UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File No. 001-11155

WESTMORELAND COAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		23-1128670 (I.R.S. Employer Identification No.)

2 North Cascade Avenue, 2nd Floor
ColoradoSprings, CO		80903
(Address of principal executive offices)		(Zip Code)

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

Yes þ     No o

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

Yes o      No o

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

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

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

Yes o     No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 2, 2009: 10,299,619 shares of common stock, $2.50 par value.

 

 

TABLE OF CONTENTS

		PAGE
PART I — FINANCIAL INFORMATION			3
ITEM 1 — FINANCIAL STATEMENTS			3
ITEM 1 — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			8
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			32
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			48
ITEM 4 — CONTROLS AND PROCEDURES			48
PART II — OTHER INFORMATION			49
ITEM 1 — LEGAL PROCEEDINGS			49
ITEM 1A — RISK FACTORS			49
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			50
ITEM 3 — DEFAULTS UPON SENIOR SECURITIES			51
ITEM 5 — OTHER INFORMATION			51
ITEM 6 — EXHIBITS			52
SIGNATURE			53
EXHIBIT INDEX			54
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

		September 30,				December 31,
		2009				2008
		(In thousands)
Assets
Current assets:
Cash and cash equivalents		$	18,910			$	39,941
Receivables:
Trade			47,269				71,754
Contractual third-party reclamation receivables			11,126				14,256
Other			3,847				4,202
			62,242				90,212
Inventories			27,370				24,654
Restricted investments and bond collateral			—				2,001
Other current assets			5,691				5,062
Total current assets			114,213				161,870
Property, plant and equipment:
Land and mineral rights			83,861				83,874
Capitalized asset retirement cost			121,741				121,741
Plant and equipment			478,742				446,714
			684,344				652,329
Less accumulated depreciation, depletion and amortization			238,937				208,929
Net property, plant and equipment			445,407				443,400
Excess of trust assets over pneumoconiosis benefit obligation, less current portion			371				2,239
Advanced coal royalties			3,073				3,311
Reclamation deposits			72,374				69,707
Restricted investments and bond collateral, less current portion			48,697				45,302
Contractual third-party reclamation receivables, less current portion			70,767				66,918
Deferred income taxes			2,019				1,420
Intangible assets, net of accumulated amortization of $6.4 million and $4.8 million at September 30, 2009, and December 31, 2008, respectively			9,214				10,823
Other assets			7,040				7,977
Total Assets		$	773,175			$	812,967

See accompanying Notes to Consolidated Financial Statements.

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

		September 30,				December 31,
		2009				2008
		(In thousands)
Liabilities and Shareholders’ Deficit
Current liabilities:
Current installments of long-term debt		$	160,315			$	34,186
Revolving lines of credit			19,200				10,300
Accounts payable and accrued expenses			126,129				141,536
Total current liabilities			305,644				186,022
Long-term debt, less current installments			72,434				224,667
Workers’ compensation, less current portion			11,419				11,801
Postretirement medical costs, less current portion			268,584				266,675
Pension and SERP obligations, less current portion			27,260				38,862
Deferred revenue, less current portion			84,505				80,907
Asset retirement obligations, less current portion			212,042				205,572
Other liabilities			16,285				16,059
Total liabilities			998,173				1,030,565
Shareholders’ deficit:
Preferred stock of $1.00 par value
Authorized 5,000,000 shares; Issued and outstanding 160,129 shares at September 30, 2009, and December 31, 2008			160				160
Common stock of $2.50 par value
Authorized 30,000,000 shares; Issued and outstanding 10,279,107 shares at September 30, 2009, and 9,690,018 shares at December 31, 2008			25,697				24,223
Other paid-in capital			90,890				96,196
Accumulated other comprehensive loss			(103,943	)			(119,367	)
Accumulated deficit			(233,355	)			(218,810	)
Total Westmoreland Coal Company shareholders’ deficit			(220,551	)			(217,598	)
Noncontrolling interest			(4,447	)			—
Total deficit			(224,998	)			(217,598	)
Total Liabilities and Shareholders’ Deficit		$	773,175			$	812,967

See accompanying Notes to Consolidated Financial Statements.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands, except per share data)
Revenues:
Coal		$	91,708			$	117,288			$	272,891			$	318,102
Energy			20,696				23,969				66,091				67,970
Independent power projects — equity in earnings			—				48				—				250
			112,404				141,305				338,982				386,322
Cost, expenses and other:
Cost of sales			95,434				112,477				282,867				308,320
Depreciation, depletion and amortization			11,533				10,969				32,561				30,879
Selling and administrative			10,214				9,757				31,820				30,554
Restructuring charges			—				—				—				628
Heritage health benefit expenses			7,438				6,659				21,446				21,867
Gain on sales of assets			(12	)			(883	)			(58	)			(1,505	)
Other operating income			(2,452	)			—				(9,249	)			—
			122,155				138,979				359,387				390,743
Operating income (loss)			(9,751	)			2,326				(20,405	)			(4,421	)
Other income (expense):
Interest expense			(5,755	)			(5,839	)			(17,271	)			(17,396	)
Interest expense attributable to beneficial conversion feature			—				—				—				(8,108	)
Interest income			684				1,264				2,362				3,817
Other income (expense)			1,698				(774	)			5,782				(559	)
Loss on extinguishment of debt			—				—				—				(5,178	)
			(3,373	)			(5,349	)			(9,127	)			(27,424	)
Loss before income taxes			(13,124	)			(3,023	)			(29,532	)			(31,845	)
Income tax expense (benefit) from operations			317				130				306				373
Net income (loss)			(13,441	)			(3,153	)			(29,838	)			(32,218	)
Less net loss attributable to noncontrolling interest			(1,417	)			—				(4,447	)			—
Net loss attributable to the Parent company			(12,024	)			(3,153	)			(25,391	)			(32,218	)
Less preferred stock dividend requirements			340				340				1,020				1,020
Net loss applicable to common shareholders		$	(12,364	)		$	(3,493	)		$	(26,411	)		$	(33,238	)
Net income per share applicable to common shareholders:
Basic and diluted		$	(1.21	)		$	(0.37	)		$	(2.68	)		$	(3.50	)
Weighted average number of common shares outstanding:
Basic and diluted			10,244				9,537				9,850				9,493

See accompanying Notes to Consolidated Financial Statements.

