—			640
Other operating income	—			—			(7,258		)	—			473			(6,785		)
	28,679			74,666			54,742			388,524			(55,524		)	491,087
Operating income (loss)	(28,679		)	12,119			3,802			23,384			—			10,626
Other income (expense):
Interest expense	(16,365		)	(469		)	(657		)	(12,370		)	92			(29,769		)
Loss on extinguishment of debt	(7,873		)	(9,073		)	(84		)	—			—			(17,030		)
Interest income	266			14			206			1,050			(92		)	1,444
Other income (loss)	(3,014		)	—			170			272			—			(2,572		)
	(26,986		)	(9,528		)	(365		)	(11,048		)	—			(47,927		)
Loss before income taxes and income of consolidated subsidiaries	(55,665		)	2,591			3,437			12,336			—			(37,301		)
Equity in income of subsidiaries	18,508			—			—			—			(18,508		)	—
Loss before income taxes	(37,157		)	2,591			3,437			12,336			(18,508		)	(37,301		)
Income tax expense (benefit)	(282		)	(2,498		)	(26		)	7,263			(4,883		)	(426		)
Net income (loss)	(36,875		)	5,089			3,463			5,073			(13,625		)	(36,875		)
Less net loss attributable to noncontrolling interest	(3,775		)	—			—			—			—			(3,775		)
Net loss attributable to the Parent company	$	(33,100	)	$	5,089		$	3,463		$	5,073		$	(13,625	)	$	(33,100	)

110

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31, 2013

(In thousands)

	Parent/Issuer			Co-Issuer		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	(8,127	)	$	4,215	$	16,079		$	13,072		$	(33,366	)	$	(8,127	)
Other comprehensive income (loss)
Amortization of accumulated actuarial gains or losses, pension	3,490			28		—			863			(891		)	3,490
Adjustments to accumulated actuarial losses and transition obligations, pension	28,974			180		10,554			3,252			(13,986		)	28,974
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	4,005			—		—			852			(852		)	4,005
Adjustments to accumulated actuarial gains and transition obligations, postretirement medical benefits	53,230			—		11,941			5,411			(17,352		)	53,230
Tax effect of other comprehensive income gains	(4,892		)	—		—			—			—			(4,892		)
Unrealized and realized gains and losses on available-for-sale securities	(57		)	—		(17		)	(38		)	55			(57		)
Other comprehensive income	84,750			208		22,478			10,340			(33,026		)	84,750
Comprehensive income attributable to Westmoreland Coal Company	$	76,623		$	4,423	$	38,557		$	23,412		$	(66,392	)	$	76,623

111

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31, 2012

(In thousands)

	Parent/Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	(13,662	)	$	8,113		$	37,771		$	(4,541	)	$	(41,343	)	$	(13,662	)
Other comprehensive income (loss)
Amortization of accumulated actuarial gains or losses, pension	2,960			23			—			766			(789		)	2,960
Adjustments to accumulated actuarial losses and transition obligations, pension	(9,812		)	(52		)	(3,034		)	(2,132		)	5,218			(9,812		)
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	2,572			—			—			973			(973		)	2,572
Adjustments to accumulated actuarial gains and transition obligations, postretirement medical benefits	(22,342		)	—			(1,969		)	(865		)	2,834			(22,342		)
Unrealized and realized gains and losses on available-for-sale securities	(268		)	—			1			(65		)	64			(268		)
Other comprehensive income	(26,890		)	(29		)	(5,002		)	(1,323		)	6,354			(26,890		)
Comprehensive income (loss) attributable to Westmoreland Coal Company	$	(40,552	)	$	8,084		$	32,769		$	(5,864	)	$	(34,989	)	$	(40,552	)

112

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31, 2011

(In thousands)

	Parent/Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	(36,875	)	$	5,089		$	3,463		$	5,073		$	(13,625	)	$	(36,875	)
Other comprehensive income (loss)
Amortization of accumulated actuarial gains or losses, pension	1,647			9			—			702			(711		)	1,647
Adjustments to accumulated actuarial losses and transition obligations, pension	(15,798		)	(150		)	—			(444		)	594			(15,798		)
Amortization of accumulated actuarial gains or losses, transition obligations, and prior service costs, postretirement medical benefit	(288		)	—			—			295			(295		)	(288		)
Adjustments to accumulated actuarial gains and transition obligations, postretirement medical benefits	(49,136		)	—			—			(9,269		)	9,269			(49,136		)
Unrealized and realized gains and losses on available-for-sale securities	(200		)	—			(103		)	(100		)	203			(200		)
Other comprehensive income	(63,775		)	(141		)	(103		)	(8,816		)	9,060			(63,775		)
Comprehensive income (loss) attributable to Westmoreland Coal Company	$	(100,650	)	$	4,948		$	3,360		$	(3,743	)	$	(4,565	)	$	(100,650	)

113

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 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)	$	(8,127	)	$	4,215		$	16,079		$	13,072		$	(33,366	)	$	(8,127	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in income of subsidiaries	(42,347		)	—			—			—			42,347			—
Depreciation, depletion, and amortization	354			10,178			27,452			29,247			—			67,231
Accretion of asset retirement obligation and receivable	—			63			4,192			8,426			—			12,681
Non-cash tax benefits	(4,892		)	—			—			—			—			(4,892		)
Amortization of intangible assets and liabilities, net	—			622			—			43			—			665
Share-based compensation	2,437			37			914			1,934			—			5,322
Loss on sale of assets	—			—			115			(189		)	—			(74		)
Amortization of deferred financing costs	3,165			—			49			517			—			3,731
Other	—			—			(1,001		)	—			—			(1,001		)
Loss on extinguishment of debt	64			—			—			—			—			64
Gain on sales of investments	—			—			19			(22		)	—			(3		)
Changes in operating assets and liabilities:
Receivables, net	(18		)	(126		)	9,871			(4,069		)	(13,294		)	(7,636		)
Inventories	—			(3,114		)	187			415			—			(2,512		)
Excess of black lung benefit obligation over trust assets	319			—			—			—			—			319
Accounts payable and accrued expenses	(613		)	5,141			4,082			(9,852		)	14,821			13,579
Deferred revenue	—			(8,706		)	972			(1,344		)	—			(9,078		)
Income tax payable	—			—			(1,679		)	1,678			—			(1		)
Accrual for workers’ compensation	(2,069		)	—			—			—			—			(2,069		)
Asset retirement obligations	—			—			(1,971		)	(7,439		)	—			(9,410		)
Accrual for postretirement medical benefits	101			—			5,620			2,000			—			7,721
Pension and SERP obligations	1,391			18			589			390			—			2,388
Other assets and liabilities	(144		)	4,983			8,206			4,124			(5,350		)	11,819
Distributions received from subsidiaries	78,000			—			—			—			(78,000		)	—
Net cash provided by (used in) operating activities	27,621			13,311			73,696			38,931			(72,842		)	80,717
Cash flows from investing activities:
Additions to property, plant and equipment	(737		)	(790		)	(17,156		)	(9,908		)	—			(28,591		)
Change in restricted investments and bond collateral and reclamation deposits	49			(8		)	1,766			(373		)	—			1,434
Net proceeds from sales of assets	—			—			534			368			—			902

114

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Proceeds from the sale of restricted investments	—			—			788			7,499			—			8,287
Receivable from customer for property and equipment purchases	—			—			—			(389		)	—			(389		)
Other	—			—			(2,500		)	(1,040		)	—			(3,540		)
Net cash provided by (used in) investing activities	(688		)	(798		)	(16,568		)	(3,843		)	—			(21,897		)
Cash flows from financing activities:
Change in book overdrafts	—			—			310			—			—			310
Repayments of long-term debt	(500		)	—			(2,322		)	(25,266		)	—			(28,088		)
Borrowings on revolving lines of credit	—			—			—			7,000			—			7,000
Repayments on revolving lines of credit	—			—			—			(7,000		)	—			(7,000		)
Debt issuance costs and other refinancing costs	(26		)	—			—			(156		)	—			(182		)
Dividends/distributions	(1,360		)	(14,500		)	(44,500		)	(19,000		)	78,000			(1,360		)
Transactions with Parent/affiliates	(14,557		)	783			(8,036		)	26,968			(5,158		)	—
Net cash provided by (used in) financing activities	(16,443		)	(13,717		)	(54,548		)	(17,454		)	72,842			(29,320		)
Net increase (decrease) in cash and cash equivalents	10,490			(1,204		)	2,580			17,634			—			29,500
Cash and cash equivalents, beginning of year	14,836			4,545			5,362			6,867			—			31,610
Cash and cash equivalents, end of year	$	25,326		$	3,341		$	7,942		$	24,501		$	—		$	61,110

115

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 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)	$	(13,662	)	$	8,113		$	37,771		$	(4,541	)	$	(41,343	)	$	(13,662	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in income of subsidiaries	(45,762		)	—			—			—			45,762			—
Depreciation, depletion, and amortization	421			10,085			19,571			27,068			—			57,145
Accretion of asset retirement obligation and receivable	—			59			4,038			8,092			—			12,189
Amortization of intangible assets and liabilities, net	—			622			—			36			—			658
Share-based compensation	2,716			44			559			2,721			—			6,040
Loss (gain) on sale of assets	13			—			251			264			—			528
Amortization of deferred financing costs	2,889			—			847			622			—			4,358
Loss on extinguishment of debt	1,986			—			—			—			—			1,986
Gain on sales of investments	(190		)	—			—			25			—			(165		)
Changes in operating assets and liabilities:
Receivables, net	147			(151		)	(20,910		)	102			7,957			(12,855		)
Inventories	—			709			(2,389		)	(484		)	—			(2,164		)
Excess of black lung benefit obligation over trust assets	1,791			—			—			—			—			1,791
Accounts payable and accrued expenses	4,981			(3,209		)	18,396			5,453			(8,222		)	17,399
Deferred revenue	—			(8,312		)	772			(658		)	—			(8,198		)
Accrual for workers’ compensation	(2,096		)	—			—			—			—			(2,096		)
Asset retirement obligations	—			—			(1,198		)	(5,745		)	—			(6,943		)
Accrual for postretirement medical benefits	(524		)	—			4,858			1,857			—			6,191
Pension and SERP obligations	1,286			15			709			792			—			2,802
Other assets and liabilities	(243		)	(536		)	1,047			(10,128		)	2,000			(7,860		)
Distributions received from subsidiaries	31,971			—			—			—			(31,971		)	—
Net cash provided by (used in) operating activities	(14,276		)	7,439			64,322			25,476			(25,817		)	57,144
Cash flows from investing activities:
Additions to property, plant and equipment	(159		)	(2,067		)	(8,385		)	(10,421		)	—			(21,032		)
Change in restricted investments and bond collateral and reclamation deposits	(3,248		)	(7		)	(27,504		)	(3,133		)	—			(33,892		)
Cash payments related to acquisitions and other	4,000			—			(76,522		)	—			—			(72,522		)
Net proceeds from sales of assets	—			—			240			240			—			480
Proceeds from the sale of restricted investments	1,581			—			1,889			636			—			4,106
Receivable from customer for property and equipment purchases	—			—			—			(674		)	—			(674		)

116

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Net cash provided by (used in) investing activities	2,174			(2,074		)	(110,282		)	(13,352		)	—			(123,534		)
Cash flows from financing activities:
Change in book overdrafts	—			(259		)	6			—			—			(253		)
Borrowings from long-term debt	119,364			—			—			—			—			119,364
Repayments of long-term debt	(23,000		)	—			(2,494		)	(19,352		)	—			(44,846		)
Borrowings on revolving lines of credit	—			—			—			16,500			—			16,500
Repayments on revolving lines of credit	—			—			—			(16,500		)	—			(16,500		)
Debt issuance costs and other refinancing costs	(5,666		)	—			—			(22		)	—			(5,688		)
Dividends/distributions	(1,360		)	(1,050		)	(19,173		)	(11,748		)	31,971			(1,360		)
Transactions with Parent/affiliates	(88,541		)	483			72,840			21,372			(6,154		)	—
Net cash provided by (used in) financing activities	797			(826		)	51,179			(9,750		)	25,817			67,217
Net increase (decrease) in cash and cash equivalents	(11,305		)	4,539			5,219			2,374			—			827
Cash and cash equivalents, beginning of year	26,141			6			143			4,493			—			30,783
Cash and cash equivalents, end of year	$	14,836		$	4,545		$	5,362		$	6,867		$	—		$	31,610

117

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 2011

(In thousands)

Statements of Cash Flows	Parent/ Issuer			Co-Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Cash flows from operating activities:
Net loss	$	(36,875	)	$	5,089		$	3,463		$	5,073		$	(13,625	)	$	(36,875	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Equity in income of subsidiaries	(18,508		)	—			—			—			18,508			—
Depreciation, depletion, and amortization	306			10,175			7,936			27,177			—			45,594
Accretion of asset retirement obligation and receivable	—			55			3,034			7,789			—			10,878
Amortization of intangible assets and liabilities, net	—			621			—			36			—			657
Share-based compensation	1,671			32			249			2,769			—			4,721
Loss (gain) on sale of assets	3			189			59			389			—			640
Amortization of deferred financing costs	1,485			(21		)	383			668			—			2,515
Loss on extinguishment of debt	7,873			9,073			84			—			—			17,030
Gain on sales of investments	—			—			(75		)	(75		)	—			(150		)
Loss on derivative instruments	3,079			—			—			—			—			3,079
Changes in operating assets and liabilities:
Receivables, net	(158		)	1,479			(4,343		)	2,263			6,250			5,491
Inventories	—			(1,820		)	134			(439		)	—			(2,125		)
Excess of black lung benefit obligation over trust assets	4,319			—			—			—			—			4,319
Accounts payable and accrued expenses	5,849			(1,063		)	378			3,103			(4,139		)	4,128
Deferred revenue	—			(8,774		)	(349		)	(795		)	—			(9,918		)
Accrual for workers’ compensation	1,248			—			—			—			—			1,248
Asset retirement obligations	—			—			(875		)	(5,635		)	—			(6,510		)
Accrual for postretirement medical benefits	(2,878		)	—			—			1,235			—			(1,643		)
Pension and SERP obligations	(4,320		)	(50		)	—			3,092			—			(1,278		)
Other assets and liabilities	444			(529		)	3,839			(392		)	(428		)	2,934
Distributions received from subsidiaries	23,400			—			—			—			(23,400		)	—
Net cash provided by (used in) operating activities	(13,062		)	14,456			13,917			46,258			(16,834		)	44,735
Cash flows from investing activities:
Additions to property, plant and equipment	(797		)	(2,119		)	(2,569		)	(22,109		)	—			(27,594		)
Change in restricted investments and bond collateral and reclamation deposits	(1,714		)	2,581			(3,738		)	(3,115		)	—			(5,986		)
Cash payments related to acquisitions and other	(4,000		)	—			—			—			—			(4,000		)
Net proceeds from sales of assets	—			—			250			437			—			687
Proceeds from the sale of investments	—			—			1,075			2,275			—			3,350

118

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Receivable from customer for property and equipment purchases	—			—			—			(96		)	—			(96		)
Net cash provided by (used in) investing activities	(6,511		)	462			(4,982		)	(22,608		)	—			(33,639		)
Cash flows from financing activities:
Change in book overdrafts	(146		)	259			(694		)	(143		)	—			(724		)
Borrowings from long-term debt	142,500			—			—			—			—			142,500
Repayments of long-term debt	(2,532		)	(46,220		)	(11,982		)	(12,832		)	—			(73,566		)
Borrowings on revolving lines of credit	—			1,500			12,200			73,500			—			87,200
Repayments on revolving lines of credit	—			(1,500		)	(29,100		)	(75,000		)	—			(105,600		)
Debt issuance costs	(6,042		)	(9,077		)	100			—			—			(15,019		)
Exercise of stock options	422			—			—			—			—			422
Dividends/distributions	(21,301		)	(10,700		)	—			(12,700		)	23,400			(21,301		)
Transactions with Parent/affiliates	(67,458		)	49,946			20,684			3,394			(6,566		)	—
Net cash provided by (used in) financing activities	45,443			(15,792		)	(8,792		)	(23,781		)	16,834			13,912
Net increase (decrease) in cash and cash equivalents	25,870			(874		)	143			(131		)	—			25,008
Cash and cash equivalents, beginning of year	271			880			—			4,624			—			5,775
Cash and cash equivalents, end of year	$	26,141		$	6		$	143		$	4,493		$	—		$	30,783

119

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

19. SUBSEQUENT EVENT

On February 7, 2014, the Company closed on a private offering of $425 million in aggregate principal amount of 10.75% Senior Secured Notes due 2018 at a price of 106.875% plus accrued interest from February 1, 2014. The proceeds from the offering will be used primarily to pay the purchase price and related expenses for the Sherritt Acquisition (See Note 1 for additional details of the Sherritt Acquisition), to prepay the outstanding senior secured notes issued of WML (See Note 5 for additional details of the WML debt), and for working capital. The proceeds will be held in escrow pending the completion of the Sherritt Acquisition, which is expected to occur by the end of the first quarter of 2014.

120

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE.

None.

ITEM 9A — CONTROLS AND PROCEDURES.

(a) Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Internal control over financial reporting refers to a process designed by, or under the supervision of, our principal executive and principal financial officers or persons performing similar functions, and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013, using the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations (1992 framework), or COSO, Internal Control — Integrated Framework. Based upon management’s evaluation, the Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, concluded that our internal control over financial reporting was effective as of December 31, 2013.

Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on our internal control over financial reporting as of December 31, 2013.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Westmoreland Coal Company

We have audited Westmoreland Coal Company and subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Westmoreland Coal Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions

121

and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Westmoreland Coal Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based onthe COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Westmoreland Coal Company and subsidiaries as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2013, and our report dated February 28, 2014 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Denver, Colorado

February 28, 2014

(d) Evaluation of Disclosure Controls and Procedures

As of December 31, 2013, management conducted an evaluation, under the supervision and with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as December 31, 2013 in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by us in such reports is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

122

PART III

ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by Item 10 will be included under the headings Directors, Executive Officer, Corporate Governance and Section 16(a) Beneficial Ownership Reporting Compliance in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 20, 2014, and such required information is incorporated herein by reference.

