10-Q/A 1 d53579e10vqza.htm AMENDMENT NO. 1 TO FORM 10-Q e10vqza
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q/A
 
Amendment No. 1 to Form 10-Q
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File Number 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 Colorado Springs,
Colorado
(Address of principal executive offices)
  80903
(Zip Code)
 
 
Registrant’s telephone number, including area code
719-442-2600
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o     No þ
 
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. (Check one):
 
             
Large accelerated filer o
  Accelerated filer x   Non-accelerated filer o   Smaller reporting company o
             
        (Do not check if a smaller reporting company)    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 1, 2008: Common stock, $2.50 par value: 9,445,936 shares
 


 

 
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 Rule 13a-14(a)/15d-14(a) Certifications
 Certifications pursuant to 18 U.S.C. Section 1350


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Explanatory Note
 
Overview
 
Westmoreland Coal Company is filing this amendment to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007. The consolidated balance sheets and statements of operations have been restated to correct errors in the amounts recorded for the Company’s postretirement medical benefit obligations and related expenses, and its stock based compensation expense. The restatement adjustments had no effect on the cash flows of the Company for any of the periods presented.
 
For the three months ended March 31, 2007 and 2006, the restatement had the following effects on the Company’s statements of operations:
 
                 
    Three Months Ended March 31,  
    2007     2006  
    (In thousands)  
 
Net income applicable to common shareholders,
as previously reported
  $ 8,874     $ 5,353  
Increase in heritage health benefit expenses related
to the 2001 court decision
    (1,414 )     (928 )
Increase in heritage health benefit expenses related
to an error in 2006 census data
          (302 )
Increase in selling and administrative expenses related
to other census data errors
    (30 )     (30 )
Increase in stock compensation expense related
to stock based incentive plan
    (66 )     (42 )
                 
Total adjustments
    (1,510 )     (1,302 )
                 
Net income applicable to common shareholders,
as restated
  $ 7,364     $ 4,051  
                 
 
Postretirement Medical Benefit Obligations
 
The Company identified two groups of individuals that were omitted from the census data used by its actuaries to calculate the Company’s liability for one of its postretirement medical benefit plans. These omissions principally resulted from two errors:
 
1) The Company was signatory to the 1993 Wage Agreement with the United Mine Workers of America (UMWA), which covered employees who worked for the Company in the period 1993 through 1998. During this period, the Company sold or discontinued all of its mining operations covered by the 1993 Wage Agreement. The Company believed at the time that it was only responsible to provide life-time medical benefits to employees who met all retirement eligibility criteria during the term of the 1993 Wage Agreement, including attaining retirement age while working for the Company. In 1997, the Company removed from the census information used by its actuaries to calculate the Company’s postretirement medical benefits obligations those former employees who would not meet all eligibility criteria prior to the expiration of the 1993 Wage Agreement in 1998 and recorded a curtailment gain.
 
In 1998, during negotiations with the UMWA related to the dismissal of the Company’s bankruptcy case, the Company agreed to continue providing benefits to former employees who were covered by the individual employer plan established under the 1993 Wage Agreement. The Company agreed to provide benefits to these employees for a five year period and thereafter until a court of competent jurisdiction ruled that the Company could terminate these benefits. The Company therefore included in its 1998 financial statements the estimated cost of providing benefits to these former employees for a period of five years ending in 2003.


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However, in 2001, in a United States District Court case involving an employer other than Westmoreland, the court ruled that the employer was obligated to provide lifetime health benefits to employees who had not reached age 55 but were otherwise entitled to lifetime health benefits under the 1993 Wage Agreement. The court decision obligated the employer in that case to provide lifetime health benefits to the individuals who worked under the 1993 Wage Agreement when those individuals met all eligibility criteria to receive benefits (including attaining age 55). While the Company was not party to that case, the court in that case was interpreting the same contract to which the Company was party. The Company failed to take into account the possible precedential effect of this 2001 decision, or the possibility that a court considering a claim by the Company would be persuaded by the reasoning of this 2001 decision, and failed to adjust the postretirement actuarial calculations of its medical benefit obligations accordingly. The Company also failed to take into account the effect of this court decision on another plan that the Company had assumed in connection with an acquisition. The Company had previously been contesting the eligibility of certain former employees covered by a similar plan.
 