Westmoreland Coal Company and Subsidiaries
Consolidated Statement of Shareholders’ Deficit and Comprehensive Loss
Nine Months Ended September 30, 2009
(Unaudited)

		Class A
		Convertible												Accumulated												Total
		Exchangeable												Other								Non-				Shareholders’
		Preferred				Common				Other Paid-				Compre-				Accumulated				controlling				Equity
		Stock				Stock				In Capital				hensive Loss				Deficit				Interest				(Deficit)
														(In thousands)
Balance at December 31, 2008 (160,129 preferred shares and 9,690,018 common shares outstanding)		$	160			$	24,223			$	96,196			$	(119,367	)		$	(218,810	)		$	—			$	(217,598	)
Cumulative effect of adoption of ASC 815-40			—				—				(9,847	)			—				10,846				—				999
Common stock issued as compensation (189,089 shares, less 100,000 shares forfeited)			—				224				1,638				—				—				—				1,862
Contributions of Company stock to pension plan assets (500,000 shares)			—				1,250				2,903				—				—				—				4,153
Net loss			—				—				—				—				(25,391	)			(4,447	)			(29,838	)
Adjustment of accumulated actuarial losses and transition obligations, pension			—				—				—				(2,186	)			—				—				(2,186	)
Amortization of accumulated actuarial losses and transition obligations, pension			—				—				—				1,574				—				—				1,574
Amortization of accumulated actuarial losses and transition obligations, postretirement medical benefits			—				—				—				5,368				—				—				5,368
Effect of pension plan freeze			—				—				—				10,670				—				—				10,670
Effect of postretirement plan amendments			—				—				—				15,426				—				—				15,426
Effect of postretirement plan discount rate change															(16,136	)											(16,136	)
Unrealized gain on available-for-sale securities			—				—				—				708				—				—				708
Comprehensive loss																											(14,414	)
Balance at September 30, 2009 (160,129 preferred shares and 10,279,107 common shares outstanding)		$	160			$	25,697			$	90,890			$	(103,943	)		$	(233,355	)		$	(4,447	)		$	(224,998	)

See accompanying Notes to Consolidated Financial Statements.

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

		Nine Months Ended September 30,
		2009				2008
		(In thousands)
Cash flows from operating activities:
Net loss		$	(29,838	)		$	(32,218	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred power sales revenue			11,192				21,388
Equity in earnings of independent power projects			—				(250	)
Cash distributions from independent power projects			—				250
Loss on extinguishment of debt			—				2,292
Gain on derivative instruments			(5,948	)			—
Depreciation, depletion and amortization			32,561				30,879
Accretion of asset retirement obligation and receivable			7,482				8,204
Amortization of intangible assets and liabilities, net			290				548
Restructuring charge			—				628
Share-based compensation			1,843				2,037
Loss (gain) on sales of assets			(58	)			(1,505	)
Amortization of deferred financing costs			1,476				673
Non-cash interest expense			1,090				8,549
Loss on impairment and sales of investment securities			412				825
Warrant repriced in lieu of registration requirement			—				355
Changes in operating assets and liabilities:
Receivables, net			13,364				(9,380	)
Inventories			(2,716	)			3,508
Excess of trust assets over pneumoconiosis benefit obligation			1,868				(437	)
Deferred income taxes			(599	)			—
Accounts payable and accrued expenses			(6,314	)			1,489
Deferred coal revenue			(1,180	)			232
Income tax payable			(1,204	)			420
Accrual for workers’ compensation			(391	)			(476	)
Asset retirement obligation			(551	)			(2,044	)
Accrual for postretirement medical costs			6,566				7,792
Pension and SERP obligations			2,608				(2,409	)
Other assets and liabilities			(4,437	)			(8,386	)
Net cash provided by operating activities			27,516				32,964
Cash flows from investing activities:
Additions to property, plant and equipment			(24,171	)			(24,630	)
Change in restricted investments and bond collateral and reclamation deposits			(4,561	)			33,020
Net proceeds from sales of assets			929				1,880
Proceeds from the sale of investments			796				—
Receivable from customer for property and equipment purchases			(364	)			(558	)
Net cash provided by (used in) investing activities			(27,371	)			9,712
Cash flows from financing activities:
Change in book overdrafts			(602	)			(4,822	)
Borrowings from long-term debt			—				205,377
Repayments of long-term debt			(29,418	)			(202,718	)
Borrowings on revolving lines of credit			57,816				147,900
Repayments of revolving lines of credit			(48,916	)			(150,200	)
Debt issuance costs			(56	)			(5,083	)
Exercise of stock options			—				203
Net cash used in financing activities			(21,176	)			(9,343	)
Net increase (decrease) in cash and cash equivalents			(21,031	)			33,333
Cash and cash equivalents, beginning of period			39,941				19,736
Cash and cash equivalents, end of period		$	18,910			$	53,069
Non-cash transactions:
Pension and postretirement plan changes		$	9,960			$	—
Capital leases			8,984				12,331

See accompanying Notes to Consolidated Financial Statements.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES

1. BASIS OF PRESENTATION

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

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

These quarterly consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, or 2008 Form 10-K. The accounting principles followed by the Company are set forth in the Notes to the Company’s consolidated financial statements in its 2008 Form 10-K. Most of the descriptions of the accounting principles and other footnote disclosures previously made have been omitted in this report so long as the interim information presented is not misleading.

The consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles and require use of management’s estimates. The financial information contained in this Form 10-Q is unaudited, but reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2009, are not necessarily indicative of results to be expected for the year ending December 31, 2009. The Company has evaluated subsequent events through November 9, 2009, the date of issuance of the consolidated financial statements. Certain prior year amounts have been reclassified to conform to the current year presentation.

Liquidity

The Company has suffered recurring losses from operations, has a working capital deficit and a net capital deficiency that raise substantial doubt about the ability of the Company to continue as a going concern. The accompanying consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about the ability of the Company to continue as a going concern.

The Company’s lending arrangements contain, among other conditions, events of default and various affirmative and negative covenants. At June 30, 2009, WML did not comply with a leverage ratio covenant in its debt agreement primarily as a result of customer outages. The leverage ratio is calculated using Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, as defined by the agreement, for the previous four quarters. For the same reason, WML also did not comply with this covenant as of September 30, 2009, and believes it will not comply with the leverage ratio requirements for the fourth quarter of 2009 and the first quarter of 2010. On October 7, 2009, WML obtained a waiver from its lenders for the quarters ended June 30, 2009, and September 30, 2009. WML also received waivers for future leverage ratio non-compliance for the quarters ended December 31, 2009, and March 31, 2010, provided it meets certain conditions. The leverage ratio waivers also allow WML to access funds under its $25.0 million revolving line of credit. Despite the fact WML has received waivers for existing and future non-compliance with the leverage ratio requirements, it has classified $127.0 million of outstanding debt as a current liability in the Consolidated Balance Sheet due to the uncertainty of future compliance with covenant requirements. However, WML expects to fully comply with all conditions under these waivers.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

As a result of the WML non-compliance, WML paid its lenders $0.6 million as consideration for entry into the leverage ratio waivers. These costs were recorded in Selling and administrative expenses in the Consolidated Results of Operations.

At September 30, 2009, primarily a result of unfavorable market conditions driving decreases in tonnages sold, WRI was not in compliance with a net worth requirement contained in its Business Loan Agreement. On October 29, 2009, WRI obtained a waiver from its lenders for the quarter ended September 30, 2009. In addition, WRI’s Business Loan Agreement was amended on November 9, 2009, to extend the commencement of the net worth requirement from September 30, 2009 to April 30, 2010. Despite the fact WRI has received a waiver and an amendment to its Business Loan Agreement, it has classified its term debt of $4.8 million as a current liability in the Consolidated Balance Sheet due to the uncertainty of future compliance with covenant requirements.

The Company is a holding company (the “Parent”) and conducts its operations through subsidiaries, which generally have obtained separate financing. As a holding company, the Company has significant cash requirements to fund its ongoing heritage health benefit costs, pension contributions, and corporate overhead expenses. The principal sources of cash flow to the Parent are distributions from its principal operating subsidiaries. Each of WML, ROVA and WRI has a credit agreement that contains covenants applicable to that subsidiary. Only the WRI agreement permits dividends to be paid by WRI to the Parent without restriction.

The major factors impacting the Company’s liquidity are as follows:

•

The Company’s significant level of debt and limitations under current debt agreements on the ability of WML and ROVA to pay dividends to the Company.

As of September 30, 2009, the Company’s total gross indebtedness was approximately $251.9 million, the principal components of which are: $149.4 million under the WML revolving line of credit, term and other debt; $59.8 million of ROVA term debt; $32.2 million under WRI’s revolving line of credit, term and other debt; and $10.5 million of convertible notes.

The maturities of long-term debt and the revolving lines of credit due over the next twelve months are $179.5 million, of which $142.3 million relates to the ongoing WML and WRI loan covenant non-compliance and the potential future cross default on the convertible notes. In addition, $17.2 million relates to funds drawn on WRI’s $20.0 million revolving line of credit. On November 9, 2009, WRI renewed its revolving line of credit and amended its term debt. See Note 7 for additional details on the renewal and the amendment. The remaining $20.0 million due over the next twelve months is payable by its subsidiaries, and is expected to be funded by cash provided by the operations of those subsidiaries.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The WML and ROVA debt agreements require the maintenance of reserve accounts and limit the ability of those subsidiaries to distribute funds to the Parent based on changes in reserve account balances and the subsidiaries’ operating results. Accordingly, these subsidiaries may not be able to pay dividends to the Parent in the amounts and in the time periods required for it to pay its heritage health benefit costs, pension contributions and corporate overhead expenses. Additionally, the WML and ROVA revolving lines of credit are only available to these operations.

The $20.0 million WRI revolving line of credit allows the Parent to draw on it at any given time for general corporate purposes. As of September 30, 2009, $17.2 million had been drawn under the WRI revolving line of credit.

•

The Company’s heritage health obligation, which must be funded by distributions from the Company’s operating subsidiaries, and its pension obligations.

The Company’s heritage health benefit costs consist of payments for postretirement medical benefits, workers’ compensation benefits and combined benefit fund premiums. The Company expects to make payments of $5.7 million for these costs during the remainder of 2009.