ITEM 11 — EXECUTIVE COMPENSATION.

The information required by Item 11 will be included under the headings Corporate Governance, Director Compensation for 2013, Compensation Discussion and Analysis and Executive Compensation for 2013 in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 20, 2014, and such required information is incorporated herein by reference.

ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by Item 12 will be included under the headings Beneficial Ownership of Securities and Equity Compensation Plan Information in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 20, 2014, and such required information is incorporated herein by reference.

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by Item 13 will be included under the headings Certain Transactions and Corporate Governance in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 20, 2014, and such required information is incorporated herein by reference.

ITEM 14 — PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by Item 14 will be included under the heading Auditors in our definitive proxy statement for our Annual Meeting of Stockholders to be held May 20, 2014, and such required information is incorporated herein by reference.

123

PART IV

ITEM 15 —EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

1. The following consolidated financial statements for Westmoreland Coal Company are filed herewith in Item 8:
	Report of Independent Registered Public Accounting Firm	59
	Consolidated Balance Sheets - December 31, 2013 and 2012	60
	Consolidated Statements of Operations - Years Ended December 31, 2013, 2012 and 2011	62
	Consolidated Statements of Comprehensive Income (Loss) - Years Ended December 31, 2013, 2012 and 2011	63
	Consolidated Statements of Shareholders’ Deficit - Years Ended December 31, 2013, 2012 and 2011	64
	Consolidated Statements of Cash Flows - Years Ended December 31, 2013, 2012 and 2011	65
	Notes to Consolidated Financial Statements	67
2. The following financial statement schedules for Westmoreland Resources, Inc. and subsidiary, Westmoreland Energy LLC and subsidiaries, Westmoreland Kemmerer, Inc. and Kemmerer Mine are filed herewith:
	Westmoreland Resources, Inc. and subsidiary
	Report of Independent Registered Public Accounting Firm	126
	Consolidated Balance Sheets - December 31, 2013 and 2012	127
	Consolidated Statements of Operations - Years Ended December 31, 2013, 2012 and 2011	128
	Consolidated Statements of Comprehensive Income (Loss) - Years Ended December 31, 2013, 2012 and 2011	129
	Consolidated Statements of Shareholder's Equity - Years Ended December 31, 2013, 2012 and 2011	130
	Consolidated Statements of Cash Flows - Years Ended December 31, 2012, 2011 and 2010	131
	Notes to Consolidated Financial Statements	132
	Westmoreland Energy LLC and subsidiaries
	Report of Independent Registered Public Accounting Firm	145
	Consolidated Balance Sheets - December 31, 2013 and 2012	146
	Consolidated Statements of Operations - Years Ended December 31, 2013, 2012 and 2011	147
	Consolidated Statements of Comprehensive Income (Loss) - Years Ended December 31, 2013, 2012 and 2011	148
	Consolidated Statements of Shareholders’ Equity - Years Ended December 31, 2013, 2012 and 2011	149
	Consolidated Statements of Cash Flows - Years Ended December 31, 2013, 2012 and 2011	150
	Notes to Consolidated Financial Statements	151
	Westmoreland Kemmerer, Inc.	158
	Report of Independent Registered Public Accounting Firm	158
	Balance Sheets - December 31, 2013 and 2012	159
	Statements of Operations - Year Ended December 31, 2013 and Eleven Months Ended December 31, 2012	160
	Statements of Comprehensive Income - Year Ended December 31, 2013 and Eleven Months Ended December 31, 2012	161
	Statements of Shareholder's Equity - Year Ended December 31, 2013 and Eleven Months Ended December 31, 2012	162
	Statements of Cash Flows - Year Ended December 31, 2013 and Eleven Months Ended December 31, 2012	163
	Notes to Financial Statements	164
	Kemmerer Mine	179
	Independent Auditors' Report	181
	Statements of Revenues and Direct Operating Expenses - Month Ended January 31, 2012 and Year Ended December 31, 2011	182
	Statements of Cash Flows - Month Ended January 31, 2012 and Year Ended December 31, 2011	183
	Notes to Financial Statements	183
3. The exhibits listed in the Exhibit Index are filed with or incorporated by reference in this Annual Report on Form 10-K.		197

124

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:	February 28, 2014	/s/ Robert P. King
		Name: Robert P. King
		Title:   Chief Executive Officer             (A Duly Authorized Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Robert P. King	Chief Executive Officer,	February 28, 2014
Robert P. King	(Principal Executive Officer), and Director
/s/ Kevin A. Paprzycki	Chief Financial Officer and Treasurer	February 28, 2014
Kevin A. Paprzycki	(Principal Financial Officer)
/s/ Russell H. Werner	Controller (Principal Accounting Officer)	February 28, 2014
Russell H. Werner
/s/ Keith E. Alessi	Director	February 28, 2014
Keith E. Alessi
/s/ Gail E. Hamilton	Director	February 28, 2014
Gail E. Hamilton
/s/ Michael G. Hutchinson	Director	February 28, 2014
Michael G. Hutchinson
/s/ Richard M. Klingaman	Director	February 28, 2014
Richard M. Klingaman
/s/ Craig R. Mackus	Director	February 28, 2014
Craig R. Mackus
/s/ Jan B. Packwood	Director	February 28, 2014
Jan B. Packwood
/s/ Robert C. Scharp	Director	February 28, 2014
Robert C. Scharp

125

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Westmoreland Resources, Inc.

We have audited the accompanying consolidated balance sheets of Westmoreland Resources, Inc. and subsidiary (the Company) (a wholly owned subsidiary of Westmoreland Coal Company) as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive income (loss), shareholder’s equity and cash flows  for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Westmoreland Resources, Inc. and subsidiary as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Denver, Colorado

February 28, 2014

126

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Balance Sheets

December 31, 2013 and 2012

(In thousands)

	2013		2012
Assets
Current assets:
Cash and cash equivalents	$	2,185	$	1,076
Accounts receivable
Trade	6,277		3,599
Other	2,935		1,743
	9,212		5,342
Inventories	5,324		4,901
Other current assets	5,967		4,464
Total current assets	22,688		15,783
Property, plant and equipment, at cost:
Land and mineral rights	39,538		27,494
Plant and equipment	130,626		123,343
	170,164		150,837
Less accumulated depreciation, depletion and amortization	101,136		94,799
Net property, plant and equipment	69,028		56,038
Restricted investments and bond collateral	11,653		14,506
Contractual third-party reclamation receivables	293		327
Advanced coal royalties	2,000		—
Other assets	586		635
Total assets	$	106,248	$	87,289
Liabilities and Shareholder’s Equity
Current liabilities:
Current installments of long-term debt	$	2,578	$	1,939
Accounts payable	7,940		4,671
Payable to related parties	984		1,161
Accrued expenses	6,598		5,185
Asset retirement obligations	1,106		1,412
Other current liabilities	268		—
Total current liabilities	19,474		14,368
Long-term debt, less current installments	2,227		2,473
Asset retirement obligations, less current portion	35,296		24,401
Payable to related party	9,639		1,870
Other liabilities	—		15,677
Total liabilities	66,636		58,789
Shareholder’s equity:
Common stock of $1 par value. Authorized 40,000 shares; issued and outstanding 10,000 shares at December 31, 2013 and 2012	10		10
Additional paid-in capital	16,083		15,970
Accumulated other comprehensive income	—		16
Retained earnings	23,519		27,177
Total Westmoreland Resources Inc. shareholder’s equity	39,612		43,173
Noncontrolling interest	—		(14,673		)
Total shareholder’s equity	39,612		28,500
Total liabilities and shareholder’s equity	$	106,248	$	87,289

See accompanying Notes to Consolidated Financial Statements.

127

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Statements of Operations

Years Ended December 31, 2013, 2012 and 2011

(In thousands, except per share data)

	2013			2012			2011
Revenues	$	57,545		$	39,041		$	79,831
Costs and expenses:
Cost of sales	73,659			43,727			76,714
Depreciation, depletion, and amortization	9,710			6,283			7,925
Selling and administrative	3,810			3,780			3,656
Loss (gain) on sale of assets	(121		)	9			59
Other operating income	(22,367		)	(17,452		)	(7,258		)
	64,691			36,347			81,096
Operating income (loss)	(7,146		)	2,694			(1,265		)
Other income (expense):
Interest expense	(289		)	(382		)	(668		)
Loss on extinguishment of debt	—			—			(84		)
Interest income	126			226			146
Other	220			208			170
	57			52			(436		)
Income (loss) before income taxes	(7,089		)	2,746			(1,701		)
Income tax expense (benefit)	—			—			(16		)
Net income (loss)	(7,089		)	2,746			(1,685		)
Less: net loss attributable to noncontrolling interest	(3,431		)	(6,436		)	(3,775		)
Net income attributable to Parent company	$	(3,658	)	$	9,182		$	2,090
Net income per share applicable to Parent company	$	(365.80	)	$	918.20		$	209.00
Weighted average number of common shares outstanding	10			10			10

See accompanying Notes to Consolidated Financial Statements.

128

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Statements of Comprehensive Income (Loss)

Years Ended December 31, 2013, 2012 and 2011

(In thousands)

	2013			2012		2011
Net income (loss)	$	(7,089	)	$	2,746	$	(1,685	)
Other comprehensive income (loss):
Unrealized and realized gains and losses on available-for-sale securities	(16		)	1		(105		)
Comprehensive income (loss) attributable to Westmoreland Resources Inc.	$	(7,105	)	$	2,747	$	(1,790	)

See accompanying Notes to Consolidated Financial Statements.

129

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Statements of Shareholder’s Equity

Years Ended December 31, 2011, 2012 and 2013

(In thousands)

	Common stock		Additional paid-in capital			Advances from (to) Parent			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Noncontrolling Interest			Total Shareholder’s Equity
Balance, December 31, 2010	$	10	$	15,526		$	(13,387	)	$	120		$	15,905		$	(4,462	)	$	13,712
Westmoreland Coal Company common stock issued as compensation	—		183			—			—			—			—			183
Contribution of Westmoreland Coal Company common stock to pension plan on the Company’s behalf	—		104			—			—			—			—			104
Adjustment for utilization of tax losses of Westmoreland Coal Company	—		(16		)	—			—			—			—			(16		)
Advances from (to) Parent	—		—			13,387			—			—			—			13,387
Unrealized gain on available-for-sale securities	—		—			—			(105		)	—			—			(105		)
Net loss	—		—			—			—			2,090			(3,775		)	(1,685		)
Balance, December 31, 2011	10		15,797			—			15			17,995			(8,237		)	25,580
Westmoreland Coal Company common stock issued as compensation	—		173			—			—			—			—			173
Unrealized loss on available-for-sale securities	—		—			—			1			—			—			1
Net income	—		—			—			—			9,182			(6,436		)	2,746
Balance, December 31, 2012	10		15,970			—			16			27,177			(14,673		)	28,500
Westmoreland Coal Company common stock issued as compensation	—		113			—			—			—			—			113
Assumption of noncontrolling interest of subsidiary	—		—			—			—			—			18,104			18,104
Unrealized loss on available-for-sale securities	—		—			—			(16		)	—			—			(16		)
Net loss	—		—			—			—			(3,658		)	(3,431		)	(7,089		)
Balance, December 31, 2013	$	10	$	16,083		$	—		$	—		$	23,519		$	—		$	39,612

See accompanying Notes to Consolidated Financial Statements.

130

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Statements of Cash Flows

Years Ended December 31, 2013, 2012 and 2011

(In thousands)

	2013			2012			2011
Cash flows from operating activities:
Net income (loss)	$	(7,089	)	$	2,746		$	(1,685	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation, depletion and amortization	9,710			6,283			7,925
Accretion of asset retirement obligation and receivable	2,522			2,368			3,034
Share-based compensation	113			173			183
Other	(1,001		)	—			—
Postretirement medical benefit costs allocated by Parent, net of payments	1			1			1
Pension contributions, net of pension costs allocated by Parent	44			39			(119		)
Loss (gain) on sale of assets	(121		)	9			59
Loss on extinguishment of debt	—			—			84
Amortization of deferred financing costs	49			443			412
Utilization of tax losses of Westmoreland Coal Company	—			—			(16		)
Change in:
Accounts receivable	(3,870		)	2,639			(1,834		)
Inventories	(423		)	(411		)	(170		)
Accounts payable	4,682			(3,695		)	1,117
Payable to related parties	(177		)	1,771			400
Asset retirement obligation	(37		)	(62		)	(954		)
Other assets and liabilities	1,930			3,092			3,368
Net cash provided by operating activities	6,333			15,396			11,805
Cash flows from investing activities:
Additions to property, plant and equipment	(10,230		)	(4,518		)	(2,069		)
Increase in restricted investments and bond collateral	2,837			(913		)	(2,741		)
Proceeds from sales of assets	307			—			250
Other	(2,000		)	—			—
Net cash used in investing activities	(9,086		)	(5,431		)	(4,560		)
Cash flows from financing activities:
Increase in book overdrafts	268			—			(695		)
Repayments of long-term debt	(2,239		)	(2,503		)	(11,976		)
Borrowings on revolving line of credit	—			—			12,200
Repayments on revolving line of credit	—			—			(29,100		)
Deferred financing costs	—			—			100
Change in payable to related party	5,833			(6,610		)	8,480
Advances from (to) Parent	—			—			13,387
Net cash provided by (used in) financing activities	3,862			(9,113		)	(7,604		)
Net increase (decrease) in cash and cash equivalents	1,109			852			(359		)
Cash and cash equivalents, beginning of year	1,076			224			583
Cash and cash equivalents, end of year	$	2,185		$	1,076		$	224
Supplemental disclosures of cash flow information:
Cash paid for interest	$	281		$	374		$	543
Noncash transactions:
Accrued purchases of property and equipment	338			342			126
Capital leases	2,632			1,353			117

See accompanying Notes to Consolidated Financial Statements

131

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting Policies

Nature of Operations

Westmoreland Resources, Inc., or WRI, or the Company, a wholly owned subsidiary of Westmoreland Coal Company, or WCC, or the Parent, owns a surface coal mining operation located in eastern Montana. Coal produced from the Absaloka Mine is sold to electric utilities based in the north central region of the United States. Westmoreland Coal Company owns and operates the Company. All coal reserves are owned by the Crow Tribe of Indians and the mineral rights to the coal reserves are leased by the Company on a long-term basis.

In various transactions in October 2008, the Company formed a limited liability company, Absaloka Coal LLC, which it owns jointly with a newly formed subsidiary, WRI Partners, Inc., to mine and sell coal from the Absaloka Mine. Absaloka Coal LLC subleases the mineral rights from the Company entitling Absaloka Coal LLC to mine up to 40.0 million tons of coal at the Absaloka Mine through December 2013. WRI also assigned to Absaloka Coal LLC all of its contracts to sell coal to third parties. The Company sold a 99% interest in Absaloka Coal LLC to a third party but continues to consolidate Absaloka Coal LLC as the Company has effective control over its operations.

The Company’s financial statements reflect substantially all of its costs of doing business. Common expenses incurred by the Parent on behalf of the Company are charged to the Company based on proportional cost allocations. The Company believes the allocations used are reasonable; however, these financial statements may not necessarily be representative of a stand-alone company.

WCC Liquidity

The Company anticipates that its cash from operations, cash on hand and available WCC borrowing capacity will be sufficient to meet its investing, financing, and working capital requirements for the foreseeable future.

On June 29, 2012, WCC and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit carved out by the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit (which was increased to $10.0 million on January 10, 2014), which would reduce the balance available under the revolver. At December 31, 2013, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. 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, Westmoreland Kemmerer, Inc., and Westmoreland Energy, LLC. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a second lien position on these assets.

Recent Developments

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 Company's largest customer. Xcel indicated that Unit 3 would be offline for an extended period. Unit 3 resumed operations during October 2013. The Company maintains business interruption insurance coverage and has recognized $16.2 million of income for the year ended December 31, 2013 and $17.3 million of income for the year ended December 31, 2012. The Company received $13.4 million of cash proceeds for the year ended December 31, 2013. Insurance proceeds are included in Net cash provided by operating activities. At the time Unit 3 resumed operations, the Company no longer recorded income from business interruption insurance. Subsequent to December 31, 2013, the Company has collected all cash proceeds due to it.

Consolidation Policy

The Company consolidates any variable interest entity, or VIE, for which the Company is considered the primary beneficiary. The Company provides for noncontrolling interests in consolidated subsidiaries, which the Company’s ownership is less than 100 percent. All intercompany accounts and transactions have been eliminated.

A VIE is an entity that is unable to make significant decisions about its activities or does not have the obligation to absorb losses or the right to receive returns generated by its operations. If the entity meets one of these characteristics, then the Company must determine if it is the primary beneficiary of the VIE. The party exposed to the majority of the risks and rewards with the VIE is the primary beneficiary and must consolidate the entity.

132

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

The Company has determined for all periods presented, it was the primary beneficiary in Absaloka Coal LLC, a VIE, in which it held less than a 50% ownership through December 31, 2013. As a result, the Company has consolidated this entity within its operations. The investment in Absaloka Coal LLC by its outside partner did not continue after December 31, 2013, and beginning in 2014, Absaloka Coal LLC will be 100% owned by the Company but will cease to have operations. As a result, the Company has unwound the transaction as of December 31, 2013 and concerning our balance sheet have decreased Other liabilities by $19.1 million and decreased Noncontrolling interest by $18.1 million. As a result, as of December 31, 2013, the noncontrolling interest was eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on a review of collectability. The Company has determined that no allowance is necessary for accounts receivable as of December 31, 2013 and 2012.