As a result of this error, 172 former employees were omitted from the census data used by the actuaries to calculate the Company’s liability for postretirement medical benefit costs at December 31, 2006.
 
2) In 2006, the census data used in the actuarial calculations for the Company’s postretirement medical benefit liability also failed to include 26 individuals who are eligible for lifetime medical benefits under the Company’s 1993 Plan. The census information for these individuals was inadvertently omitted from the actuarial calculations of the accumulated benefit obligation and related postretirement benefit obligation recorded at December 31, 2006 and the amount of expense recorded for the year ended December 31, 2006. These 26 individuals have met all retirement eligibility criteria and have qualified for postretirement medical benefits. These beneficiaries were previously included in the census data used to make the actuarial calculations for the Company’s postretirement medical benefit obligations at December 31, 2005, and in prior years.
 
3) In connection with the Company’s review of the census data for all of its post retirement benefit plans, the Company determined that it had omitted 33 additional participants in its post retirement medical benefit plans.
 
With this restatement, the Company has now included in its postretirement medical benefit liability at December 31, 2006 an actuarially determined obligation for these 231 current or former employees.
 
The first error was discovered by the Company’s actuaries and management during a review of one of the Company’s postretirement plans. The remaining errors were discovered after the Company undertook a comprehensive review of its census data for all of its plans The errors resulted in an understatement of heritage health benefit expenses and an overstatement of net income of $1.4 million and $1.3 million for the three months ended March 31, 2007 and 2006, respectively.
 
Stock based Compensation Expense
 
The Company also identified an error in the calculation of its stock based compensation expense. The Company failed to account for an incentive plan based in part on the price of the Company’s shares under SFAS 123R (“Share-Based Payment”). The errors resulted in an understatement of the Company’s stock compensation expense and an overstatement of net income of $0.1 million for each of the three months ended March 31, 2007 and 2006.
 
Amendment to this Form 10-Q
 
After discussion with our Audit Committee and our independent registered public accounting firm, management recommended to the Audit Committee that previously reported financial results be restated. The Audit Committee agreed with this recommendation. Our Amendment No. 2 to our Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K/A”) restates our previously issued consolidated balance sheets as of December 31, 2006 and 2005, our consolidated statements of operations and stockholders’ equity and


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comprehensive income for each of the years ended December 31, 2006, 2005 and 2004. This Amendment No. 1 to our Form 10-Q restates our balance sheet at March 31, 2007 and our statements of operations for the three months ended March 31, 2007 and 2006.
 
The following sections of this Amendment No. 1 to Form 10-Q have been revised to reflect the restatement: Part I — Item 1 — Financial Statements, Item 2 — Management’s Discussion and Analysis of Results of Financial Condition and Operations, and Item 4 — Controls and Procedures. Except to the extent relating to the restatement of our financial statements, the financial statements and other disclosures in this Amendment No. 1 to Form 10-Q do not reflect any events that have occurred after this Form 10-Q was initially filed on May 10, 2007, except as disclosed in Note 20, “Subsequent Events”.
 
Internal Controls
 
In connection with the restatement of the Company’s consolidated financial statements, management has determined that the description of the previously disclosed material weakness existing as of December 31, 2006 should be modified and that two additional material weaknesses existed and should be disclosed. The material weaknesses relate to the lack of adequate controls for the testing, verification and review of electronic spreadsheets that impact the company’s financial reporting, the lack of controls to ensure the completeness and accuracy of the census data used to calculate the Company’s postretirement medical benefit liabilities, and the lack of adequate controls over the accounting for the Company’s Performance Unit Plan under generally accepted accounting principles for stock based compensation plans.
 