The Company and its subsidiaries also sponsor defined benefit pension plans for its full-time employees. The Company’s Westmoreland Retirement Plan was frozen effective July 1, 2009. Under the covenants of the WML term debt, the Company is required to ensure that by September 15th of each year, the value of the Company’s pension plan assets is at least 90% of each of the plans’ year-end actuarially determined pension liability.

In order to achieve the 90% funding status required by loan covenants, the Company contributed $1.6 million in cash and $4.2 million in company stock to its Retirement Plans in the nine months ended September 30, 2009. See Note 9 for details.

The Company continues to explore ways to reduce and eliminate portions of its heritage benefit costs.

•

Cash collateral requirements for additional reclamation bonds in new mining areas.

Federal and state laws require that the Company provide bonds to secure its obligations to reclaim lands used for mining. The Company must post a bond before it can obtain a permit to mine any new area. These bonds are typically renewable on a yearly basis and have become increasingly expensive. Bonding companies are requiring that applicants collateralize increasing portions of their obligations to the bonding company. The Company anticipates that, as it permits additional areas for its mines in the remainder of 2009 and 2010, its bonding requirements will increase significantly and the collateral requirements will increase as well.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

•

Significant unanticipated customer outages and an overall decrease in the demand for electricity.

During the second quarter of 2009, unscheduled customer outages occurred after planned maintenance outages, which affected the Company’s Rosebud and Beulah Mines. The Beulah Mine customer ended its unscheduled outage and resumed coal deliveries in July 2009. However, deliveries to the Rosebud Mine’s customer were significantly reduced through late October 2009 when operations resumed. During Rosebud’s customer-scheduled maintenance outage in early 2009, it found unanticipated mechanical problems that required immediate replacement. The initial replacement parts were not successful in fixing the mechanical issues, further prolonging the maintenance outage at the power plant far beyond the initial estimates. The power plant outages at Beulah and Rosebud are referred to herein as “the customer outages.” Additionally, due to current unfavorable economic conditions in the energy market, the Company’s Absaloka and Jewett Mine’s 2009 deliveries have decreased and are expected to remain at lower levels for the remainder of the year. These reductions in actual and planned 2009 deliveries will reduce dividends and cash flows available to the Parent.

As a result of the renewed revolving line of credit and amended term debt at WRI and the conclusion of the customer shutdowns in the fourth quarter, the Company anticipates it will be able to meet its projected cash requirements for the foreseeable future, although by a small margin. The Company’s forecasts are subject to a number of uncertainties that are beyond its control, and may face unforeseeable economic issues.

2. ACCOUNTING POLICIES

Newly Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board, or FASB, issued ASC 105, The FASB Accounting Standards Codification ^TM and the Hierarchy of Generally Accepted Accounting Principles. This statement established the Accounting Standards Codification, or ASC, and was effective for interim and annual periods ending after September 15, 2009. The adoption of ASC 105 is reflected throughout the Notes to the Consolidated Financial Statements.

In June 2009, the Company adopted ASC 855-10-05, Subsequent Events. ASC 855-10-05 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. ASC 855-10-05 is effective for interim financial periods ending after June 15, 2009. The Company has evaluated subsequent events through November 9, 2009, the date of issuance of the consolidated financial statements.

In April 2009, the Company adopted ASC 825-10, Interim Disclosures About Fair Value of Financial Instrument. ASC 825-10 requires fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. ASC 825-10 is effective for interim periods ending after June 15, 2009. See Note 12 for these disclosures.

On January 1, 2009, the Company adopted ASC 815-40, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock. ASC 815-40 was issued in June 2008 by the FASB and clarifies how to determine whether certain instruments or features are indexed to an entity’s own stock. ASC 815-40 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company recorded a cumulative effect of change in accounting principle upon adoption of ASC 815-40. See Note 11 for additional information.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

On January 1, 2009, the Company adopted ASC 810-45, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB 51. ASC 810-45 establishes accounting and reporting standards for (1) noncontrolling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. ASC 810-45 requires noncontrolling interests (minority interests) to be reported as a separate component of equity. The amount of net income or loss attributable to the noncontrolling interest will be included in consolidated net income or loss on the face of the income statement. In addition, this statement requires that a parent recognize a gain or loss in net income or loss when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. ASC 810-45 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The Company recorded $1.4 million and $4.4 million net loss attributable to noncontrolling interest in the three and nine months ended September 30, 2009, which is reflected in the Company’s consolidated financial statements.

On January 1, 2009, the Company adopted ASC 815-10, Disclosures about Derivative Instruments and Hedging Activities — an amendment of ASC 815. ASC 815-10 expands the disclosure requirements for derivative instruments and hedging activities. This statement specifically requires entities to provide enhanced disclosures addressing the following: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under ASC 815-10, Accounting for Derivative Instruments and Hedging Activities and its related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815-10 was effective for fiscal years and interim periods beginning after November 15, 2008, and the Company included the required disclosures in Note 11.