Inventories

Inventories, which include materials and supplies as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs.

Exploration and Mine Development

Exploration expenditures are charged to Cost of sales as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves.

At existing surface operations, additional pits may be added to increase production capacity in order to meet customer requirements. These expansions may require significant capital to purchase additional equipment, relocate equipment, build or improve existing haul roads and create the initial pre-production box cut to remove overburden for new pits at existing operations. If these pits operate in a separate and distinct area of the mine, the costs associated with initially uncovering coal for production are capitalized and amortized over the life of the developed pit consistent with coal industry practices. Once production has begun, mining costs are then expensed as incurred.

Where new pits are routinely developed as part of a contiguous mining sequence, the Company expenses such costs as incurred. The development of a contiguous pit typically reflects the planned progression of an existing pit, thus maintaining production levels from the same mining area utilizing the same employee group and equipment.

Property, Plant, and Equipment

Property, plant and equipment are recorded at cost. Expenditures that extend the useful lives of existing plant and equipment or increase productivity of the assets are capitalized. Maintenance and repair costs that do not extend the useful life or increase productivity of the asset are expensed as incurred. Coal reserves are recorded at cost, or at fair value in the case of acquired businesses.

Coal reserves, mineral rights and mine development costs are depleted based upon estimated recoverable proven and probable reserves. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as

133

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

follows:

	Years
Buildings and improvements	15 to 30
Machinery and equipment	3 to 30

The Company assesses the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to fair value. When an asset is retired or sold, its cost and related accumulated depreciation and depletion are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and equipment still in use is not eliminated from the accounts. Amortization of capital leases is included in Depreciation, depletion and amortization.

Restricted Investments and Bond Collateral

The Company has requirements to maintain restricted cash and investments for bonding requirements. Amounts held are recorded as Restricted investments and bond collateral. Funds in the restricted investment and bond collateral accounts are not available to meet the Company’s operating cash needs.

Contractual Third-Party Reclamation Receivables

Certain of the Company’s customers have agreed to reimburse the Company for reclamation expenditures as they are incurred. Amounts that are reimbursable by customers are recorded as Contractual third-party reclamation receivables when the related reclamation obligation is recorded.

Fair Value

The Company is required to disclose the fair value of financial instruments. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the balance sheet approximates the fair value of these instruments due to the short duration to maturities. The fair value of the Company’s Level 1 available-for-sale equity securities is generally based on independent third-party market prices.

The Company’s non-recurring fair value measurements include asset retirement obligations. 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.

Financial Instruments

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

Held-to-maturity financial instruments consist of non-derivative financial assets with fixed or determinable payments and a fixed term, which the Company has the ability and intent to hold until maturity, and, therefore, accounts for them as held-to-maturity 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.

The Company has securities classified as available-for-sale, which are recorded at fair value. The changes in fair values are recorded as unrealized gains (losses) as a component of Accumulated other comprehensive loss in shareholder’s equity.

The Company reviews its securities routinely for other-than-temporary impairment. The primary factors used to determine if an impairment charge must be recorded because a decline in value of the security is other than temporary include (i) whether the fair value of the investment is significantly below its cost basis, (ii) the financial condition of the issuer of the

134

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

security, (iii) the length of time that the cost of the security has exceeded its fair value and (iv) the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. Other-than-temporary impairments are recorded as a component of Other income (expense).

Intangible Assets and Liabilities

Identifiable intangible assets or liabilities acquired in a business combination must be recognized and reported separately from goodwill. Intangible assets result from more favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. Intangible liabilities result from less favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. The majority of these intangible assets and liabilities are amortized on a straight-line basis over the respective period of the sales and purchase agreements, while the remainder are amortized on a unit-of-production basis. The Company did not have intangible assets or liabilities as of December 31, 2013 and 2012.

Postretirement Medical Benefits and Pension Plans

The Company, through a plan sponsored by WCC, provides certain medical benefits for retired employees and their dependents. Effective September 1, 2009, WCC eliminated these benefits for non-represented employees and retirees. These benefits are provided through an unfunded self-insured program.

WCC requires the costs of postretirement medical benefits other than pensions to be accrued over the employees’ period of active service. These costs are determined on an actuarial basis and are allocated by the Parent to the Company based on its share of the plan participants. These costs are recorded in Cost of sales with a corresponding decrease in Payable to related party. The Parent’s consolidated balance sheets reflect the unfunded status of these postretirement medical benefit obligations.

The Company also participates in the Parent’s noncontributory defined benefit pension plan, which was frozen effective July 1, 2009. The costs to provide the benefits are accrued over the employees’ period of active service and are determined on an actuarial basis. The Company records an allocation of net periodic retirement benefit costs from the Parent in Cost of sales with a corresponding decrease in Payable to related party. The Parent’s consolidated balance sheets reflect the unfunded status of these defined benefit pension plan obligations.

Income Taxes

The Company files consolidated federal and state tax returns with its Parent. As the Company itself is not a taxable entity, the Parent’s tax expense for its income tax return group included on the Parent’s consolidated income tax return is allocated among the members of that group. This allocation is calculated as if each member were a separate taxpayer. This allocation is reflected by the Company in Income tax expense (benefit) with the offset in Additional paid-in capital. There is no formal tax sharing agreement with the Parent.

The Company accounts for deferred income taxes using the asset and liability method. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Company’s financial statements based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, as well as net operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance against its net deferred tax assets to the extent the Company believes that it is more likely than not that it will not realize the net deferred tax assets.

Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. This standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Asset Retirement Obligations

The Company’s asset retirement obligation, or ARO, liabilities primarily consist of estimated costs related to reclaiming surface land and support facilities at its mines in accordance with federal and state reclamation laws as established by each mining permit.

The Company estimates its ARO liabilities for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the estimated future costs for a third party to perform the required work. Cost

135

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

estimates are escalated for inflation, and then discounted at the credit-adjusted risk-free rate. The Company records mineral rights associated with the initial recorded liability. Mineral rights are amortized based on the units-of-production method over the estimated recoverable, proven and probable reserves at the related mine, and the ARO liability is accreted to the projected settlement date. Changes in estimates could occur due to revisions of mine plans, changes in estimated costs, and changes in the timing of the performance of reclamation activities.

Coal Revenues

The Company recognizes coal sales revenue at the time title passes to the customer in accordance with the terms of the underlying sales agreements and after any contingent performance obligations have been satisfied. Coal sales revenue is recognized based on the pricing contained in the coal contracts in place at the time that title passes and any retroactive pricing adjustments to those contracts are recognized as revised agreements are reached with the customers and any performance obligations included in the agreements are satisfied.

Other Operating Income

Other operating income in the accompanying Consolidated Statements of Operations reflects income from sources other than coal revenues. Income from the Company’s Indian Coal Tax Credit monetization transaction is recorded as Other operating income. The Company recognizes income as business interruption losses are incurred and reimbursement is virtually assured and has recognized $16.2 million and $17.3 million of income during 2013 and 2012, respectively; which is included in Other operating income. Insurance proceeds are included in Net cash provided by operating activities.

Share-Based Compensation

Share-based compensation expense is generally measured at the grant date and recognized as expense over the vesting period of the entire award. This expense relates to WCC common stock attributable to the Company's employees. These costs are recorded in Cost of sales and Selling and administrative expenses.

Earnings (Loss) per Share

Basic earnings (loss) per share have 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 interests.

Accounting Pronouncements Adopted

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 only affects the Company's disclosures.

2. Indian Coal Production Tax Credits (ICTC’s)

In August 2005, the Energy Policy Act of 2005 was enacted. Among other provisions, it contains a tax credit for the production of coal owned by Indian tribes. The tax credit is equal to $2.308 per ton in 2013 and increases annually based on an inflation-adjustment factor. The credit may be used against regular corporate income tax for all years and against alternative minimum taxes for the initial four-year period after the placed in service date of the facility. The Absaloka Mine produces coal that qualifies for this credit. The ICTC's expired in December 2013. The ICTC's have not been extended as of December 31, 2013 by any provisions of the Internal Revenue Code.

In July 2008, the Company finalized an agreement with the Crow Tribe covering the treatment of the tax credit in determining royalties payable to the Tribe under its lease agreement with the Tribe.

On October 16, 2008, the Company entered into a series of transactions with a financial institution, or Partner, designed to enable the Company to take advantage of ICTC’s generated by its mining operations.

136

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

In these transactions, the Company formed a limited liability company, Absaloka Coal LLC, which it owned jointly with a newly formed subsidiary, WRI Partners, Inc., to mine and sell coal from the Absaloka Mine. Absaloka Coal LLC then entered into a sublease from the Company for the coal leases with the Crow Tribe, entitling Absaloka Coal LLC to mine up to 40.0 million tons of coal at the Absaloka Mine through 2013. WRI also assigned to Absaloka Coal LLC all of its contracts to sell coal to third parties.

On October 16, 2008, the Company sold its interest in Absaloka Coal LLC to the Partner for consideration consisting of an initial payment of $4.0 million, $34.0 million of fixed principal and interest payments, and contingent payments based on 90% of the credits allocated to the Partner in excess of the fixed payments. The total consideration paid by the Partner to the Company was approximately $50.0 million through December 31, 2013. The Company shared approximately $15.2 million of this consideration with the Crow Tribe as royalties.

The Partner was entitled to 99% of Absaloka Coal LLC’s earnings and related distributions until it had received a 10% return on its initial $4.0 million cash investment, after which it was entitled to 5% of earnings and distributions.

On October 3, 2008, the Company requested a private letter ruling, or PLR, request with the IRS concerning various issues relating to the validity of the ICTC’s. In March 2009, the Company received a PLR confirming the availability of the ICTC’s under the specific scenario described whereby WRI subleased the right to mine a fixed amount of coal from the Company’s Absaloka Mine to the LLC. The Company recognizes the fixed and contingent payments from the Partner as they are received as income in its consolidated financial statements.

As part of the purchase agreement, the Company has an option to purchase the Partner's entire membership interest after October 16, 2013, and the Partner is entitled to withdraw at any time from Absaloka Coal LLC. In these events, or on dissolution of the LLC, the Company would be required to pay the Partner the appraised value of its capital account balance.

The Company is the sole manager of Absaloka Coal LLC and has entered into a contract mining agreement with Absaloka Coal LLC under which it receives an amount equal to all of its mining costs plus a fee per ton of coal mined. Westmoreland Coal Sales Company acts as the exclusive sales agent on behalf of Absaloka Coal LLC under a sales agency agreement and receives a fee for its services based on the tons of coal sold.

On May 30, 2013, the Company extended its ICTC monetization transaction two and a half months to December 31, 2013 to coincide with the IRS's extension of the ICTC. The Company also agreed with the Partner in the transaction to adjust the mining fee the Company receives as compensation for mining to better reflect current market conditions.

The Partner did not extend the ICTC monetization transaction with the Company, and it expired on December 31, 2013. As a result, the Company unwound the transaction as of December 31, 2013 and decreased Other liabilities by $19.1 million and decreased Noncontrolling interest by $18.1 million. As a result, as of December 31, 2013, the noncontrolling interest was eliminated. The Company is currently pursuing future monetization of the ICTC in the event that the IRS extends the ICTC beyond December 31, 2013.

3. Inventories

Inventory consisted of the following at December 31, 2013 and 2012 (in thousands):

	2013			2012
Coal	$	108		$	248
Materials and supplies	5,333			4,792
Reserve for obsolete inventory	(117		)	(139		)
Total	$	5,324		$	4,901

4. Restricted Investments and Bond Collateral

The Company’s restricted investments and bond collateral consisted of the following (in thousands):

	December 31,
	2013		2012
Reclamation bond collateral	$	11,653	$	14,506

137

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at December 31, 2013 are as follows (in thousands):

	Carrying Value		Fair Value
Cash and cash equivalents	$	7,628	$	7,628
Held-to-maturity securities	1,581		1,669
Time deposits	2,444		2,444
	$	11,653	$	11,741

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

As of December 31, 2013, the Company had reclamation bond collateral in place for its active Absaloka Mine. These government-required bonds assure that coal-mining operations comply with applicable federal and state regulations relating to the performance and completion of final reclamation activities. The amounts deposited in the bond collateral account secure the bonds issued by the bonding company.

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

The amortized cost, gross unrealized holding gains and fair value of held-to-maturity securities at December 31, 2013 and 2012 are as follows (in thousands):

	2013		2012
Amortized cost	$	1,581	$	2,424
Gross unrealized holding gains	88		128
Fair value	$	1,669	$	2,552

Maturities of held-to-maturity securities are as follows at December 31, 2013 (in thousands):

	Amortized Cost		Fair Value
Due within one year	$	364	$	369
Due in five years or less	825		860
Due in more than ten years	392		440
	$	1,581	$	1,669

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at December 31, 2013 and 2012 are as follows (in thousands):

	2013		2012
Cost basis	$	—	$	175
Gross unrealized holding gains	—		16
Fair value	$	—	$	191

5. Long-term Debt

The amount outstanding at December 31, 2013 and 2012 under the Company’s long-term debt consisted of the following (in thousands):

	Total Debt Outstanding
	2013			2012
Capital lease obligations	$	4,805		$	4,412
Less current portion	(2,578		)	(1,939		)
Total debt outstanding, less current portion	$	2,227		$	2,473

138

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

The following table presents aggregate contractual debt maturities of all long-term debt (in thousands):

	As of December 31, 2013
2014	$	2,578
2015	1,102
2016	876
2017	206
2018	43
Thereafter	—
	$	4,805

WRI leases equipment utilized in its operations at the Absaloka Mine. The weighted average interest rate for these capital leases outstanding at December 31, 2013 and 2012 was 5.92% and 6.61%, respectively and mature at various dates beginning in 2014 through 2017.

6. Postretirement Medical Benefits

The Company participates in a postretirement medical benefit plan sponsored by the Parent. The plan provided medical benefits for retired employees and their dependents. Effective September 1, 2009, WCC eliminated these benefits for non-represented employees and retirees.

The Company records an allocation of the net periodic postretirement medical benefit cost from the Parent as a component of Cost of sales with a corresponding decrease in Payable to related party. In 2013 and 2012, the Company did not make medical benefit payments for its retirees who participate in the Parent’s postretirement medical benefit plan. The Company recorded postretirement medical benefit costs of less than $0.1 million in both 2013 and 2012. The benefit obligation attributable to the plan participants that are employees or retirees of the Company was less than $0.1 million at December 31, 2013 and 2012.

7. Pension Plan

The Company participates in a noncontributory defined benefit pension plan sponsored by the Parent, which was frozen effective July 1, 2009. This plan covered nearly all of the Company’s full-time employees. Benefits are generally based on years of service, the employee’s average annual compensation for the highest five continuous years of employment as specified in the plan agreement and social security integration levels.

The Company records an allocation of the net periodic pension benefit cost from the Parent as Cost of sales with a corresponding decrease in Payable to related party. The Company allocated less than $0.1 million in net periodic pension benefit cost in both 2013 and 2012. In 2013 and 2012, the Company did not make any contributions to the pension plan sponsored by the Parent. The accumulated pension benefit obligation attributable to the plan participants that are employees or retirees of the Company was $2.2 million and $2.4 million at December 31, 2013 and 2012, respectively. This obligation is funded with $1.9 million and $1.7 million of plan assets held by the Parent at December 31, 2013 and 2012, respectively, resulting in a $0.3 million and $0.7 million unfunded liability recorded on the Parent’s consolidated balance sheet at December 31, 2013 and 2012, respectively.

The Company does not expect to contribute to WCC’s pension plan during 2013.

a) Multi-Employer Pension

The Company contributes to the Central Pension Fund, or the Plan, a multiemployer defined benefit pension plan pursuant to collective bargaining agreements. The Plan’s Employer Identification Number is 36-6052390. The Company contributes to the Plan based on a negotiated rate per hour worked per participating employee. For the Plan’s year-end dates of January 31, 2012 and 2011, no single employer contributed more than 5% of total contributions to the Plan. As of the Plan’s year-end date January 31, 2012, it had a healthy or greater than 80% funding status.

139

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

The following table shows the required disclosures for the Central Pension Fund:

	WRI
Employer plan number	9243
Minimum contributions per hour worked	$	5.70
Expiration date of collective bargaining agreements	5/31/2015
Employer contributions (in millions):
2013	$	0.9
2012	0.5
2011	0.9

8. Asset Retirement Obligations and Contractual Third Party Reclamation Receivables

a) Asset Retirement Obligations

Changes in the Company’s asset retirement obligations during the year ended December 31, 2013 and 2012 were (in thousands):

	2013			2012
Asset retirement obligations, beginning of year	$	25,813		$	24,757
Accretion	2,572			2,394
Liabilities settled	(28		)	(73		)
Changes due to amount and timing of reclamation	8,045			(1,265		)
Asset retirement obligations, end of year	36,402			25,813
Less current portion	(1,106		)	(1,412		)
Asset retirement obligations, less current portion	$	35,296		$	24,401

As permittee, the Company is responsible for the total amount. The financial responsibility for a portion of final reclamation of the mine when it is closed has been transferred by contract to one of the Company’s customers.

b) Contractual Third-Party Reclamation Receivables

The Company has recognized an asset of $0.3 million and $0.3 million at December 31, 2013 and 2012, respectively as a contractual third-party reclamation receivable, representing the present value of the obligation of one of its customers to reimburse the Company for a portion of the asset retirement costs.

9. Fair Value

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. The Company is required to disclose the fair value of financial instruments where practicable. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the Consolidated Balance Sheet approximate the fair value of these instruments due to the short duration to their maturities. See Notes 4 and 8 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 1 assets include available-for-sale equity securities generally valued based on independent third-party market prices. The Company had no Level 1 inputs at December 31, 2013.

• 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. The Company had no Level 2 inputs at December 31, 2013 and 2012.

140

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

• Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company had no Level 3 inputs at December 31, 2013 and 2012.