Effects of Restatement
 
The following table sets forth the effects of the restatement on affected line items within the Company’s previously reported statements of operations for the three months ended March 31, 2007 and 2006:
 
                 
    For the Three Months Ended
 
    March 31,  
Effects on Statements of Operations
  2007     2006  
 
Selling and administrative expenses:
               
As previously reported
  $ 12,980     $ 9,426  
As restated
    13,076       9,498  
Heritage health benefit expenses:
               
As previously reported
  $ 465     $ 7,024  
As restated
    1,879       8,254  
Net earnings:
               
As previously reported
  $ 9,214     $ 5,789  
As restated
    7,704       4,487  
Effect on per share amounts:
               
Basic, as previously reported
  $ 0.98     $ 0.63  
Basic, as restated
    0.81       0.48  
Diluted, as previously reported
  $ 0.96     $ 0.60  
Diluted, as restated
    0.79       0.45  
 
In light of the restatement, readers should not rely on the Company’s previously filed financial statements and other financial information for the three months ended March 31, 2007 and 2006.


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Westmoreland Coal Company and Subsidiaries
Consolidated Balance Sheets
 
                 
    March 31,
    December 31,
 
    2007     2006  
    (As Restated, note 2)  
    (In thousands)  
    (Unaudited)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 25,749     $ 26,738  
Receivables:
               
Trade
    65,186       56,923  
Other
    7,777       6,017  
                 
      72,963       62,940  
Inventories
    26,278       24,484  
Restricted cash
          3,300  
Excess of trust assets over pneumoconiosis benefit obligation
    3,566       5,566  
Other current assets
    7,080       4,992  
                 
Total current assets
    135,636       128,020  
                 
Property, plant and equipment:
               
Land and mineral rights
    80,076       79,442  
Capitalized asset retirement cost
    145,294       143,655  
Plant and equipment
    362,677       350,414  
                 
      588,047       573,511  
Less accumulated depreciation, depletion and amortization
    149,891       142,059  
                 
Net property, plant and equipment
    438,156       431,452  
Investment in independent power projects
             
Excess of trust assets over pneumoconiosis benefit obligation, less current portion
    2,430       2,266  
Advanced coal royalties
    3,826       3,982  
Reclamation deposits
    63,712       62,486  
Restricted cash and bond collateral
    68,098       66,353  
Contractual third party reclamation receivables
    30,716       41,938  
Intangible assets
    12,762       13,263  
Other assets
    4,001       11,622  
                 
Total Assets
  $ 759,337     $ 761,382  
                 
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
               
Current installments of long-term debt
  $ 75,332     $ 76,803  
Accounts payable and accrued expenses:
               
Trade
    47,075       54,603  
Deferred revenue
    1,004       886  
Income taxes
    4,362       4,180  
Interest
    1,898       2,907  
Production taxes
    26,268       23,589  
Workers’ compensation
    936       949  
Pension and SERP obligations
    76       76  
Postretirement medical benefits
    17,175       16,968  
Asset retirement obligations
    15,926       13,832  
                 
Total current liabilities
    190,052       194,793  
                 
Long-term debt, less current installments
    198,548       216,204  
Revolving lines of credit
    7,600       13,000  
Workers’ compensation, less current portion
    8,463       8,589  
Postretirement medical costs, less current portion
    283,832       283,098  
Pension and SERP obligations, less current portion
    23,022       22,815  
Deferred revenue, less current portion
    32,492       15,328  
Asset retirement obligations, less current portion
    167,093       170,230  
Other liabilities
    17,069       17,756  
Minority interest
    6,087       5,502  
                 
Commitments and contingent liabilities
           
                 
Shareholders’ deficit:
               
Preferred stock of $1.00 par value Authorized 5,000,000 shares;
Issued and outstanding 160,130 shares at March 31, 2007 and December 31, 2006
    160       160  
Common stock of $2.50 par value Authorized 20,000,000 shares;
Issued and outstanding 9,056,864 shares at March 31, 2007 and 9,014,078 shares at December 31, 2006
    22,642       22,535  
Other paid-in capital
    80,153       79,246  
Accumulated other comprehensive loss
    (137,130 )     (139,424 )
Accumulated deficit
    (140,746 )     (148,450 )
                 
Total shareholders’ deficit
    (174,921 )     (185,933 )
                 
Total Liabilities and Shareholders’ Deficit
  $ 759,337     $ 761,382  
                 
 
See accompanying Notes to Consolidated Financial Statements.