In June 2008, the FASB released ASC 260-10-45, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The guidance requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities as defined in ASC 260-10-45, Participating Securities and the Two Class Method under ASC 260-10, and therefore, should be included in computing earnings per share using the two-class method. The guidnace was effective for the Company as of January 1, 2009, but had no impact on the Company’s earnings per share calculation as of September 30, 2009.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

3. INVENTORIES

Inventory consisted of the following (in thousands):

		September 30,				December 31,
		2009				2008
Coal		$	1,212			$	1,697
Materials, fuel and supplies			26,342				23,352
Reserves for slow-moving obsolete inventory			(184	)			(395	)
Total		$	27,370			$	24,654

4. RESTRICTED INVESTMENTS AND BOND COLLATERAL

The Company’s restricted investments and bond collateral consist of the following (in thousands):

		September 30,				December 31,
		2009				2008
Corporate:
Workers’ compensation bonds		$	6,070			$	5,759
Postretirement health benefit bonds			3,435				2,193
Coal Segment:
Westmoreland Mining — debt service reserve account			5,064				5,065
WRI Indian Coal Production Tax escrow			—				2,001
Reclamation bond collateral:
Rosebud Mine			12,518				13,489
Absaloka Mine			8,946				5,781
Jewett Mine			1,251				973
Beulah Mine			1,070				1,070
ROVA:
Debt protection accounts			7,142				8,391
Repairs and maintenance account			2,601				1,977
Ash reserve account			600				604
Total restricted investments and bond collateral			48,697				47,303
Less current portion			—				(2,001	)
Total restricted investments and bond collateral, less current portion		$	48,697			$	45,302

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. Funds in the restricted investment and bond collateral accounts are not available to meet the Company’s cash needs.

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

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The Company’s carrying value and estimated fair value of its restricted investments and bond collateral at September 30, 2009, are as follows (in thousands):

		Carrying Value				Fair Value
Cash and cash equivalents		$	31,523			$	31,523
Time deposits			10,342				10,342
Held-to-maturity securities			4,011				4,335
Available-for-sale securities			2,821				2,821
		$	48,697			$	49,021

The Company recorded an impairment of $0.2 million during the first nine months of 2009 as a result of other-than-temporary declines in the value of marketable securities included in restricted investments and bond collateral.

Coal Segment

In April 2009, the final approval was received for the private letter ruling and all payments for the Indian Coal Production Tax Credit monetization transaction received by WRI were released from escrow.

ROVA

Pursuant to the terms of its loan agreement with Prudential, ROVA must maintain either three or six months debt service reserves in its debt protection accounts, which is based on the calculation of its current debt service coverage ratio. As a result of the September 15, 2009 debt service coverage ratio calculation, ROVA will be required to maintain six months of subsequent debt service reserves effective October 30, 2009.

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 September 30, 2009 is as follows (in thousands):

Amortized cost		$	4,011
Gross unrealized holding gains			324
Fair value		$	4,335

Maturities of held-to-maturity securities are as follows at September 30, 2009 (in thousands):

		Amortized Cost				Fair Value
Due within one year		$	550			$	553
Due after five years to ten years			1,322				1,471
Due in more than ten years			2,139				2,311
		$	4,011			$	4,335

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The cost basis, gross unrealized holding gains and losses and fair value of available-for-sale securities at September 30, 2009, is as follows (in thousands):

Cost basis		$	2,625
Gross unrealized holding gains			237
Gross unrealized holding losses			(41	)
Fair value		$	2,821

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following (in thousands):

		September 30,				December 31,
		2009				2008
Trade		$	46,359			$	64,962
Production taxes			28,504				26,056
Asset retirement obligations			18,316				17,136
Postretirement medical benefits			18,176				18,176
Deferred revenue			8,024				1,610
Accrued severance and other liabilities			3,927				7,947
Interest			1,108				1,314
Workers’ compensation			1,028				1,037
Bank overdrafts			381				983
Pension and SERP obligations			306				306
Income taxes			—				2,009
Total accounts payable and accrued expenses		$	126,129			$	141,536

6. RESTRUCTURING AND SEVERANCE

In 2007, the Company initiated a restructuring plan in order to reduce the overall cost structure of the Company. This decision was based on an analysis of the Company’s internal operations, its future customer commitments, its current and potential markets, and its financial projections for profitability. The Company expects the severance payments to be paid out through March 2011.

The table below represents the restructuring provision activity for the nine months ended September 30, 2009 (in thousands):

Beginning		Restructuring				Restructuring				Ending
Balance		Charges				Payments				Balance
$2,089		$	—			$	(1,370	)		$	719

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

7. LINES OF CREDIT AND LONG-TERM DEBT

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

		Total Debt Outstanding
		September 30,				December 31,
		2009				2008
Corporate debt:
Convertible notes		$	10,485			$	15,789
Westmoreland Mining debt:
Revolving line of credit			2,000				—
Term debt			125,000				125,000
Capital lease obligations			21,584				22,091
Other term debt			784				964
Westmoreland Resources, Inc:
Revolving line of credit			17,200				10,300
Term debt			4,767				6,375
Capital lease obligations			10,370				5,842
ROVA debt:
Revolving line of credit			—				—
Term debt			59,759				82,792
Total debt outstanding			251,949				269,153
Less current portion			(179,515	)			(44,486	)
Total debt outstanding, less current portion		$	72,434			$	224,667

The ROVA term debt includes debt premiums of $1.0 million and the convertible notes include a debt discount of $6.4 million at September 30, 2009. The balance of the convertible notes at December 31, 2008, did not include a debt discount, as the accounting guidance requiring the Company to record a debt discount became effective January 1, 2009.

The following table presents the maturities of all long-term debt and revolving credit facilities outstanding at September 30, 2009 (in thousands). This table has been significantly revised from the table disclosed in the 2008 Form 10-K as a result of WML’s and WRI’s loan covenant defaults and the potential cross default on the Company’s convertible notes.

Remainder of 2009		$	170,633
2010			16,357
2011			14,613
2012			15,401
2013			15,453
Thereafter			24,877
		$	257,334

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Convertible Debt

The Company paid interest on its 9% senior secured convertible notes in kind through the issuance of $1.1 million of additional notes during the nine months ended September 30, 2009. This resulted in an additional 108,988 shares of common stock being issuable on conversion of the convertible notes at a conversion price of $10.00 per share, bringing the total to 1,687,833 shares at September 30, 2009.