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

	Fair Value at December 31, 2012
	Level 1		Level 2		Level 3
Assets:
Available-for-sale investments included in Restricted investments and bond collateral	$	191	$	—	$	—

10. Income Taxes

Income tax benefit attributable to net income before income taxes consists of (in thousands):

	2013		2012		2011
Current:
State	$	—	$	—	$	(16	)
Income tax benefit	$	—	$	—	$	(16	)

Income tax benefit attributable to net income before income taxes differed from the amounts computed by applying the statutory federal income tax rate of 34% to pre-tax income as a result of the following (in thousands):

	2013			2012			2011
Computed tax expense (benefit) at statutory rate	$	(2,410	)	$	933		$	(578	)
Increase in income tax expense (benefit) resulting from:
Noncontrolling interest	1,167			2,188			1,283
State income taxes, return to provision adjustment	—			—			(10		)
Prior year permanent items tax adjustments	(75		)	—			1
Change in valuation allowance for net deferred tax assets	1,208			(3,008		)	(745		)
Domestic production activities deduction	—			(160		)	—
Indian coal tax credit	(52		)	—			—
Other, net	162			47			33
Actual income tax benefit	$	—		$	—		$	(16	)

141

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):

	2013			2012
Deferred tax assets:
Indian coal tax credit carryforward	$	16,008		$	15,956
Accruals for following:
Asset retirement obligations	13,869			7,505
NOL carryforward	3,599			1,391
Other accruals	268			316
Pension and postretirement medical obligation	109			269
AMT credit carryforward	140			96
Total gross deferred tax assets	33,993			25,533
Less valuation allowance	(15,503		)	(14,296		)
Net deferred tax assets	18,490			11,237
Deferred tax liabilities:
Property, plant and equipment, due to differences in basis and depreciation, depletion and amortization	(17,407		)	(11,237		)
Gain on sale of partnership interest	(1,083		)	—
Total gross deferred tax liabilities	(18,490		)	(11,237		)
Net deferred taxes	$	—		$	—

As of December 31, 2013, the Company has available federal net operating loss carryforwards to reduce future regular taxable income, which expires as follows (in thousands):

Expiration Date	Regular Tax
2030	$	65
2031	1,368
2033	7,942
Total	$	9,375

As of December 31, 2013, the Company also has an estimated $9.2 million in state net operating loss carryforwards to reduce future taxable income.

11. Commitments and contingencies

a) Leases

The gross value of property, plant, equipment and mine development assets under capital leases was $5.5 million and $5.3 million as of December 31, 2013 and 2012, respectively, related primarily to the leasing of mining equipment. The accumulated amortization for these items was $1.2 million and $1.6 million at December 31, 2013 and 2012, respectively.

142

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

Future minimum capital and operating lease payments as of December 31, 2013, are as follows (in thousands):

	December 31, 2013
	Capital Leases			Operating Leases
2014	$	2,800		$	988
2015	1,184			737
2016	895			255
2017	208			—
2018	45			—
Thereafter	—			—
Total minimum lease payments	5,132			$	1,980
Less imputed interest	(327		)
Present value of minimum capital lease payments	$	4,805

Rental expense under operating leases during the year ending December 31, 2013, 2012 and 2011 totaled $2.5 million, $1.2 million and $1.2 million, respectively.

The Company leases certain of its coal reserves from third parties and pays royalties based on either a per ton rate or as a percentage of revenues received. Royalties charged to expense under all such lease agreements amounted to $7.3 million, $5.0 million and $10.1 million in 2013, 2012 and 2011, respectively.

At December 31, 2013, the Company had fuel supply contracts outstanding with a minimum purchase requirement of 1.0 million gallons of diesel fuel per year. These contracts qualify for the normal purchase normal sale exception under hedge accounting.

The company is subject to litigation in the ordinary course of business. No material litigation exists.

12. Coal Sales and Major Customers

The customers from which more than 10% of total revenue has been derived and the percentage of total revenue from those customers is summarized as follows (in thousands):

	2013			2012			2011
Customer A	$	25,958		$	26,525		$	52,835
Customer B (1)	7,416			—			—
Customer C (2)	3,663			—			16,911
	$	37,037		$	26,525		$	69,746
Percentage of total revenue	64		%	68		%	87		%

____________________ 

(1) The revenue from Customer B did not exceed 10% in 2012 or 2011

(2) The revenue from Customer C did not exceed 10% in 2013 or 2012

13. Related Party Transactions

The Company engages in certain transactions with its Parent and other subsidiaries of the Parent.

The Company was allocated costs for accounting, audit, tax and information technology incurred by its Parent. In 2013, 2012 and 2011, these costs were $0.5 million, $0.4 million and $0.3 million, respectively, and are included in Selling and administrative expenses.

During 2012, Westmoreland Risk Management, Inc., or WRMI, a wholly owned subsidiary of WCC, reimbursed the Company $1.5 million related to the explosion and subsequent fire as described in Note 1. In 2011, WRMI reimbursed the Company $0.5 million. This reimbursement is included in Other operating income.

Payable to related party primarily represent the Company’s obligations for long-term loans from the Parent and accruals for postretirement medical benefit costs and pension costs allocated by the Parent, net of payments.

143

WESTMORELAND RESOURCES, INC. AND SUBSIDIARY

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

14. Quarterly Financial Data (unaudited)

Summarized quarterly financial data is as follows:

	Three Months Ended
	March 31			June 30		September 30			December 31
	(In thousands; except per share data)
2013:
Revenues	$	11,350		$	9,539	$	17,149		$	19,507
Operating income (loss)	(584		)	2,374		(1,723		)	(7,213		)
Net income (loss) applicable to Parent company	646			2,497		(82		)	(6,719		)
Basic income (loss) per common share	$	64.60		$	249.70	$	(8.20	)	$	(671.90	)
2012:
Revenues	$	9,355		$	7,880	$	9,452		$	12,354
Operating income (loss)	484			1,601		(739		)	1,348
Net income applicable to Parent company	980			1,914		991			5,297
Basic income per common share	$	98.00		$	191.40	$	99.10		$	529.70

During the fourth quarter of 2013, as a result of a review of useful lives assigned to assets under capital leases and an evaluation of other operating income, the Company recorded $1.4 million of additional net expense related to prior years. In accordance with applicable U.S. GAAP, management quantitatively and qualitatively evaluated the materiality of the error and determined the error to be immaterial to the Company's 2013 consolidated financial statements.

144

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

Report of Independent Registered Public Accounting Firm

The Board of Directors of

Westmoreland Energy LLC

We have audited the accompanying consolidated balance sheets of Westmoreland Energy LLC and subsidiaries (the Company) (a wholly owned subsidiary of Westmoreland Coal Company) as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive income, member’s equity and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Westmoreland Energy LLC and subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Denver, Colorado

February 28, 2014

145

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Balance Sheets

December 31, 2013 and 2012

	2013			2012
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	3,341		$	4,545
Accounts receivable	13,144			13,018
Inventories	6,161			3,047
Other current assets	143			298
Total current assets	22,789			20,908
Property, plant, and equipment:
Land	1,156			1,156
Capitalized asset retirement cost	239			239
Plant, equipment, and other	220,872			219,857
	222,267			221,252
Less accumulated depreciation and amortization	71,653			61,474
	150,614			159,778
Restricted investments	5,998			5,990
Intangible assets, net of accumulated amortization of $12.3 million at December 31, 2013 and $10.7 million at December 31, 2012	1,283			2,923
Total assets	$	180,684		$	189,599
Liabilities and Member’s Equity
Current liabilities:
Accounts payable	$	10,119		$	4,979
Accrued expenses	3			3
Other current liabilities	5,053			—
Deferred revenue	9,024			8,788
Total current liabilities	24,199			13,770
Deferred revenue, less current portion	41,297			50,239
Pension	99			289
Asset retirement obligation	892			829
Intangible liabilities, net of accumulated amortization of $7.6 million at December 31, 2013 and $6.6 million at December 31, 2012	5,606			6,625
Total liabilities	72,093			71,752
Member’s equity:
Contributed capital	52,840			52,810
Accumulated other comprehensive income	(164		)	(372		)
Retained earnings	55,915			65,409
Total member’s equity	108,591			117,847
Total liabilities and member’s equity	$	180,684		$	189,599

See accompanying Notes to Consolidated Financial Statements.

146

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Statements of Operations

Years Ended December 31, 2013, 2012 and 2011

	2013			2012			2011
	(In thousands)
Revenues	$	87,567		$	81,285		$	86,785
Costs and expenses:
Cost of sales	63,794			59,299			60,243
Depreciation	10,178			10,085			10,175
Selling and administrative	3,609			3,657			4,059
Restructuring charges	5,078			—			—
Loss on sale of assets	—			—			189
	82,659			73,041			74,666
Operating income	4,908			8,244			12,119
Other income (expense):
Interest expense	(39		)	(39		)	(469		)
Loss on extinguishment of debt	26			—			(9,073		)
Interest income	—			15			14
	(13		)	(24		)	(9,528		)
Income before income taxes	4,895			8,220			2,591
Income tax expense (benefit)	680			107			(2,498		)
Net income	$	4,215		$	8,113		$	5,089

See accompanying Notes to Consolidated Financial Statements.

147

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Statements of Comprehensive Income

December 31, 2013, 2012 and 2011

	2013		2012			2011
	(In thousands)
Net income	$	4,215	$	8,113		$	5,089
Other comprehensive income (loss):
Amortization and adjustment of accumulated actuarial gains or losses, pension	208		(29		)	(140		)
Comprehensive income attributable to Westmoreland Energy LLC	$	4,423	$	8,084		$	4,949

See accompanying Notes to Consolidated Financial Statements.

148

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Statements of Member’s Equity

Years Ended December 31, 2011, 2012 and 2013

	Contributed Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Total Member’s Equity
	(In thousands)
Balance at December 31, 2010	$	35		$	(203	)	$	66,184		$	66,016
Distributions	—			—			(10,700		)	(10,700		)
Transactions with Parent/affiliates	52,670			—			(2,722		)	49,948
Westmoreland Coal Company common stock issued as compensation	32			—			—			32
Contributions of Westmoreland Coal Company common stock to pension plan on the Company’s behalf	43			—			—			43
Amortization and adjustment of accumulated actuarial loss of pension plans	—			(140		)	—			(140		)
Net income	—			—			5,089			5,089
Balance at December 31, 2011	52,780			(343		)	57,851			110,288
Distributions	—			—			(1,050		)	(1,050		)
Transactions with Parent/affiliates	(14		)	—			495			481
Westmoreland Coal Company common stock issued as compensation	44			—			—			44
Amortization and adjustment of accumulated actuarial loss of pension plans	—			(29		)	—			(29		)
Net income	—			—			8,113			8,113
Balance at December 31, 2012	52,810			(372		)	65,409			117,847
Distributions	—			—			(14,500		)	(14,500		)
Transactions with Parent/affiliates	—			—			791			791
Westmoreland Coal Company common stock issued as compensation	30			—			—			30
Amortization and adjustment of accumulated actuarial loss of pension plans	—			208			—			208
Net income	—			—			4,215			4,215
Balance at December 31, 2013	$	52,840		$	(164	)	$	55,915		$	108,591

See accompanying Notes to Consolidated Financial Statements

149

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Consolidated Statements of Cash Flows

Years Ended December 31, 2013, 2012 and 2011

	2013			2012			2011
	(In thousands)
Cash flows from operating activities:
Net income	$	4,215		$	8,113		$	5,089
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	10,178			10,085			10,175
Accretion of asset retirement obligation	63			59			55
Share-based compensation	30			44			32
Loss on the sale of assets	—			—			189
Amortization of deferred financing costs	—			—			(21		)
Amortization of intangible assets and liabilities, net	621			621			621
Loss on extinguishment of debt	—			—			9,073
Change in:
Accounts receivable	(126		)	(151		)	1,479
Inventories	(3,339		)	709			(1,820		)
Accounts payable and accrued expenses	10,193			(3,201		)	(1,063		)
Deferred revenues	(8,706		)	(8,312		)	(8,774		)
Other assets and liabilities	174			(523		)	(579		)
Net cash provided by operating activities	13,303			7,444			14,456
Cash flows from investing activities:
Purchases of property, plant and equipment	(790		)	(2,070		)	(2,119		)
Change in restricted investments	(8		)	(7		)	2,581
Net cash provided by (used in) investing activities	(798		)	(2,077		)	462
Cash flows from financing activities:
Change in book overdrafts	—			(259		)	259
Repayments of long-term debt	—			—			(46,220		)
Borrowings on revolving lines of credit	—			—			1,500
Repayments on revolving lines of credit	—			—			(1,500		)
Deferred financing costs and other refinancing costs	—			—			(9,077		)
Transactions with Parent/affiliates	791			481			49,946
Distributions	(14,500		)	(1,050		)	(10,700		)
Net cash used in financing activities	(13,709		)	(828		)	(15,792		)
Net increase (decrease) in cash and cash equivalents	(1,204		)	4,539			(874		)
Cash and cash equivalents, beginning of year	4,545			6			880
Cash and cash equivalents, end of year	$	3,341		$	4,545		$	6
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	39		$	39		$	1,179
Income taxes (refunds)	—			—			(74		)
Noncash transactions:
Accrued purchases of property and equipment	—			—			3

See accompanying Notes to Consolidated Financial Statements

150

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Nature of Operations

Westmoreland Energy LLC, or WELLC, or the Company, a wholly owned subsidiary of Westmoreland Coal Company, or WCC, or the Parent, is a special purpose Delaware Limited Liability Company formed on December 4, 2000. Through its subsidiaries, the Company owns and operates two cogeneration facilities also known as Roanoke Valley Power Facility, or ROVA, located in Weldon, North Carolina. The first facility, ROVA I, is a 180 MW facility and the second facility, ROVA II, is a 50 MW facility adjacent to ROVA I. ROVA I and ROVA II operate as exempt wholesale generators as determined by the Federal Energy Regulatory Commission, or FERC. ROVA I commenced commercial operation on May 29, 1994. ROVA II commenced commercial operation on June 1, 1995. The Parent provides management and administrative support to WELLC and its subsidiaries, including legal, environmental, sales, and accounting services.

The Company’s financial statements reflect substantially all of its costs of doing business. Common expenses incurred by the Parent on behalf of the Company are charged to the Company based on proportional cost allocations. The Company believes the allocations used are reasonable; however, these financial statements may not necessarily be representative of a stand-alone company.

WCC Liquidity

The Company anticipates that its cash from operations, cash on hand and available WCC borrowing capacity will be sufficient to meet its investing, financing, and working capital requirements for the foreseeable future.

On June 29, 2012, WCC and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit carved out by the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit (which was increased to $10.0 million on January 10, 2014), which would reduce the balance available under the revolver. At December 31, 2013, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. 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, Westmoreland Resources, Inc., Westmoreland Kemmerer, Inc., and WELLC. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a second lien position on these assets.

Consolidation Policy

The consolidated financial statements of WELLC include the accounts of the Company and its wholly owned subsidiaries, after elimination of intercompany balances and transactions.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on a review of collectability. The Company has determined that no allowance is necessary for accounts receivable as of December 31, 2013 and 2012.

Inventories

Inventories, which consist primarily of coal, are stated at the lower of cost or market. Cost is determined using the average cost method.

151

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

Restricted Investments

The Company has requirements to maintain restricted cash and investments for letter of credit requirements. Funds in the restricted investment accounts are not available to meet the Company’s operating cash needs. For all of its restricted investments, the Company can select from several investment options for the funds and receives the investment returns on these investments.

Property, Plant, and Equipment

Property, plant and equipment are carried at cost and include expenditures for new facilities, those expenditures that substantially increase the productive lives of existing plant and equipment and long-term spare parts inventory. Maintenance and repair costs that do not extend the useful life or increase the productivity of the asset are expensed as incurred. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as follows:

	Years
Buildings and improvements	15 to 30
Machinery and equipment	3 to 36

Ash monofills are amortized on a cost per ton basis multiplied by tons sent to each monofill. The ash monofills were built as disposal sites for the ash generated during operations. Long-term spare parts inventory begins depreciation when placed in service.

The Company assesses the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to fair value.

When an asset is retired or sold, its cost and related accumulated depreciation and depletion are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and equipment still in use is not eliminated from the accounts.

Intangible Assets and Liabilities

Identifiable intangible assets or liabilities acquired in a business combination must be recognized and reported separately from goodwill. The Company has determined that its acquired identifiable intangible assets and liabilities are related to sales and purchase agreements. Intangible assets result from more favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. Intangible liabilities result from less favorable market prices than contracted prices in sales and purchase agreements as measured during a business combination. These intangible assets and liabilities are amortized on a straight-line basis over the respective period of the sales and purchase agreements.

Amortization of intangible assets recognized in Cost of sales was $1.6 million in 2013 and $1.6 million in 2012 and 2011. Amortization of intangible assets and liabilities recognized in Revenues was $1.0 million in 2013, 2012 and 2011.

The estimated aggregate amortization amounts from intangible assets and liabilities for each of the next five years as of December 31, 2013 are as follows:

	Amortization Expense (Revenue)
	(In thousands)
2014	$	(26	)
2015	(834		)
2016	(996		)
2017	(996		)
2018	(996		)

152

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

Fair Value

The Company is required to disclose the fair value of financial instruments. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the balance sheet approximates the fair value of these instruments due to the short duration to maturities.

The Company’s non-recurring fair value measurements include asset retirement obligations. 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.

Financial Instruments

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

Pension Plan

The Company participates in the Parent’s noncontributory defined benefit pension plan, which was frozen effective July 1, 2009. The costs to provide the benefits are accrued over the employees’ period of active service and are determined on an actuarial basis. The liability recorded for this obligation was $0.1 million and $0.3 million at December 31, 2013 and 2012, respectively.