On January 1, 2009, the Company adopted ASC 815-40, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock. See Note 11 for additional information.

The note purchase agreement contains affirmative and negative covenants. The notes may be declared immediately due and payable upon the occurrence of certain events of default, and the notes are immediately due and payable without declaration upon the occurrence of other events of default. As discussed below, WML and WRI’s expected future non-compliance with loan covenants could potentially trigger a future cross default on the Company’s convertible notes. The Company has classified $10.5 million of its convertible note debt as a current liability due to the uncertainty of WML and WRI’s future compliance with covenant requirements.

Westmoreland Mining LLC

In the three and nine months ended September 30, 2009, WML repaid $1.5 million and $4.1 million, respectively, of its capital lease and other term debt. WML entered into capital lease agreements in the amount of $3.4 million for the nine months ended September 30, 2009. The weighted average interest rate for WML’s capital lease and other term debt was 7.63% and 6.14%, respectively, at September 30, 2009.

The available balance on the $25.0 million revolver at September 30, 2009, was $21.1 million, which includes a letter of credit for $1.9 million supported by the revolver. Pursuant to the leverage ratio waivers obtained on October 7, 2009, WML is able to access funds under this revolving line of credit.

WML’s lending arrangements contain, among other conditions, events of default and various affirmative and negative covenants. At June 30, 2009, WML did not comply with a leverage ratio covenant in its WML debt agreement primarily as a result of customer outages. The leverage ratio is calculated using EBITDA, as defined by the agreement, for the previous four quarters. For the same reason, WML also did not comply with this covenant as of September 30, 2009 and believes it will not comply with the leverage ratio requirements for the fourth quarter of 2009 and the first quarter of 2010. On October 7, 2009, WML obtained a waiver from its lenders for the quarter ended June 30, 2009, and September 30, 2009. WML also received waivers for future leverage ratio non-compliance for the quarters ended December 31, 2009, and March 31, 2010, provided WML meets certain conditions. Despite the fact WML has received waivers for existing and future non-compliance with the leverage ratio requirements, it has classified $127.0 million of outstanding debt as a current liability in the Consolidated Balance Sheet due to the uncertainty of future compliance with covenant requirements. However, the Company expects to fully comply with all conditions under the waivers.

In accordance with the leverage ratio waivers, the Company paid its WML lenders $0.6 million as consideration for entry into these waivers. These costs were recorded in Selling and administrative expenses in the consolidated results of operations.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

Westmoreland Resources, Inc.

On November 9, 2009, WRI’s Business Loan Agreement was amended and the $20.0 million revolving line of credit was extended to November 18, 2010. Under the amended loan agreement, the limit of the term debt was increased to $8.0 million requiring quarterly payments of principal and interest with the final payment due at January 29, 2013. The term debt’s interest rate is payable at the prime rate subject to a 7% floor per annum. In addition, the amendment extended the commencement of a net worth requirement from September 30, 2009 to April 30, 2010. In consideration for these amendments, WRI paid $0.3 million to its lender.

The balance outstanding on WRI’s revolving line of credit at September 30, 2009 was $17.2 million.

In the three and nine months ended September 30, 2009, WRI repaid $1.1 million and $2.7 million, respectively, of its outstanding term debt and capital lease obligations. WRI entered into capital lease agreements in the amount of $5.6 million for the nine months ended September 30, 2009. The weighted average interest rate for WRI’s capital leases was 7.61% at September 30, 2009. Interest on WRI’s term debt and its revolving line of credit at September 30, 2009, was 3.25% and 6.0%, respectively.

WRI’s Business Loan Agreement requires it to comply with numerous covenants and minimum financial ratio requirements primarily related to debt coverage, tangible net worth, capital expenditures, and its operations. At September 30, 2009, primarily as a result of unfavorable market conditions driving decreases in tonnages sold, WRI was not in compliance with a net worth requirement contained in its Business Loan Agreement. On October 29, 2009, WRI obtained a waiver from its lenders for the quarter ended September 30, 2009. Also described above, WRI’s Business Loan Agreement was amended on November 9, 2009, to extend the commencement of the net worth requirement from September 30, 2009 to April 30, 2010. Despite the fact WRI has received a waiver and an amendment to its Business Loan Agreement, it has classified its term debt of $4.8 million as a current liability in the Consolidated Balance Sheet due to the uncertainty of future compliance with covenant requirements.

ROVA

In the three and nine months ended September 30, 2009, ROVA repaid $6.8 million and $22.7 million of its outstanding debt, which included payments of $3.6 million for floating rate term debt and $19.1 million for fixed rate term debt.

ROVA’s $6.0 million revolving loan had no balance outstanding as of September 30, 2009. Interest on the revolving loan is payable quarterly at the three-month LIBOR rate plus 1.375% (1.72% per annum at September 30, 2009).

The fixed rate term debt and the revolving loan are secured by a pledge of the quarterly cash distributions from ROVA. ROVA is required to comply with numerous loan covenants primarily related to interest and fixed charge coverage and its operations. As of September 30, 2009, ROVA was in compliance with such covenants.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

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 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Health care benefits		$	5,777			$	5,941			$	16,725			$	19,224
Combined benefit fund payments			802				880				2,406				2,642
Workers’ compensation benefits			146				145				447				437
Black lung benefits (credit)			713				(307	)			1,868				(436	)
Total		$	7,438			$	6,659			$	21,446			$	21,867

In the nine months ended September 30, 2009, the Company recorded a gain of $0.8 million, related to a settlement of past heritage claims. Also, the Company’s valuation of its Black lung benefits was unfavorably impacted by interest rate changes.