Deferred Revenue

Deferred revenue is recognized as a portion of the capacity payments under the power sales agreements is considered to be an operating lease. The deferred power revenues are recognized as power is delivered on a pro rata basis, based on the payments estimated to be received and recognized over the remaining term of the power sales agreements.

Asset Retirement Obligation

The Company’s asset retirement obligation (ARO) liabilities primarily consist of estimated costs related to reclaiming land at its facilities in accordance with federal and state reclamation laws.

The Company estimates its ARO liabilities based upon detailed engineering calculations of the amount and timing of the future costs for a third party to perform the required work. Cost estimates are escalated for inflation, and then discounted at the credit-adjusted risk-free rate. The Company records a capitalized asset retirement cost associated with the initial recorded liability. The capitalized asset retirement cost is amortized on a straight-line basis and the ARO liability is accreted to the projected settlement date. Changes in estimates could occur due to revisions of plant operating plans, changes in estimated costs, and changes in timing of the performance of reclamation activities.

Changes in the Company’s asset retirement obligations for the years ended December 31, 2013 and 2012 were as follows:

	2013		2012
	(In thousands)
Asset retirement obligation, beginning of period	$	829	$	770
Accretion	63		59
Asset retirement obligation, end of period	$	892	$	829

Income Taxes

The Company is a limited liability company, or LLC, which is treated as a disregarded entity for U.S. Federal and State income tax purposes and as a result is included in the determination of taxable income or loss of WCC. In preparing these separate financial statements, income taxes have been provided like any other tax-paying enterprise based upon the requirement

153

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

that single-member LLCs are subsidiaries of the member for financial reporting purposes, and income taxes generally are allocated under ASC paragraphs 740-10-30-27 and 30-28.

The Company files consolidated federal and state tax returns with its Parent. As the Company itself is not a taxable entity, the Parent’s tax expense for its income tax return group included on the Parent’s consolidated income tax return is allocated among the members of that group. This allocation is calculated as if each member were a separate taxpayer. This allocation is reflected by the Company in Income tax expense (benefit) with a corresponding amount in Member’s equity. There is no formal tax sharing agreement with the Parent.

The Company accounts for deferred income taxes using the asset and liability method. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Company’s consolidated financial statements based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, as well as net operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance against its net deferred tax assets to the extent the Company believes that it is more likely than not that it will not realize the net deferred tax assets.

Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. This accounting standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Power Revenues

ROVA supplies power under long-term power sales agreements. Under these agreements, ROVA invoices and collects capacity payments based on kilowatt-hours produced if the units are dispatched or for the kilowatt-hours of available capacity if the units are not fully dispatched.

A portion of the capacity payments under the agreements is considered to be an operating lease. The Company is recognizing amounts invoiced under the power sales agreements as revenue on a pro rata basis, based on the weighted average per kilowatt hour capacity payments estimated to be received over the remaining term of the power sales agreements. Under this method of recognizing revenue, $8.7 million and $8.3 million of previously deferred revenue was recognized during 2013 and 2012, respectively.

On December 23, 2013, the Company entered into an agreement with Dominion Virginia Power, a subsidiary of Dominion, to restructure the remaining five years of the ROVA I and ROVA II contracts. From January 2014 through March 2019, the Company will keep ROVA ready to operate and expects to run the plant during high demand energy periods. The Company will additionally buy power from a power provider at a fixed price, and will supply Dominion that power. The Company can also operate the plant and sell power on the open market if it it chooses.

The Company incurred restructuring charges of $5.1 million for the year ended December 31, 2013 primarily related to legal and consulting fees. The restructuring plan is expected to be complete by March 31, 2014. The Company expects that the aggregate $5.1 million of expenditures will be cash expenditures paid out in the first quarter of 2014.

The table below represents the restructuring provision activity during the year ended December 31, 2013 (in millions):

Beginning Balance		Restructuring Charges		Restructuring Payments		Ending Balance
$	—	$	5.1	$	—	$	5.1

Share-Based Compensation

Share-based compensation expense is generally measured at the grant date and recognized as expense over the vesting period of the entire award. This expense relates to WCC common stock attributable to the Company's employees. These costs are recorded in Selling and administrative expenses in the accompanying consolidated statements of operations.

154

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

Accounting Pronouncements Adopted

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 only affects the Company's disclosures.

2. Restricted Investments

The Company’s restricted investments consist of the following at December 31, 2013 and 2012:

	2013		2012
	(In thousands)
Cash and cash equivalents	$	5,998	$	5,990
Total restricted investments	$	5,998	$	5,990

All restricted investments at December 31, 2013 and 2012 consisted of cash and cash equivalents.

All underlying financial instruments included in the restricted investment accounts have Level I inputs available regarding fair value measurements. Level I inputs are quoted prices in active markets for identical financial instruments that the Company has the ability to access at the fair value measurement date.

The Company is required to fund a letter of credit account for its power operations. The letter of credit account has been released from restriction in February, 2014.

3. Income Taxes

Income tax expense (benefit) consists of:

	Years Ended December 31,
	2013		2012		2011
	(In thousands)
Current:
Federal	$	680	$	107	$	(2,492	)
State	—		—		(6		)
Income tax expense (benefit)	$	680	$	107	$	(2,498	)

Income tax expense attributable to net income before income taxes differed from the amounts computed by applying the statutory federal income tax rate of 34% to pre-tax income as a result of the following:

	Years Ended December 31,
	2013			2012			2011
	(In thousands)
Computed tax expense (benefit) at statutory rate	$	1,664		$	2,795		$	907
Increase (decrease) in income tax expense resulting from:
State tax, net of federal benefit	—			—			(4		)
Prior year permanent items tax return true-up	—			(5		)	(29		)
Change in valuation allowance for net deferred tax assets	(918		)	(2,664		)	(911		)
2009 federal refund from NOL carryback	—			(8		)	(2,464		)
Other, net	(66		)	(11		)	3
Income tax expense (benefit)	$	680		$	107		$	(2,498	)

155

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31,
	2013			2012
	(In thousands)
Deferred tax assets:
Accruals for the following:
Pension and postretirement medical benefit obligation	$	37		$	111
Deferred revenue	18,770			22,757
Reclamation	333			266
MBO bonus	253			202
Restructuring	1,894			—
NOLs	155			306
Other accruals	80			70
Total gross deferred tax assets:	21,522			23,712
Less valuation allowance	(3,741		)	(5,133		)
Net deferred tax assets	17,781			18,579
Deferred tax liabilities:
Other	(887		)	(1,156		)
Property, plant, and equipment, principally due to differences in depreciation, depletion, and amortization	(16,894		)	(17,423		)
Total gross deferred tax liabilities:	(17,781		)	(18,579		)
Net deferred tax asset	$	—		$	—

As of December 31, 2013, the Company also had an estimated $4.7 million in State net operating loss carryforwards to reduce future taxable income.

4. Commitments and contingencies

Coal Supply Agreement

Westmoreland Partners, which owns ROVA, has two coal supply agreements with contracts expiring in 2014 and 2015. If Westmoreland Partners continues to purchase coal under these contracts at the current volume and pricing, then Westmoreland Partners would be obligated to pay $17.9 million in 2014 and $2.9 million in 2015.

The coal supply agreements provide for coal at a price per ton that is significantly less than today’s open market price for Central Appalachia coal. Upon the termination of the coal supply agreements beginning in 2014, the Company will be required to renegotiate its current contract or find a substitute supply of coal at a projected cost per ton far greater than the price it is paying today.

The company is subject to litigation in the ordinary course of business. No material litigation exists.

5. Power Sales and Major Customers

Substantially all of the Company’s power sales during the years ended December 31, 2013, 2012 and 2011 were made to one customer. ROVA supplies power to Dominion Virginia Power under long-term contracts, which expire in 2019 and 2020. The Company can extend, by mutual consent, the contracts with Dominion Virginia Power for five-year terms at mutually agreeable pricing.

On December 23, 2013, the Company entered into an agreement with Dominion Virginia Power, a subsidiary of Dominion, to restructure the remaining five years of the ROVA I and ROVA II contracts. From January 2014 through March 2019, the Company will keep ROVA ready to operate and expects to run the plant during high demand energy periods. The Company will additionally buy power from a power provider at a fixed price, and will supply Dominion that power. The Company can also operate the plant and sell power on the open market if it it chooses.

156

WESTMORELAND ENERGY LLC AND SUBSIDIARIES

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Consolidated Financial Statements (Continued)

6. Related-Party Transactions

The Company incurred various costs which were paid to WCC relating to accounting services and are included in Selling and administrative expenses. Fees paid totaled $0.2 million in 2013 and 2012 and $0.3 million in 2011.

In addition, WCC allocated $0.2 million in 2013, 2012 and 2011, of audit and tax fees to the Company, which are included in Selling and administrative expenses.

7. Quarterly Financial Data (unaudited)

Summarized quarterly financial data is as follows:

	Three Months Ended
	March 31			June 30			September 30		December 31
	(In thousands)
2013:
Revenues	$	19,336		$	23,162		$	24,911	$	20,158
Operating income (loss)	(1,004		)	4,838			5,088		(4,014		)
Net income (loss)	(1,004		)	4,833			5,083		(4,697		)
2012:
Revenues	$	20,722		$	15,882		$	22,534	$	22,147
Operating income (loss)	2,790			(1,748		)	4,023		3,179
Net income (loss)	2,783			(1,756		)	4,016		3,070

157

WESTMORELAND KEMMERER, INC.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholder of

Westmoreland Kemmerer, Inc.

We have audited the accompanying balance sheets of Westmoreland Kemmerer, Inc. (the Company) (a wholly owned subsidiary of Westmoreland Coal Company) as of December 31, 2013 and 2012 and the related statements of operations, comprehensive income, shareholder’s equity and cash flows for the year ended December 31, 2013 and the eleven month period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Westmoreland Kemmerer, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the year ended December 31, 2013 and the eleven month period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Denver, Colorado

February 28, 2014

158

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Balance Sheets

	December 31, 2013		December 31, 2012
Assets	(in thousands)
Current assets:
Cash and cash equivalents	$	7,942	$	5,018
Accounts receivable
Trade	16,906		13,415
Other	83		278
	16,989		13,693
Inventories	10,753		11,637
Deferred income taxes	870		905
Other current assets	916		1,086
Total current assets	37,470		32,339
Property, plant and equipment, at cost:
Land and mineral rights	63,386		63,442
Plant and equipment	99,372		92,408
	162,758		155,850
Less accumulated depreciation, depletion and amortization	31,053		13,352
Net property, plant and equipment	131,705		142,498
Restricted investments and bond collateral	24,966		24,702
Deferred income taxes	—		774
Total assets	$	194,141	$	200,313
Liabilities and Shareholder’s Equity
Current liabilities:
Current installments of long-term debt	$	213	$	—
Accounts payable	6,794		11,653
Deferred revenue	3,969		2,997
Income taxes	—		1,679
Payable to related party	927		1,053
Accrued production taxes	16,211		9,200
Postretirement medical benefits	329		87
Asset retirement obligations	1,998		2,107
Total current liabilities	30,441		28,776
Long-term debt, less current installments	438		—
Deferred tax liabilities	6,220		—
Postretirement medical costs, less current portion	49,418		55,981
Pension obligations	9,381		19,346
Asset retirement obligations, less current portion	15,176		15,661
Total liabilities	111,074		119,764
Shareholder’s equity:
Common stock of $.01 par value. Authorized, issued and outstanding 100 shares at December 31, 2013 and 2012	—		—
Additional paid-in capital	65,576		76,777
Accumulated other comprehensive loss	17,491		(5,003		)
Retained earnings	—		8,775
Total Westmoreland Kemmerer, Inc. shareholder’s equity	83,067		80,549
Total liabilities and shareholder’s equity	$	194,141	$	200,313

See accompanying Notes to Financial Statements.

159

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Statements of Operations

	Year Ended December 31, 2013			Eleven Months Ended December 31, 2012
	(In thousands)
Revenues	$	172,467		$	151,606
Costs and expenses:
Cost of sales	120,088			104,971
Depreciation, depletion, and amortization	17,742			13,287
Selling and administrative	5,675			5,351
Loss on sale of assets	236			242
	143,741			123,851
Operating income	28,726			27,755
Other income (expense):
Interest expense	(11		)	—
Interest income	380			4
Other	108			189
	477			193
Income before income taxes	29,203			27,948
Income tax expense	8,461			8,916
Net income	$	20,742		$	19,032

See accompanying Notes to Financial Statements.

160

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Statements of Comprehensive Income

	Year Ended December 31, 2013		Eleven Months Ended December 31, 2012
	(In thousands)
Net income	$	20,742	$	19,032
Other comprehensive income (loss):
Adjustments to accumulated actuarial losses and transition obligations, pension	10,554		(3,034		)
Adjustments to accumulated actuarial gains and transition obligations, postretirement medical benefits	11,940		(1,969		)
Comprehensive income attributable to Westmoreland Kemmerer, Inc.	$	43,236	$	14,029

See accompanying Notes to Financial Statements.

161

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Statements of Shareholder’s Equity

Eleven Months Ended December 31, 2012 and Year Ended December 31, 2013

	Additional paid-in capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Shareholder’s Equity
	(In thousands)
Balance at January 31, 2012	$	76,523		$	—		$	—		$	76,523
Westmoreland Coal Company common stock issued as compensation	254			—			—			254
Transactions with Parent/affiliates	—			—			8,916			8,916
Distributions	—			—			(19,173		)	(19,173		)
Other comprehensive loss	—			(5,003		)	—			(5,003		)
Net income	—			—			19,032			19,032
Balance at December 31, 2012	76,777			(5,003		)	8,775			80,549
Westmoreland Coal Company common stock issued as compensation	671			—			—			671
Transactions with Parent/affiliates	—			—			3,111			3,111
Distributions	(11,872		)	—			(32,628		)	(44,500		)
Other comprehensive loss	—			22,494			—			22,494
Net income	—			—			20,742			20,742
Balance at December 31, 2013	$	65,576		$	17,491		$	—		$	83,067

See accompanying Notes to Financial Statements.

162

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Statements of Cash Flows

	Year Ended December 31, 2013			Eleven Months Ended December 31, 2012
	(In thousands)
Cash flows from operating activities:
Net income	$	20,742		$	19,032
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation, depletion and amortization	17,742			13,287
Accretion of asset retirement obligation and receivable	1,670			1,670
Share-based compensation	671			254
Loss on sale of assets	236			242
Change in:
Accounts receivable	(3,296		)	(13,693		)
Inventories	608			(1,978		)
Accounts payable and accrued production taxes	1,459			19,334
Payable to related parties	(126		)	1,053
Deferred revenues	972			772
Asset retirement obligation	(1,945		)	(1,136		)
Accrual for postretirement medical benefits	5,619			4,858
Pension and SERP obligations	589			709
Other assets and liabilities	5,520			(1,086		)
Net cash provided by operating activities	50,461			43,318
Cash flows from investing activities:
Additions to property, plant and equipment	(6,019		)	(3,562		)
Increase in restricted investments and bond collateral	(264		)	(24,702		)
Proceeds from sales of assets	227			221
Net cash used in investing activities	(6,056		)	(28,043		)
Cash flows from financing activities:
Repayments of long-term debt	(92		)	—
Transactions with Parent/affiliates	3,111			8,916
Distributions	(44,500		)	(19,173		)
Net cash used in financing activities	(41,481		)	(10,257		)
Net increase in cash and cash equivalents	2,924			5,018
Cash and cash equivalents, beginning of year	5,018			—
Cash and cash equivalents, end of year	$	7,942		$	5,018
Supplemental disclosures of cash flow information:
Cash paid for interest	$	11		$	—
Noncash transactions:
Accrued purchases of property and equipment	693			—
Capital leases	743			—

See accompanying Notes to Financial Statements

163

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements

1. Summary of Significant Accounting Policies

Nature of Operations

Westmoreland Kemmerer, Inc., or WKI, or the Company, a wholly owned subsidiary of Westmoreland Coal Company, or WCC, or the Parent, owns a surface coal mining operation located in southwestern Wyoming. On January 31, 2012, WCC closed on the acquisition of the Kemmerer Mine. See footnote 2 for additional information on the acquisition. Coal produced from the Kemmerer Mine is sold to electric utilities and various industrial customers based in the north central region of the United States. Westmoreland Coal Company owns and operates the Company. All coal reserves are owned by the Company.

The Company’s financial statements reflect substantially all of its costs of doing business. Common expenses incurred by the Parent on behalf of the Company are charged to the Company based on proportional cost allocations. The Company believes the allocations used are reasonable; however, these financial statements may not necessarily be representative of a stand-alone company.

WCC Liquidity

The Company anticipates that its cash from operations, cash on hand and available WCC borrowing capacity will be sufficient to meet its investing, financing, and working capital requirements for the foreseeable future.

On June 29, 2012, WCC and certain of its subsidiaries entered into a five-year, $20.0 million revolving line of credit carved out by the indenture governing the 10.75% Senior Notes with an expiration date of June 30, 2017. The revolver may support up to $2.0 million of letters of credit (which was increased to $10.0 million on January 10, 2014), which would reduce the balance available under the revolver. At December 31, 2013, availability on the revolver was $20.0 million with no outstanding balance and no supported letters of credit. 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, Westmoreland Resources, Inc., WKI, and Westmoreland Energy, LLC. Pursuant to the Intercreditor Agreement, the holders of the 10.75% Senior Notes now have a second lien position on these assets.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximate fair value. Cash equivalents consist of highly liquid investments with original maturities of three months or less.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company evaluates the need for an allowance for doubtful accounts based on a review of collectability. The Company has determined that no allowance is necessary for accounts receivable as of December 31, 2013.

Inventories

Inventories, which include materials and supplies as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs.

Exploration and Mine Development

Exploration expenditures are charged to Cost of sales as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves.

At existing surface operations, additional pits may be added to increase production capacity in order to meet customer requirements. These expansions may require significant capital to purchase additional equipment, relocate equipment, build or

164

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

improve existing haul roads and create the initial pre-production box cut to remove overburden for new pits at existing operations. If these pits operate in a separate and distinct area of the mine, the costs associated with initially uncovering coal for production are capitalized and amortized over the life of the developed pit consistent with coal industry practices. Once production has begun, mining costs are then expensed as incurred.

Where new pits are routinely developed as part of a contiguous mining sequence, the Company expenses such costs as incurred. The development of a contiguous pit typically reflects the planned progression of an existing pit, thus maintaining production levels from the same mining area utilizing the same employee group and equipment.

Property, Plant, and Equipment

Property, plant and equipment are recorded at cost. Expenditures that extend the useful lives of existing plant and equipment or increase productivity of the assets are capitalized. Maintenance and repair costs that do not extend the useful life or increase productivity of the asset are expensed as incurred. Coal reserves are recorded at cost, or at fair value in the case of acquired businesses.

Coal reserves, mineral rights and mine development costs are depleted based upon estimated recoverable proven and probable reserves. Plant and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives as follows:

	Years
Buildings and improvements	15 to 30
Machinery and equipment	3 to 30

The Company assesses the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to fair value. When an asset is retired or sold, its cost and related accumulated depreciation and depletion are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss. Fully depreciated plant and equipment still in use is not eliminated from the accounts. Amortization of capital leases is included in Depreciation, depletion and amortization.

Restricted Investments and Bond Collateral

The Company has requirements to maintain restricted cash and investments for bonding requirements. Amounts held are recorded as Restricted investments and bond collateral. Funds in the restricted investment and bond collateral accounts are not available to meet the Company’s operating cash needs.

Fair Value

The Company is required to disclose the fair value of financial instruments. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the balance sheet approximates the fair value of these instruments due to the short duration to maturities.

Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and is defined as:

• Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities generally valued based on independent third-party market prices.

• 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 Company’s non-recurring fair value measurements include asset retirement obligations. 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

165

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

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.

See Notes 4, 7, and 8 for further disclosures related to the Company’s fair value estimates.

Financial Instruments

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

Postretirement Health Care Benefits

The Company accrues the cost to provide the benefits over the employees’ period of active service for postretirement benefits other than pensions. These costs are determined on an actuarial basis. The Company’s balance sheet reflects the unfunded status of postretirement benefit obligations.

Pension Plan

The Company accrues the cost to provide the benefits over the employees’ period of active service for the non-contributory defined benefit pension plan it sponsors. These costs are determined on an actuarial basis. The Company’s balance sheet reflects the unfunded status of the defined benefit pension plan.

Deferred Revenue

Deferred revenues represent a multi-tiered pricing structure on a certain coal sales contract.

Income Taxes

The Company files consolidated federal and state tax returns with its Parent. As the Company itself is not a taxable entity, the Parent’s tax expense for its income tax return group included on the Parent’s consolidated income tax return is allocated among the members of that group. This allocation is calculated as if each member were a separate taxpayer. This allocation is reflected by the Company in Income tax expense (benefit) with the offset in Shareholder's equity. There is no formal tax sharing agreement with the Parent.

The Company accounts for deferred income taxes using the asset and liability method. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Company’s financial statements based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, as well as net operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company establishes a valuation allowance against its net deferred tax assets to the extent the Company believes that it is more likely than not that it will not realize the net deferred tax assets.

Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. This standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Asset Retirement Obligations

The Company’s asset retirement obligation, or ARO, liabilities primarily consist of estimated costs related to reclaiming surface land and support facilities at its mines in accordance with federal and state reclamation laws as established by each mining permit.

The Company estimates its ARO liabilities for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the estimated future costs for a third party to perform the required work. Cost estimates are escalated for inflation, and then discounted at the credit-adjusted risk-free rate. The Company records mineral rights associated with the initial recorded liability. Mineral rights are amortized based on the units-of-production method over the estimated recoverable, proven and probable reserves at the related mine, and the ARO liability is accreted to the projected

166

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

settlement date. Changes in estimates could occur due to revisions of mine plans, changes in estimated costs, and changes in the timing of the performance of reclamation activities.

Coal Revenues

The Company recognizes coal sales revenue at the time title passes to the customer in accordance with the terms of the underlying sales agreements and after any contingent performance obligations have been satisfied. Coal sales revenue is recognized based on the pricing contained in the coal contracts in place at the time that title passes and any retroactive pricing adjustments to those contracts are recognized as revised agreements are reached with the customers and any performance obligations included in the agreements are satisfied.

Share-Based Compensation

Share-based compensation expense is generally measured at the grant date and recognized as expense over the vesting period of the entire award. This expense relates to WCC common stock attributable to the Company's employees. These costs are recorded in Cost of sales and Selling and administrative expenses.

Accounting Pronouncements Adopted

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 only affects the Company's disclosures.

2. Acquisition

On December 23, 2011, WCC, through Westmoreland Kemmerer, Inc., entered into a purchase and sale agreement with Chevron Mining Inc., a Missouri corporation (the “Seller”), pursuant to which WCC agreed to purchase from Seller 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. WCC did not acquire working capital in the acquisition, other than inventory.

On January 31, 2012, WCC closed on the acquisition of the Kemmerer Mine from the Seller. In addition, on January 31, 2012, WCC completed the issuance and sale of $125.0 million aggregate principal amount of 10.75% senior secured notes due 2018 (the “Add-On Notes”) at a price equal to approximately 95.5% of their face value.

The purchase consideration for the Kemmerer Mine was $164.5 million, which included $76.5 million paid in cash, plus the assumption of approximately $88.0 million of liabilities. The net proceeds of the Add-On Notes financed the $76.5 million cash portion of the purchase consideration, $24.7 million of cash bonding obligations for the Kemmerer Mine and paid cash transaction costs for the Kemmerer acquisition and the Add-On Notes. The balance of the net proceeds of the Add-On Notes was used to fund working capital requirements necessary to integrate the Kemmerer operations with WCC's operations.

The Kemmerer acquisition has been accounted for under the acquisition method of accounting that requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value.

WCC has finalized the purchase price allocation for the Kemmerer acquisition. No significant goodwill or other intangible assets were evident in the acquisition.

167

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

A summary of the purchase consideration and allocation of the purchase consideration follow (in millions):

	Final as of December 31, 2012
Purchase consideration:
Cash paid	$	76.5
Fair value of liabilities assumed:
Postretirement medical cost obligations	49.2
Asset retirement obligations	19.4
Pension obligations	15.6
Deferred revenue	2.2
Accrued liabilities	1.6
Total fair value of liabilities assumed	88.0
Total purchase consideration	$	164.5
Allocation of purchase consideration:
Inventories	$	9.6
Land and mineral rights	65.5
Plant and equipment	89.4
Total	$	164.5

3. Inventories

Inventories consisted of the following (in thousands):

	December 31,
	2013			2012
Coal	$	156		$	202
Materials and supplies	10,995			11,688
Inventories - other	—			73
Reserve for obsolete inventory	(398		)	(326		)
Total	$	10,753		$	11,637

4. Restricted Investments and Bond Collateral

The Company’s restricted investments and bond collateral consisted of the following (in thousands):

	December 31,
	2013		2012
Reclamation bond collateral	$	24,966	$	24,702

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at December 31, 2013 are as follows (in thousands):

168

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

	Carrying Value		Fair Value
Cash and cash equivalents	$	439	$	439
Held-to-maturity securities	24,527		24,198
	$	24,966	$	24,637

Held-to-Maturity Restricted Investments and Bond Collateral

The amortized cost, gross unrealized holding gains and losses and fair value of held-to-maturity securities are as follows:

	December 31,
	2013			2012
	(In thousands)
Amortized cost	$	24,527		$	—
Gross unrealized holding gains	81			—
Gross unrealized holding losses	(410		)	—
Fair value	$	24,198		$	—

Maturities of held-to-maturity securities are as follows at December 31, 2013:

	Amortized Cost		Fair Value
	(In thousands)
Due in five years or less	$	13,438	$	13,432
Due after five years to ten years	5,558		5,452
Due in more than ten years	5,531		5,314
	$	24,527	$	24,198

5. Long-Term Debt

The amounts outstanding under the Company’s long-term debt consisted of the following at December 31, 2013:

	Total Debt Outstanding
	(In thousands)
Capital lease obligations	$	651
Less current portion	(213		)
Total debt outstanding, less current portion	$	438

The following table presents aggregate contractual debt maturities of all long-term debt:

	As of December 31, 2013
	(In thousands)
2014	$	213
2015	225
2016	213
Total debt	$	651

The Company engages in leasing transactions for equipment utilized in its mining operations. At December 31, 2013, the capital leases outstanding had a weighted average interest rate of 5.92% and mature at various dates beginning in 2014 through 2016. During the year ended December 31, 2013, the Company acquired $0.7 million of equipment under capital leases.

169

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

6. Postretirement Medical Benefits

The Company provides postretirement medical benefits pursuant to collective bargaining agreements. These benefits are provided through self-insured programs.

The following table sets forth the actuarial present value of postretirement medical benefit obligations and amounts recognized in the Company’s financial statements:

	Year Ended December 31, 2013			Eleven Months Ended December 31, 2012
	(In thousands)
Change in benefit obligations:
Net benefit obligation at beginning of period	$	56,068		$	49,241
Service cost	3,659			2,834
Interest cost	2,325			2,029
Actuarial loss (gain)	(11,941		)	1,969
Gross benefits and expenses paid	(363		)	(5		)
Net benefit obligation at end of year	49,748			56,068
Change in plan assets:
Employer contributions	363			5
Gross benefits and expenses paid	(363		)	(5		)
Fair value of plan assets at end of year	—			—
Unfunded status at end of year	$	(49,748	)	$	(56,068	)
Amounts recognized in the balance sheet consist of:
Current liabilities	$	(329	)	$	(87	)
Noncurrent liabilities	(49,418		)	(55,981		)
Accumulated other comprehensive loss	(9,971		)	1,969
Net amount recognized	$	(59,718	)	$	(54,099	)
Amounts recognized in accumulated other comprehensive loss consists of:
Net actuarial loss (gain)	$	(9,971	)	$	1,969

Actuarial gains and losses are amortized over the average future service of the plan’s participants. The following amounts will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2014 (in millions): 

Actuarial gain $ 0.5

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

	Year Ended December 31, 2013		Eleven Months Ended December 31, 2012
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	3,659	$	2,834
Interest cost	2,325		2,029
Total net periodic benefit cost	$	5,984	$	4,863

These costs are included in the accompanying statement of operations in Cost of sales and Selling and administrative expenses.

170

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

Assumptions

The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows:

	December 31, 2013	December 31, 2012
Discount rate	5.05%	4.15%
Measurement date	December 31, 2013	December 31, 2012

The discount rate is adjusted annually based on an Aa corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields.

The weighted-average assumptions used to determine net periodic benefit cost were as follows:

	Year Ended December 31, 2013	Eleven Months Ended December 31, 2012
Discount rate	4.15%	4.50%
Measurement date	December 31, 2012	January 31, 2012

The following presents information about the assumed health care trend rate:

	December 31, 2013		December 31, 2012
Health care cost trend rate assumed for next year	6.75	%	7.00	%
Rate to which the cost trend is assumed to decline (ultimate trend rate)	5.00	%	5.00	%
Year that the trend rate reaches the ultimate trend rate	2021		2021

The effect of a one percent change on the health care cost trend rate used to calculate periodic postretirement medical benefit costs and the related benefit obligation are summarized in the table below:

	Postretirement Medical Benefits
	1 % Increase		1 % Decrease
	(In thousands)
Effect on service and interest cost components	$	1,745	$	(1,254	)
Effect on postretirement medical benefit obligation	$	10,360	$	(7,983	)

Cash Flows

The following benefit payments and Medicare D subsidy (which the Company receives as a benefit partially offsetting its prescription drug costs for retirees and their dependents) are expected by the Company:

	Postretirement Medical  Benefits		Medicare D Subsidy			Net  Postretirement Medical Benefits
	(In thousands)
2014	$	329	$	(4	)	$	325
2015	540		(5		)	535
2016	765		(8		)	757
2017	1,010		(20		)	990
2018	1,386		(31		)	1,355
Years 2019 - 2023	10,831		(508		)	10,323

171

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

7. Pension

Defined Benefit Pension Plans

The Company provides a defined benefit pension plan to qualified full-time employees pursuant to a collective bargaining agreement. Benefits are generally based on years of service and a specific dollar amount per year of service as specified in the plan agreement. The Company’s funding policy is to contribute annually the minimum amount prescribed, as specified by applicable regulations.

	Year Ended December 31, 2013			Eleven Months Ended December 31, 2012
	(In thousands)
Change in benefit obligation:
Net benefit obligation at the beginning of period	$	62,465		$	57,307
Service cost	1,451			1,348
Interest cost	2,223			2,107
Actuarial loss	(7,309		)	3,844
Benefits paid	(2,914		)	(2,141		)
Net benefit obligation at end of year	55,916			62,465
Change in plan assets:
Fair value of plan assets at the beginning of period	43,119			41,704
Actual return on plan assets	6,330			3,556
Benefits paid	(2,914		)	(2,141		)
Fair value of plan assets at end of year	46,535			43,119
Underfunded status at end of year	$	(9,381	)	$	(19,346	)
Amounts recognized in the accompanying balance sheet consist of:
Noncurrent liability	$	(9,381	)	$	(19,346	)
Accumulated other comprehensive loss (income)	(7,520		)	3,034
Net amount recognized at end of year	$	(16,901	)	$	(16,312	)
Amounts recognized in accumulated other comprehensive loss consist of:
Net actuarial loss (gain)	$	(7,520	)	$	3,034

The accumulated benefit obligation for all plans was $55.9 million and $62.5 million at December 31, 2013 and 2012, respectively.

The components of net periodic benefit cost are as follows:

	Year Ended December 31, 2013			Eleven Months Ended December 31, 2012
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	1,451		$	1,348
Interest cost	2,223			2,107
Expected return on plan assets	(3,085		)	(2,746		)
Total net periodic pension cost	$	589		$	709

These costs are included in the accompanying statement of operations in Cost of sales and Selling and administrative expenses.

172

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

Assumptions

The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows:

	December 31, 2013	December 31, 2012
Discount rate	4.55%	3.65%
Measurement date	December 31, 2013	December 31, 2012

The discount rate is adjusted annually based on an Aa corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to ninetieth percentiles, which excludes bonds with outlier yields.

The following table provides the assumptions used to determine net periodic benefit cost:

	Year Ended December 31, 2013	Eleven Months Ended December 31, 2012
Discount rate	3.65%	4.10%
Expected return on plan assets	7.40%	7.40%
Rate of compensation increase	N/A	N/A
Measurement date	December 31, 2012	January 31, 2012

Plan Assets

The Company’s investment goals are to maximize returns subject to specific risk management policies. The Company sets the expected return on plan assets based on historical trends and forecasts provided by its third-party fund managers. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in fixed income and equity securities, both domestic and international. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.

The weighted-average target asset allocation of the Company’s pension trusts were as follows at December 31, 2013:

	Target Allocation
Asset category
Cash and equivalents	0% - 10%
Equity securities funds	20% - 60%
Debt securities funds	40% - 80%
Other	0% - 10%

173

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

The fair value of the Company’s pension plan assets by asset category is as follows:

	December 31, 2013
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Pooled separate accounts:
Large-cap	$	21,190	$	—	$	21,190	$	—
International blend	7,566		—		7,566		—
Fixed income domestic	10,270		—		10,270		—
Fixed income long-term	5,186		—		5,186		—
Stable Value	2,323		—		2,323		—
	$	46,535	$	—	$	46,535	$	—

	December 31, 2012
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Pooled separate accounts:
Large-cap	$	19,027	$	—	$	19,027	$	—
International blend	7,324		—		7,324		—
Fixed income domestic	14,643		—		14,643		—
Stable Value	2,125		—		2,125		—
��	$	43,119	$	—	$	43,119	$	—

The Company did not have any Level 1 or Level 3 assets.

The Company’s Level 2 assets include pooled separate accounts, which are valued based on the quoted market prices of the securities underlying the investments.

Contributions

The Company did not make any contributions to its retirement plan during 2013. In 2014, the Company expects to make approximately $1.3 million of pension plan contributions.

174

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

Cash Flows

The following benefit payments are expected to be paid from its pension plan assets:

	Pension Benefits
	(In thousands)
2014	$	2,997
2015	3,165
2016	3,309
2017	3,506
2018	3,490
Years 2019 - 2023	18,750

The benefits expected to be paid are based on the same assumptions used to measure the Company’s pension benefit obligation at December 31, 2013 and include estimated future employee service.

8. Asset Retirement Obligations

Changes in the Company’s asset retirement obligations were as follows December 31, 2013:

	Year Ended December 31, 2013			Eleven Months Ended December 31, 2012
Asset retirement obligations, beginning of period	$	17,768		$	19,377
Accretion	1,670			1,670
Liabilities settled	(2,210		)	(1,270		)
Changes due to amount and timing of reclamation	(54		)	(2,009		)
Asset retirement obligations, end of year	17,174			17,768
Less current portion	(1,998		)	(2,107		)
Asset retirement obligations, less current portion	$	15,176		$	15,661

As permittee, the Company is responsible for the total amount.