9. PENSION AND POSTRETIREMENT MEDICAL BENEFITS

The Company provides pension and postretirement medical benefits to qualified full-time employees and retired employees and their dependents, mandated by the Coal Industry Retiree Health Benefit Act of 1992 and a 1992 collective bargaining agreement.

Effective July 1, 2009, the Company froze the Westmoreland Retirement Plan and, as a result, future benefits will not accrue under this plan. Accordingly, the Company recorded a curtailment loss of $0.2 million in the third quarter of 2009 related to the plan freeze. In addition, the Company recorded a $10.7 million decrease in its pension liability with a corresponding decrease in Accumulated other comprehensive loss.

The Company also eliminated postretirement medical benefits for non-represented employees and retirees effective September 1, 2009, and, as a result, recorded a $0.7 million increase in its liability with a corresponding increase in Accumulated other comprehensive loss. Although the elimination of benefits resulted in a decrease in the Company’s liability of $15.4 million, this decrease was offset by a $16.1 million increase in the liability due to a decrease in the discount rate used at September 1, 2009, the re-measurement date.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The Company incurred net periodic benefit costs of providing pension benefits as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Components of net periodic benefit cost:
Service cost		$	115			$	411			$	1,462			$	1,947
Interest cost			1,142				889				3,699				3,204
Expected return on plan assets			(857	)			(1,260	)			(2,501	)			(3,312	)
Amortization of deferred items			270				175				1,574				525
Curtailment loss			204				—				204				—
Total net periodic benefit cost		$	874			$	215			$	4,438			$	2,364

As part of the WML refinancing, the Company is required by loan covenants to ensure that by September 15th of each year, the value of its pension assets are at least 90% of each of the plan’s year end actuarially determined pension liability.

The Company contributed $1.6 million in cash and $4.2 million in company stock to its Retirement Plans in the nine months ended September 30, 2009, in order to achieve the required 90% funding status.

The Company incurred net periodic benefit costs of providing postretirement medical benefits as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Components of net periodic benefit cost:
Service cost		$	184			$	145			$	631			$	507
Interest cost			4,055				3,817				12,430				12,830
Amortization of deferred items			1,770				2,080				5,368				6,240
Total net periodic benefit cost		$	6,009			$	6,042			$	18,429			$	19,577

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Former mining operations		$	5,555			$	5,676			$	16,844			$	18,415
Current operations			454				366				1,585				1,162
Total net periodic benefit cost		$	6,009			$	6,042			$	18,429			$	19,577

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

The Company expects to pay approximately $17.2 million for postretirement medical benefits during 2009, net of Medicare Part D reimbursements. A total of $3.6 million and $12.7 million were paid in the three and nine months ended September 30, 2009, respectively, net of Medicare Part D reimbursements.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

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

The asset retirement obligations, contractual third-party reclamation receivables, and reclamation deposits at September 30, 2009, for each of the Company’s mines and ROVA are summarized below (in thousands):

						Contractual
		Asset				Third-Party
		Retirement				Reclamation				Reclamation
		Obligations				Receivables				Deposits
Rosebud		$	131,167			$	16,842			$	72,374
Jewett			64,418				64,418				—
Absaloka			16,497				633				—
Beulah			15,391				—				—
Savage			2,369				—				—
ROVA			516				—				—
Total		$	230,358			$	81,893			$	72,374

Asset Retirement Obligations

Changes in the Company’s asset retirement obligations were (in thousands):

		Nine Months Ended
		September 30,
		2009				2008
Asset retirement obligations, beginning of period		$	222,708			$	206,497
Accretion			13,072				11,468
Settlements (final reclamation performed)			(5,422	)			(5,511	)
Changes due to amount and timing of reclamation			—				(1,992	)
Asset retirement obligations, end of period			230,358				210,462
Less current portion			(18,316	)			(10,536	)
Asset retirement obligations, less current portion		$	212,042			$	199,926

The Company estimates that the cost of final reclamation for its mines and ROVA when they are closed in the future will total approximately $444.7 million with a present value of $230.4 million.

Contractual Third-Party Reclamation Receivables

The Company has recognized an asset of $81.9 million as a contractual third-party reclamation receivable, representing the present value of obligations of certain customers to reimburse the Company for a portion of the asset retirement costs at the Company’s Rosebud, Jewett, and Absaloka Mines.

Reclamation Deposits

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

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The Company’s carrying value and estimated fair value of its reclamation deposits at September 30, 2009, are as follows (in thousands):

		Carrying Value				Fair Value
Cash and cash equivalents		$	30,152			$	30,152
Held-to-maturity securities			23,567				24,981
Time deposits			15,629				15,629
Available-for-sale securities			3,026				3,026
		$	72,374			$	73,788

The Company recorded an impairment of $0.3 million during the first nine months of 2009 as a result of other-than-temporary declines in the value of marketable securities included in reclamation deposits.