9. Income Taxes

Income tax expense attributable to net income before income taxes consists of (in thousands):

	Year Ended December 31, 2013			Eleven Months Ended December 31, 2012
Current:
Federal	$	9,306		$	8,916
Deferred:
Federal	(845		)	—
Income tax expense	$	8,461		$	8,916

175

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

Income tax expense (benefit) attributable to net income before income taxes differed from the amounts computed by applying the statutory federal income tax rate of 35% to pre-tax income as a result of the following (in thousands):

	Year Ended December 31, 2013			Eleven Months Ended December 31, 2012
Computed tax expense at statutory rate	$	10,221		$	9,782
Increase in income tax expense resulting from:
Tax depletion in excess of book	(848		)	—
Domestic production activities deduction	(923		)	(875		)
Other, net	11			9
Actual income tax expense	$	8,461		$	8,916

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31,
	2013			2012
	(In thousands)
Deferred tax assets:
Accruals for the following:
Pension and postretirement medical benefit obligation	$	20,696		$	26,395
Asset retirement obligations	6,011			6,922
Accrued vacation	594			649
Other accrued liabilities	409			348
Total gross deferred tax assets	27,710			34,314
Deferred tax liabilities:
Property, plant, and equipment, principally due to differences in depreciation, depletion, and amortization	(33,060		)	(32,635		)
Total gross deferred tax liabilities	(33,060		)	(32,635		)
Net deferred tax asset	$	(5,350	)	$	1,679
Deferred tax asset - current	$	870		$	905
Deferred tax asset (liability) - noncurrent	(6,220		)	774
Net deferred tax asset	$	(5,350	)	$	1,679

10. Commitments and Contingencies

a) Leases

The gross value of property, plant, equipment under capital leases was $0.7 million as of December 31, 2013, related to the leasing of mining equipment. The accumulated amortization for these items was $0.1 million at December 31, 2013.

176

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

Future minimum capital and operating lease payments as of December 31, 2013, are as follows:

	Capital Leases			Operating Leases
	(In thousands)
2014	$	246		$	632
2015	245			3
2016	218			—
2017	—			—
2018	—			—
Thereafter	—			—
Total minimum lease payments	709			$	635
Less imputed interest	(58		)
Present value of minimum capital lease payments	$	651

Rental expense under operating leases during the year ended December 31, 2013 and the eleven months ended December 31, 2012 totaled $1.3 million and $0.6 million, respectively.

The Company leases certain of its coal reserves from third parties and pays royalties based on either a per ton rate or as a percentage of revenues received. Royalties charged to expense under all such lease agreements amounted to $7.6 million and $6.6 million, for the year ended December 31, 2013 and the eleven months ended December 31, 2012, respectively.

The company is subject to litigation in the ordinary course of business. No material litigation exists.

11. Coal Sales and Major Customers

The customers from which more than 10% of total revenue has been derived and the percentage of total revenue from those customers is summarized as follows (in thousands):

	Year ended December 31, 2013			Eleven months ended December 31, 2012
Customer A	$	112,061		$	96,718
Customer B	23,888			19,617
Customer C	22,482			18,253
	$	158,431		$	134,588
Percentage of total revenue	92		%	89		%

12. Related Party Transactions

The Company was allocated audit and tax fees and information technology costs incurred by its Parent. For the year ended December 31, 2013 and the eleven months ended December 31, 2012, these fees were $0.6 million and $0.3 million, respectively, and are included in Selling and administrative expenses.

177

WESTMORELAND KEMMERER, INC.

(A Wholly Owned Subsidiary of Westmoreland Coal Company)

Notes to Financial Statements (Continued)

13. Quarterly Financial Data (unaudited)

Summarized quarterly financial data is as follows:

	Three Months Ended
	March 31 (1)		June 30		September 30		December 31
	(In thousands)
2013
Revenues	$	41,284	$	41,797	$	43,764	$	45,622
Operating income	5,995		7,264		6,527		8,940
Net income	6,025		7,339		6,615		763
Eleven months ended December 31, 2012:
Revenues	$	30,733	$	38,177	$	44,339	$	38,357
Operating income	8,266		5,521		10,915		3,053
Net income (loss)	8,281		5,529		11,036		(5,811		)

____________________

(1) for the period ended March 31, 2012, data includes only two months of activity

178

KEMMERER MINE

Westmoreland Coal Company (the “Company”) completed its acquisition of Chevron Mining Inc.'s (the Seller) Kemmerer surface coal mine on January 31, 2012.

The required audited financial statements of Kemmerer Mine (predecessor to Westmoreland Kemmerer, Inc.) for the month ended January 31, 2012 and the year ended December 31, 2011 are following. In accordance with the letter, dated January 31, 2013, from the staff of the Division of Corporation Finance of the Securities and Exchange Commission to the Company, these financial statements present a Statement of Assets to be Acquired and Liabilities to be Assumed and Statements of Revenues and Direct Operating Expenses and Statements of Cash Flows. The full S-X Rule 3-16 financial statements and other financial information are not available and not presented due to the following reasons:

• Because the Kemmerer Mine is not a stand-alone entity, separate, audited financial statements of the Kemmerer Mine have never been prepared and the Seller has not maintained the distinct and separate accounts necessary to present the full financial statements of the Kemmerer Mine. In addition, certain available financial information for the Kemmerer Mine is kept on separate accounting systems and at separate physical locations. It would be extremely costly and impractical to obtain complete financial statements in accordance with generally accepted accounting principles because separate financial statements were never historically required nor were such statements ever prepared. The preparation of such statements would involve many subjective assumptions, unreasonable effort and expense.

• A determination of the portion of historical general and administrative expenses or other indirect expenses that were attributable to the Kemmerer Mine is not practicable due to the Seller not maintaining the distinct and separate records necessary to present such expenses.

• In evaluating the Kemmerer Mine, the Company did not rely on any audited or unaudited financial statements relating to the Kemmerer Mine. In valuing the transaction, the Company relied on individual analysis of the specific assets it was going to purchase and the liabilities it was going to assume. In addition, the Company relied on an income statement that did not contain costs that were incurred on behalf of the Kemmerer Mine at the Seller's level. The cost information provided by the Seller to the Company was summary level data containing direct operating and capital expenses. The Company's management did not believe the historical earnings or operations of the Kemmerer Mine to be necessary or relevant to its decision to acquire the Kemmerer Mine.

• The Company's financial analysis of the Kemmerer Mine was based on internally generated forward-looking projections of the Kemmerer Mine earnings potential given the reserve potential of the Kemmerer Mine; the Company's projection of the future pricing and revenue, operating, general and administrative and capital costs; information regarding the competitive environment; and the Company's extensive knowledge and experience in the coal industry.

• The omission of the full financial statements and other financial information would not have a material impact on a reader's understanding of the Kemmerer Mine's financial results and condition and related trends.

In addition, there have not been any material changes in the historical results of operations, liquidity, cash flows and financial resources related to the operations acquired since the date of acquisition.

179

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Financial Statements

For the Month Ended January 31, 2012 and the

Year Ended December 31, 2011

Together with Independent Auditors' Report

180

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of

Westmoreland Coal Company

We have audited the accompanying financial statements of the Kemmerer Mine (the Mine), predecessor to Westmoreland Kemmerer, Inc., which comprise the Statements of Revenues and Direct Operating Expenses and Statements of Cash Flows for the month ended January 31, 2012 and the year ended December 31, 2011, and the related notes to the financial statements.

The accompanying financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in Westmoreland Coal Company’s Form 10-K) and are not intended to be a complete financial presentation of the Mine.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to error or fraud.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the revenues and direct operating expenses and the cash flows of the Kemmerer Mine, predecessor to Westmoreland Kemmerer, Inc., for the month ended January 31, 2012 and the year ended December 31, 2011, in accordance with accounting principles generally accepted in the United States of America.

/s/ Tanner LLC

Salt Lake City, Utah

March 12, 2013

181

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Statements of Revenues and Direct Operating Expenses

	For the		For the
	Month Ended		Year Ended
	January 31,		December 31,
	2012		2011
Net Revenues
Product sales	$	14,753,000	$	144,112,000
Direct Operating Expenses
Cost of sales	12,275,000		127,262,000
Depreciation, depletion, amortization and accretion	1,303,000		15,484,000
Total direct operating expenses	13,578,000		142,746,000
Excess of revenues over direct operating expenses	$	1,175,000	$	1,366,000

See accompanying notes to financial statements. 182

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Statements of Cash Flows

	For the			For the
	Month Ended			Year Ended
	January 31,			December 31,
	2012			2011
Cash flows from operating activities:
Excess of revenues over direct operating expenses	$	1,175,000		$	1,366,000
Adjustments to reconcile excess of  revenues over direct operating expenses to  net cash provided by operating activities:
Depreciation, depletion, amortization and accretion	1,303,000			15,484,000
(Gain) loss on disposal of property and equipment	(14,000		)	5,871,000
Decrease (increase) in:
Accounts receivable	1,229,000			(3,104,000		)
Inventories	424,000			(1,496,000		)
Increase (decrease) in:
Accounts payable	342,000			1,145,000
Accrued liabilities	96,000			(35,000		)
Pneumoconiosis benefit obligation	—			127,000
Postretirement benefit obligation	337,000			12,984,000
Pension obligation	(1,375,000		)	5,110,000
Asset retirement obligation	—			(12,423,000		)
Net cash provided by operating activities	3,517,000			25,029,000
Cash flows from investing activities:
Purchase of property and equipment	(88,000		)	(15,883,000		)
Proceeds from sale of property and equipment	15,000			5,000
Net cash used in investing activities	(73,000		)	(15,878,000		)
Cash flows from financing activities:
Change in due to / due from CMI	(3,444,000		)	(9,151,000		)
Net change in cash	—			—
Cash at beginning of year	—			—
Cash at end of year	$	—		$	—

See accompanying notes to financial statements. 183

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

1. Description of Organization

Nature of Operations The Kemmerer Mine (the Mine), located in Lincoln County, Wyoming, was an operation of Chevron Mining, Inc. (CMI). CMI is a wholly owned subsidiary of Chevron Corporation (the Parent). The Mine produces high-quality sub-bituminous coal for sale to the adjacent Naughton power station, as well as various industrial customers located in the proximate geographic region.

On January 31, 2012, Westmoreland Coal Company, through a wholly owned subsidiary, Westmoreland Kemmerer, Inc., or WKI, completed a Purchase and Sale Agreement, pursuant to which it agreed to purchase from CMI the Mine, including associated processing and shipping facilities and other related real and personal property assets located in the Hams Forks Region of southwestern Wyoming near the town of Kemmerer, Wyoming.

2. Summary of Significant Accounting Policies	Basis of Presentation The accompanying financial statements are presented on the accrual basis of accounting and reflect the assets to be acquired, liabilities to be assumed, revenues and direct operating expenses of the Mine. During the periods presented, the Mine was not accounted for as a separate division by CMI and therefore, certain costs recorded at CMI, such as corporate and shared service expenses, interest, corporate income taxes, litigation expenses, and other indirect expenses, were not allocated to the Mine. Furthermore, all cash receipts and payments were made by CMI. Therefore, while the statements of cash flows present the sources and uses of cash, the cash flows were actually through CMI.
	The Statement of Assets to be Acquired and Liabilities to be Assumed and the Statements of Revenues and Direct Operating Expenses are presented in lieu of the financial statements required under Rule 3-16 of the Securities and Exchange Commission Regulation S-X. The results presented in these financial statements may not be representative of future operations.
	Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

184

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

2. Summary of Significant Accounting Policies Continued

Inventories Inventories, which include materials and supplies used for mining coal as well as raw coal, are stated at the lower of cost or market. Cost is determined using the average cost method. Coal inventory costs include labor, supplies, equipment, operating overhead and other related costs. Management periodically reviews inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provides a reserve to reduce inventories to their net realizable values.

Property and Equipment Mineral rights are recorded at cost less accumulated depletion. Mineral rights are depleted based upon estimated recoverable proven and probable reserves. Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation, amortization and depletion are calculated using the straight-line method over the estimated economic useful lives of the assets, and the units of production method, as follows:

Plant and equipment	3-12 years
Mining equipment	4-10 years
Tip-load equipment	5-10 years

Management estimates the economic useful lives of property and equipment based on the expected number of years the assets will be used. Management revisits these assumptions annually and adjusts the economic useful lives if warranted.

Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Routine maintenance, repairs, and renewal costs are expensed as incurred. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation and amortization are removed from the related accounts and any gain or loss is reflected in the statements of revenues and direct operating expenses.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the book value of an asset may not be fully recoverable. When this occurs, the Mine reviews the value assigned to long-lived assets by analyzing the anticipated, undiscounted cash flows they generate. When the expected future undiscounted cash flows from these assets do not exceed their carrying balances, the Mine determines the estimated fair value of such assets. Impairment is recognized to the extent the carrying amount of these assets exceeds their estimated fair value.

185

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

2. Summary of Significant Accounting Policies Continued	Postretirement Benefit Obligation The Mine accrues the cost to provide other postretirement employee benefits (OPEB), as well as life insurance, other than pension benefits, over the employees' period of active service. These costs are determined on an actuarial basis. The plan is unfunded, and the Mine and retirees share the costs. Certain life insurance benefits are paid by the Mine. Under the accounting standards for postretirement benefits, the Mine recognized the underfunded status as a liability on the Statement of Assets to be Acquired and Liabilities to be Assumed.
	Asset Retirement Obligation The Mine's asset retirement obligation (ARO) primarily consists of estimated costs to reclaim surface land and support facilities in accordance with the federal and state reclamation laws as established by each mining permit.
	The Mine estimates its ARO for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the future costs for a third party to perform the required work. These estimates are based on projected pit configurations at the end of mining and are escalated for inflation, and then discounted at a credit-adjusted risk-free rate. The Mine records an ARO asset associated with the initial recorded liability. The ARO asset is amortized based on the units-of-production method over the estimated recoverable, proven and probable reserves at the Mine, and the ARO liability is accreted to the projected settlement date. Changes in estimates occur due to revisions of Mine plans, changes in estimated costs, and changes in timing of the performance of reclamation activities, and are reflected in the period of change.
	Pension Obligation The Mine accrues the cost to provide the benefits over the employees' period of active service for the non-contributory defined benefit pension plan it sponsors. These costs are determined on an actuarial basis. The Mine's Statement of Assets to be Acquired and Liabilities to be Assumed reflects the unfunded status of the defined benefit pension plan.
	Pneumoconiosis benefit obligation The Mine is self-insured for federal and state pneumoconiosis (black lung) benefits for employees. The Mine accounts for these benefits on the accrual basis. Actuarial gains and losses are recognized in the period in which they arise.

186

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

2. Summary of Significant Accounting Policies Continued	Coal Revenues The Mine recognizes coal sales revenue at the time title passes to the customer in accordance with the terms of the underlying sales agreements. Coal sales revenue is recognized based on the pricing contained in the contracts in place at the time that title passes.
	Cost of Sales Cost of sales consists primarily of product and product-related costs.
	Income Taxes Under the provisions of the Internal Revenue Code and applicable state laws, the Mine is taxed as part of a corporate consolidated income tax return, and as a result, is not directly subject to income taxes. Therefore, no provision for income tax expense or related assets or liabilities has been included in the accompanying financial statements. The Mine is unaware of any uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
	Subsequent Events Management has evaluated events and transactions for potential recognition or disclosure subsequent to January 31, 2012 and through March 12, 2013, which is the date the financial statements were available to be issued.

3. Property and Equipment Depreciation and depletion expense on property and equipment was $1,157,000 and $13,757,000 for the month ended January 31, 2012 and the year ended December 31, 2011, respectively.

187

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

4. Postretirement Benefit Obligation The Mine provides postretirement medical benefits, as well as life insurance, to current employees and their dependents upon retirement, as mandated by the Coal Industry Retiree Health Act of 1992 and pursuant to collective bargaining agreements. These benefits are provided through self-insured programs.

188

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

4. Postretirement Benefit Obligation Continued The following table sets forth the actuarial present value of postretirement medical benefit obligations and amounts recognized in the Mine's financial statements as of and for the year ended December 31, 2011:

Change in benefit obligations:
Net obligation at beginning of year	$	42,686,000
Service cost	1,676,000
Interest cost	2,241,000
Actuarial loss	9,067,000
Net obligation at end of year	$	55,670,000

The actuarial loss was primarily a result of decreases in discount rates and updated cost projections.

The components of net periodic postretirement medical benefit cost were as follows for the month ended January 31, 2012 and the year ended December 31, 2011.

	2012		2011
Components of net periodic benefit  cost:
Service cost	$	140,000	$	1,676,000
Interest cost	197,000		2,241,000
Amortization of actuarial loss	144,000		819,000
Total net periodic benefit cost	$	481,000	$	4,736,000

Assumptions

The weighted-average discount rate used to determine the benefit obligations was 4.25% as of December 31, 2011. The discount rate assumption used to determine the postretirement benefit plan obligation and expense reflect the prevailing rates available on high-quality, fixed-income debt instruments. This rate was based on a cash flow analysis that matched estimated future benefit payments to the Citigroup Pension Discount Yield Curve as of December 31, 2011.

189

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

4. Postretirement Benefit Obligation Continued The weighted-average assumptions used to determine the net periodic benefit cost were as follows for the month ended January 31, 2012 and the year ended December 31, 2011:

	2012		2011
Discount rate	5.25	%	5.25	%
Measurement date	January 1, 2012		January 1, 2011

The following presents information about the assumed health care trend rate as of December 31, 2011:

Health care cost trend rate assumed for next   fiscal year	6.5% - 8.00%
Average assumed rate to which the cost trend is   to decline (ultimate trend rate)	5.00%
Year that the rate reaches the ultimate trend rate	2023

The effect of a one percentage change on the health care cost trend rate used to calculate periodic postretirement medical benefit costs and the related benefit obligation as of December 31, 2011 are summarized in the table below:

	1% Increase		1% Decrease
Effect on service and interest cost components	$	1,109,000	$	(816,000	)
Effect on postretirement medical benefit obligation	8,573,000		(6,966,000		)

Cash Flows

The following benefit payments were expected by the Mine subsequent to December 31, 2011:

Years Ending December 31:
2012	$	101,000
2013	373,000
2014	701,000
2015	1,077,000
2016	1,386,000
2017 - 2021	11,165,000
	$	14,803,000

190

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

5. Asset Retirement Obligation Changes in the Mine's asset retirement obligation were as follows for the month ended January 31, 2012 and the year ended December 31, 2011:

	2012		2011
Asset retirement obligation at beginning of period	$	22,045,000	$	32,857,000
Accretion	141,000		1,611,000
Changes due to amount and timing of reclamation	—		(12,423,000		)
Asset retirement obligation at end of period	$	22,186,000	$	22,045,000

6. Pension Obligation

The Mine provides a defined benefit pension plan to qualified full-time employees pursuant to a collective bargaining agreement. CMI prefunds the defined benefit plan as required by local regulations or in certain situations where prefunding provides economic advantages. In the United States, all qualified plans are subject to the Employee Retirement Income Security Act (ERISA) minimum funding standard.

The following table provides a reconciliation of the changes in the plan's benefit obligation and the fair value of the plan's assets, and the amounts recognized in the Mine's financial statements for the plan as of and for the year ended December 31, 2011:

Change in benefit obligations:
Net obligation at beginning of year	$	45,054,000
Service cost	1,167,000
Interest cost	2,417,000
Actuarial loss	5,035,000
Benefits paid	(2,176,000		)
Net obligation at end of year	51,497,000
Change in plan assets:
Fair value of plan assets at beginning of year	38,858,000
Actual return on plan assets	(491,000		)
Employer contributions	4,000,000
Benefits paid	(2,176,000		)
Fair value of plan assets at end of year	40,191,000
Unfunded status at end of year	$	(11,306,000	)

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

6. Pension Obligation Continued The following tables set forth information summarizing the changes in other comprehensive loss for the year ended December 31, 2011:

Total other comprehensive loss at beginning of year	$	12,960,000
Adjustment to actuarial return on plan assets	3,415,000
Actuarial loss	5,035,000
Amortization of recognized actuarial losses	(764,000		)
Amortization of prior period service costs	(140,000		)
Total other comprehensive loss at end of year	$	20,506,000

Prior service costs and credits and actuarial gains and losses are amortized over the expected future years of service of the plan's participants using the corridor method. The following amounts were expected to be amortized from accumulated other comprehensive loss into net periodic pension cost for the year ended December 31, 2012:

Prior period cost	$	140,000
Net loss	1,468,000
Total	$	1,608,000

The components of net periodic benefit cost were as follows for the month ended January 31, 2012 and the year ended December 31, 2011:

	2012			2011
Service cost	$	97,000		$	1,167,000
Interest cost	193,000			2,417,000
Return on plan assets	(244,000		)	(2,925,000		)
Amortization of:
Prior service cost	12,000			140,000
Actuarial loss	106,000			764,000
Total benefit cost	$	164,000		$	1,563,000

These costs are included in the accompanying Statements of Revenues and Direct Operating Expenses.

192

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

6. Pension Obligation Continued

Assumptions The weighted-average discount rate used to determine the benefit obligations was 4.50% as of January 31, 2012 and December 31, 2011. The discount rate is adjusted annually based on an A corporate bond index adjusted for the difference in the duration of the bond index and the duration of the benefit obligations. This rate is calculated using a yield curve, which is developed using the average yield for bonds in the tenth to nineteenth percentiles, which excludes bonds with outlier yields.

The weighted-average assumptions used to determine the benefit cost were as follows for the month ended January 31, 2012 and the year ended December 31, 2011:

	2012		2011
Discount rate	5.5	%	5.5	%
Expected long-term  rate of return	7.75	%	7.75	%
Measurement date	December 31, 2011		December 31, 2011

Plan Assets

The pension plan's investments were combined with the investments of Chevron Master Pension Trust (Master Trust) to maximize administrative efficiencies of CMI. The Master Trust also included the investment assets of other retirement plans sponsored by CMI. Investment income, investment management fees and other direct expenses relating to the Master Trust were allocated to the individual plans based upon the average daily balances. The Plan's interest in the Master Trust was 0.46% as of December 31, 2011.

The primary investment objectives of the pension plan are to achieve the highest rate of total return within prudent levels of risk and liquidity, to diversify and mitigate potential downside risk associated with the investments, and to provide adequate liquidity for benefit payments and portfolio management.

The Master Trust has an Investment Committee that regularly meets during the year to review the asset holdings and their returns. To assess the plan's investment performance, long-term asset allocation policy benchmarks have been established.

193

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

6. Pension Obligation Continued	Plan Assets - Continued For the Master Trust, the Chevron Board of Directors has established the following approved asset allocation ranges: Equities 40-70 percent, Fixed Income and Cash 20-65 percent, Real Estate 0-15 percent, and Other 0-5 percent. To mitigate concentration and other risks, assets are invested across multiple asset classes with active investment managers and passive index funds. CMI does not prefund the OPEB obligations.
	Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly hypothetical transaction between market participants at a given measurement date. Valuation techniques used must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and is defined as:
	Level 1, defined as observable inputs such as quoted prices in active markets for identical assets. Level 1 assets include available-for-sale equity securities generally valued based on independent third-party market prices. 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.

Cash Flows

The following benefit payments were expected to be paid from the pension plan assets subsequent to December 31, 2011:

Years Ending December 31:
2012	$	2,339,000
2013	2,395,000
2014	2,632,000
2015	2,820,000
2016	2,980,000
2017 - 2021	17,170,000
	$	30,336,000

194

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

6. Pension
ObligationContinued Cash Flows - Continued The benefits expected to be paid are based on the same assumptions used to measure the pension benefit obligation as of December 31, 2011 and include estimated future employee service.

7. Pneumoconiosis Benefit Obligation

The PPACA amended previous legislation related to black lung disease, providing automatic extension of awarded lifetime benefits to surviving spouses and providing changes to the legal criteria used to assess and award claims. The Mine has not determined what, if any, additional impact may result from these claims due to lack of claims experience under the new legislation and court rulings interpreting the new provisions. The Mine will continue to evaluate the impact of the PPACA in future periods as additional information, interpretations, guidance and claims experience becomes available.

The discount rate used in determining the actuarial present value of the pneumoconiosis benefit obligation was 6% as of December 31, 2011.

8. Commitments Contingencies, and Concentrations	Litigation The Mine is involved in legal proceedings from time-to-time arising in the normal course of business.  The legal proceedings associated with the Kemmerer Mine are handled by CMI and any matters that are subject to legal settlements will be paid by CMI.
	Concentrations Customers accounting for 10% or more of revenues were as follows for the month ended January 31, 2012 and the year ended December 31, 2011:

	2012		2011
Customer A	57	%	67	%
Customer B	13	%	12	%
Customer C	12	%	*

*The customer accounted for less than 10% for the period indicated.

Production Commitment

In July 2010, the Mine entered into a production commitment with Customer A. Under the agreement, the Mine is obligated to sell between 2.4 million tons and 2.85 million tons of coal to Customer A per year. The agreement expires in December 2021. The base price is $35.662 per ton up to 2.4 million tons and $20.00 per ton between 2.4 million and 2.85 million tons and is subject to quarterly adjustments.

195

KEMMERER MINE

(Predecessor to Westmoreland Kemmerer, Inc.)

Notes to Financial Statements

Continued

8. Commitments Contingencies, and Concentrations Continued	Production Commitment - Continued In addition, the Mine has entered into production commitments with approximately 11 other customers in which they are obligated to sell in aggregate between 1,907,000 and 4,161,000 tons of coal with a base price between $15.70 and $54.40 per ton per year. The production commitments were entered into beginning in 2004 and expire as late as 2020.
	Purchase Commitment The Mine has a purchase commitment to buy a specific number of tires per year through 2014. The estimated annual amount of the purchase commitment is $3.5 million and may vary depending on the actual cost of the tires at the time of purchase.
	Leases The Mine leases certain of its coal reserves from third parties and pays royalties based on either a per ton rate or as a percentage of revenues received. Royalties charged to expense under all such lease agreements amounted to approximately $.4 million and $4.0 million for the month ended January 31, 2012 and the year ended December 31, 2011, respectively.

9. Related Party Transactions	The Mine purchased fuel from its Parent in the amounts of $1,088,000 and $16,263,000, during the month ended January 31, 2012 and the year ended December 31, 2011, respectively.
	The Mine purchased lube services from a related party in the amount $865,000 during the year ended December 31, 2011.
	The Mine periodically transferred assets to and from other mines. The Mine received assets from another mine in the amounts of $892,000 during the year ended December 31, 2011.

196

EXHIBIT INDEX

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Filed Herewith
Other debt instruments are omitted in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. Copies of such agreements will be furnished to the Securities and Exchange Commission upon request. Exhibits with asterisks indicate management contracts or compensatory plans or arrangements.
3.1	Restated Certificate of Incorporation	S-1	333-117709	3.1	7/28/2004
3.2	Certificate of Correction to the Restated Certificate of Incorporation	8-K	001-11155	3.1	10/21/2004
3.3	Certificate of Amendment to the Restated Certificate of Incorporation	8-K	001-11155	3.1	9/7/2007
3.4	Certificate of Amendment to the Restated Certificate of Incorporation	8-K	001-11155	3.2	9/7/2007
3.5	Amended and Restated Bylaws	8-K	001-11155	3.1	1/11/2013
4.1	Certificate of Designation of Series A Convertible Exchangeable Preferred Stock	10-K	001-11155	3(a)	3/15/1993
4.2	Common Stock certificate	S-2	33-1950	4(c)	12/4/1985
4.3	Preferred Stock certificate	S-2	33-47872	4.6	5/13/1992
4.4	Indenture, dated as of 2/04/2011, by and between Westmoreland Coal Company, Westmoreland Partners and Wells Fargo Bank, NA, as trustee and note collateral agent	8-K	001-11155	4.1	2/10/2011
4.5	Form of 10.75% Senior Notes due 2018 (included as Exhibit A in Exhibit 4.4)	8-K	001-11155	4.2	2/10/2011
4.6	Pledge and Security Agreement dated as of 2/04/ 2011, by Westmoreland Coal Company and Westmoreland Partners in favor of Wells Fargo Bank, NA, as note collateral agent	8-K	001-11155	4.4	2/10/2011
4.7	Supplemental Indenture, dated as of 1/31/2012, by and among Westmoreland Coal Company, Westmoreland Partners and Wells Fargo Bank, National Association, as trustee and note collateral agent	8-K	001-11155	4.1	1/31/2012
4.8	Form of 10.75% Senior Notes due 2018 (included as Exhibit A in Exhibit 4.9)	8-K	001-11155	4.1	1/31/2012
4.9	Amendment No. 1 to the Pledge and Security Agreement dated 1/26/2012	8-K	001-11155	4.4	1/31/2012
4.10	Indenture, dated as of 2/07/2014, by and between Escrow Corporation and Wells Fargo Bank, National Association, as trustee	8-K	001-11155	4.1	2/12/2014
4.11	Form of Escrow Note (included as Exhibit A within Exhibit 4.12 hereto)	8-K	001-11155	4.2	2/12/2014
4.12	Pledge and Security Agreement, dated as of 2/07/2014, by and between Escrow Corporation and Wells Fargo Bank, National Association	8-K	001-11155	4.3	2/12/2014
4.13	Second Supplemental Indenture, dated as of 2/03/2014, by and among Westmoreland, Westmoreland Partners and Wells Fargo Bank, National Association, as trustee	8-K	001-11155	4.4	2/12/2014
10.1*	Amended and Restated 2007 Equity Incentive Plan for Employees and Non-Employee Directors	10-K	001-11155	10.0	3/13/2012

197

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Filed Herewith
10.2*	Form of ISO Agreement	10-Q	001-11155	10.1	5/9/2008
10.3*	Form of NQSO Agreement for directors	10-Q	001-11155	10.2	5/9/2008
10.4*	Form of NQSO Agreement for persons other than directors	10-Q	001-11155	10.3	5/9/2008
10.5*	Form of Restricted Stock Unit Agreement for 2010, 2011 and 2012 awards	10-Q	001-11155	10.2	8/9/2010
10.6*	Form of Performance-Based Restricted Stock Unit Agreement for 2011 and 2012 awards	10-Q	001-11155	10.1	5/9/2011
10.7*	Form of Restricted Stock Unit Agreement for 2013 Awards	10-K	001-11155	10.8	3/13/2012
10.8*	Form of Performance-Based Restricted Stock Unit Agreement for 2013 Awards	10-K	001-11155	10.9	3/13/2012
10.9*	Form of Cash Time-Based Award for 2013	10-K	001-11155	10.10	3/13/2012
10.10*	Form of Cash Performance-Based Award for 2013	10-K	001-11155	10.11	3/13/2012
10.11*	Form of 2014 Equity Plan Time-Based Awards for Employees					X
10.12*	Form of 2014 Equity Plan Performance-Based Awards for Employees					X
10.13*	Form of 2014 Equity Plan Time-Based Awards for Directors					X
10.14*	Severance Policy	10-Q	001-11155	10.9	8/5/2011
10.15*	Annual Incentive Plan/ Long-Term Incentive Plan Policy	10-K	001-11155	10.13	3/13/2012
10.16*	Executive Transition Agreement effective 4/05/2013	10-Q	001-11155	10.1	11/8/2012
10.17	Amended Coal Mining Lease between Westmoreland Resources, Inc. (WRI) and Crow Tribe dated 11/26/1974, as amended in 1982	10-Q	0-752	10(a)	5/15/1992	X
10.18	Amendment to Amended Coal Mining Lease between the Crow Tribe and WRI dated 12/02/1994	10-K	001-11155	10.2	3/13/2009
10.19	Exploration and Option to Lease Agreement between the Crow Tribe and WRI dated 2/13/2004	10-K/A	001-11155	10.2	5/8/2009
10.20	Crow Tribal Lands Coal Lease between the Crow Tribe and WRI dated 2/13/2004	10-K/A	001-11155	10.5	5/8/2009
10.21	Master Agreement dated 1/04/1999, between WCC and the UMWA	8-K	001-11155	99.2	2/4/1999
10.22	Senior Secured Convertible Note Purchase Agreement dated 3/04/2008 among WCC and Tontine	8-K	001-11155	10.1	3/6/2008
10.23	Amendment to Senior Secured Convertible Note Purchase Agreement dated 1/05/2011	8-K	001-11155	99.1	1/14/2011
10.24	Registration Rights Agreement dated 3/04/2008, among WCC and Tontine	8-K	001-11155	10.2	3/6/2008
10.25	Note Purchase Agreement dated 6/26/2008 among Westmoreland Mining LLC (WML) and institutional investors	8-K	001-11155	10.1	6/26/2008

198

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Filed Herewith
10.26	Amendment No. 1 to Note Purchase Agreement dated as of June 28, 2012 among WML and institutional investors	8-K	001-11155	10.2	7/3/2012
10.27	Continuing Agreement of Guaranty and Suretyship dated 6/26/2008 from various WML subsidiaries	8-K	001-11155	10.2	6/26/2008
10.28	Security Agreement dated 6/26/2008 among WML and U.S. Bank NA	8-K	001-11155	10.3	6/26/2008
10.29	Pledge Agreement dated 6/26/2008 among WCC, WML and U.S. Bank NA, for the benefit of the noteholders	8-K	001-11155	10.4	6/26/2008
10.30	Amended and Restated Credit Agreement dated 6/26/2008 among WML and PNC Bank, NA	8-K	001-11155	10.5	6/26/2008
10.31	First Amendment to Amended and Restated Credit Agreement dated as of 6/28/2012 among WML and PNC Bank, NA	8-K	001-11155	10.3	7/3/2012
10.32	Second Amendment to Amended and Restated Credit Agreement dated as of 3/21/2013 among WML and PNC Bank, NA	10-Q	001-11155	10.1	5/31/2013
10.33	Amended and Restated Continuing Agreement of Guaranty dated 6/26/2008 from various WML subsidiaries in favor of PNC Bank, NA	8-K	001-11155	10.6	6/26/2008
10.34	Amended and Restated Security Agreement dated 6/26/2008 among WML and U.S. Bank NA	8-K	001-11155	10.7	6/26/2008
10.35	Amended and Restated Pledge Agreement dated 6/26/2008 among WCC, WML and U.S. Bank NA	8-K	001-11155	10.8	6/26/2008
10.36	Purchase and Sale Agreement dated 12/23/2011 for Kemmerer Coal Mine Assets	8-K	001-11155	99.1	1/17/2012
10.37	Amendment to Purchase and Sale Agreement dated 1/25/2012 for Kemmerer Coal Mine Assets	8-K	001-11155	99.1	1/31/2012
10.38	Loan and Security Agreement dated 6/29/2012 among The PrivateBank and Trust Company, WCC and various subsidiaries, as amended on January 10, 2014 and January 22, 2014	8-K	001-11155	10.1	7/3/2012	X
10.39	Tract 1 Lease dated 3/25/2013 between The Crow Tribe of Indians and Westmoreland Resources, Inc.	8-K	001-11155	10.1	3/27/2013
10.40	Consolidated Power Purchase and Operating Agreement dated 12/23/2013 for Roanoke Valley Units 1 and 2 by and between Westmoreland Partners and Virginia Electric and Power Company					X
10.41	Arrangement Agreement among WCC, Sherritt International Corporation, Altius Minerals Corporation and other parties named therein, dated 12/24/2013	8-K	001-11155	99.5	1/23/2014
10.42	Purchase Agreement dated 1/29/2014, among Westmoreland Escrow Corporation, BMO Capital Markets Corp. and Deutsche Bank Securities Inc.	8-K	001-11155	10.1	2/4/2014

199

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Filed Herewith
12.1	Statement Regarding Computation of Ratios					X
21.1	Subsidiaries of WCC					X
23.1	Consent of Ernst & Young LLP					X
23.2	Consent of Tanner LLC					X
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.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Calculation Linkbase Document					X
101.LAB	XBRL Taxonomy Label Linkbase Dcoument					X
101.PRE	XBRL Taxonomy Presentation Linkbase Document					X
101.DEF	XBRL Taxonomy Definition Document					X

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). The financial information contained in the XBRL-related document is "unaudited" or "unreviewed."

200