The amortized cost, gross unrealized holding gains and losses and fair value of held-to-maturity securities at September 30, 2009, are as follows (in thousands):

Amortized cost		$	23,567
Gross unrealized holding gains			1,416
Gross unrealized holding losses			(2	)
Fair value		$	24,981

Maturities of held-to-maturity securities are as follows at September 30, 2009 (in thousands):

		Amortized Cost				Fair Value
Due within one year		$	1,771			$	1,773
Due in five years or less			2,470				2,597
Due after five years to ten years			5,712				6,024
Due in more than ten years			13,614				14,587
		$	23,567			$	24,981

The cost basis, gross unrealized holding gains and fair value of available-for-sale securities at September 30, 2009, are as follows (in thousands):

Cost basis		$	2,401
Gross unrealized holding gains			625
Fair value		$	3,026

11. DERIVATIVE INSTRUMENTS

Adoption of ASC 815-40

On January 1, 2009, the Company adopted ASC 815-40, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock. As part of the adoption of ASC 815-40, the Company determined that its convertible debt instrument is not indexed to its stock, and therefore the value of the conversion feature was separated from the debt and reclassified as a liability. A corresponding debt discount was established which will be amortized over the life of the convertible notes. Prior to adopting ASC 815-40, the Company followed ASC 470-20, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. ASC 470-20 required the Company to record interest expense and corresponding paid-in-capital related to the beneficial conversion feature in its convertible debt and was superseded by ASC 815-40. In addition to the Company’s convertible debt, ASC 815-40 also applies to a warrant the Company issued and, therefore, the value of the warrant has been recorded as a liability.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The Company recorded the following cumulative effect of change in accounting principle pursuant to its adoption of ASC 815-40 (in thousands):

		Debt				Derivative				Other Paid-				Accumulated
		Discount				Liability				In-Capital				Deficit
						Increase/(Decrease)
Record January 1, 2009, debt discount and derivative instrument liability related to convertible debt		$	7,734			$	5,605			$	—			$	(2,129	)
Record January 1, 2009, derivative instrument liability related to warrant			—				477				—				477
Record amortization of debt discount from March 4, 2008, through December 31, 2008			(653	)			—				—				(653	)
Record the reversal of the beneficial conversion feature expensed in 2008 under ASC 470-20			—				—				(8,147	)			(8,147	)
Record the reversal of prior accounting related to the warrant			—				—				(1,700	)			(1,700	)
		$	7,081			$	6,082			$	(9,847	)		$	(10,846	)

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 in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or other comprehensive income if they qualify for cash flow hedge accounting.

In May 2009, the Company entered into derivative contracts for purchases of diesel fuel and unleaded gasoline to reduce the risk of future price fluctuations of these commodities on its earnings. These contracts qualified for the normal purchases normal sale exception.

A Binomial Lattice model was used to obtain the fair value of the conversion feature in the Company’s convertible debt instrument using the following assumptions at September 30, 2009:

						Risk-Free
Stock Price		Volatility				Rate				Bond Yield
$8.13			78	%			1.67	%			8.47	%

The conversion feature of the convertible debt instruments had no value at September 30, 2009.

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

A Black-Scholes option-pricing model was used to obtain the fair value of the Company’s warrant using the following assumptions at September 30, 2009:

		Dividend								Risk-Free				Expected Life
Number of Shares included in Warrant		Yield				Volatility				Rate				(in years)
173,047		None					106	%			0.40	%			1.0

The fair value of outstanding derivative instruments not designed as hedging instruments on the accompanying Consolidated Balance Sheet were as follows (in thousands):

		Balance Sheet				September 30,				December 31,
Derivative Instruments		Location				2009				2008
Convertible debt -conversion feature		Other liabilities				$	—			$	—
Warrant		Other liabilities					204				—

The effect of derivative instruments not designed as hedging instruments on the accompanying Consolidated Statements of Operations was as follows (in thousands):

						Income Recognized in Earnings on Derivatives
						Three Months Ended								Nine Months Ended
		Statement of				September 30,								September 30,
Derivative Instruments		Operations Location				2009				2008				2009				2008
Derivative liabilities		Other income				$	1,486			$	—			$	5,948			$	—

12. FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Notes 4, 10 and 11 for additional disclosures related to fair value measurements.

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

•

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

•

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

•

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

WESTMORELAND COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

The table below sets forth, by level, the Company’s financial assets and liabilities that are accounted for at fair value (in thousands):

		Fair value at September 30, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Available-for-sale investments included in Restricted investments and bond collateral		$	2,821			$	—			$	—			$	2,821
Available-for-sale investments included in Reclamation deposits			3,026				—				—				3,026
Total assets		$	5,847			$	—			$	—			$	5,847
Liabilities:
Convertible debt — conversion feature		$	—			$	—			$	—			$	—
Warrant			—				—				204				204
Total liabilities		$	—			$	—			$	204			$	204

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

		Three Months Ended				Nine Months Ended
		September 30, 2009				September 30, 2009
Beginning balance		$	1,690			$	—
January 1, 2009, beginning balance adjustment pursuant to adoption of ASC 815-40			—				6,082
Additional debt discount			—				70
Change in fair value			(1,486	)			(5,948	)
Ending balance		$	204			$	204

The Company calculates the fair value of its debt by using discount rate estimates based on interest rates as of September 30, 2009. The estimated fair value of the Company’s debt with fixed interest rates, excluding conversion feature values, are as follows (in thousands):

		Carrying Value				Fair Value
December 31, 2008		$	220,020			$	192,521
September 30, 2009		$	201,637			$	197,330

13. STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has outstanding Series A Convertible Exchangeable Preferred Stock on which cumulative dividends of $2.125 per share are payable quarterly. The quarterly dividends, which are accumulated through and including October 1, 2009, amount to $18.2 million in the aggregate ($113.90 per preferred share or $28.48 per Depositary Share). Under the terms of the Series A Preferred Stock, the Company can redeem preferred shares at any time for the redemption value of $25.00 plus accumulated dividends paid in cash (a total of $22.2 million); however, the Company’s convertible note purchase agreement prohibits the Company from paying dividends on or redeeming preferred or common stock so long as the convertible notes are outstanding.