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Westmoreland Coal Company and Subsidiaries
 
Consolidated Statements of Operations
 
                 
    Three Months Ended March 31,  
    2007     2006  
    (As Restated, note 2)  
    (In thousands)  
 
Revenues:
               
Coal
  $ 103,080     $ 94,634  
Energy
    24,608        
Independent power projects — equity in earnings
    136       4,458  
                 
      127,824       99,092  
                 
Cost and expenses:
               
Cost of sales — coal
    83,050       73,865  
Cost of sales — energy
    14,308        
Depreciation, depletion and amortization
    8,885       5,920  
Selling and administrative
    13,076       9,498  
Heritage health benefit expenses
    1,879       8,254  
Gain on sales of assets
    (5,866 )     (5,016 )
                 
      115,332       92,521  
                 
Operating income
    12,492       6,571  
                 
Other income (expense):
               
Interest expense
    (6,545 )     (2,654 )
Interest income
    2,403       1,133  
Minority interest
    (588 )     (483 )
Other income
    124       197  
                 
      (4,606 )     (1,807 )
                 
Income before income taxes
    7,886       4,764  
Income tax expense
    182       277  
                 
Net income
    7,704       4,487  
Less preferred stock dividend requirements
    340       436  
                 
Net income applicable to common shareholders
  $ 7,364     $ 4,051  
                 
Net income per share applicable to common shareholders:
               
Basic
  $ 0.81     $ 0.48  
Diluted
  $ 0.79     $ 0.45  
                 
Weighted average number of common shares outstanding
               
Basic
    9,039       8,430  
Diluted
    9,286       8,928  
 
See accompanying Notes to Consolidated Financial Statements


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Westmoreland Coal Company and Subsidiaries

Consolidated Statement of Shareholders’ Deficit
and Comprehensive Income (Loss)
Three Months Ended March 31, 2007
 
                                                 
    Class A
                Accumulated
             
    Convertible
                Other
          Total
 
    Exchangeable
    Common
    Other Paid-In
    Comprehensive
    Accumulated
    Shareholders’
 
    Preferred Stock     Stock     Capital     Loss     Deficit     Equity (Deficit)  
    (In thousands)  
    (Unaudited)  
 
Balance at December 31, 2005 (205,083 preferred shares and 8,413,312 common shares outstanding) (As Restated, note 2)
  $ 205     $ 21,033     $ 75,344     $ (11,409 )   $ (115,381 )   $ (30,208 )
Common stock issued as compensation (89,939 shares)
          225       2,339                   2,564  
Common stock options exercised (174,732 shares)
          437       561                   998  
Dividends declared
                            (387 )     (387 )
Exchange of preferred shares for common stock (336,095 shares)
    (45 )     840       (4 )           (791 )      
Cumulative effect of change in accounting for deferred overburden removal costs
                            (16,805 )     (16,805 )
Adjustment for funded status of pension and postretirement medical benefit plans upon adoption of SFAS 158 (As Restated, note 2)
                      (129,821 )           (129,821 )
Cumulative effect of adjustment upon adoption of SAB 108
                            (2,388 )     (2,388 )
Adjustment for stock appreciation rights previously classified as a liability upon adoption of SFAS 123(R)
                1,006                   1,006  
Net loss (As Restated, note 2)
                            (12,698 )     (12,698 )
Minimum pension liability
                      1,744             1,744  
Settlement of interest rate swap agreement
                      62             62  
                                                 
Comprehensive loss (As Restated, note 2)
                                  (10,892 )
                                                 
Balance at December 31, 2006 (160,130 preferred shares and 9,014,078 common shares outstanding) (As Restated, note 2)
    160       22,535       79,246       (139,424 )     (148,450 )     (185,933 )
Common stock issued as compensation (28,820 shares)
          72       724                   796  
Common stock options exercised (13,966 shares)
          35       183                   218  
Net income (As Restated, note 2)
                            7,704       7,704  
Amortization of actuarial loss and transition obligations (As Restated, note 2)
                      2,294             2,294  
                                                 
Comprehensive income (As Restated, note 2)
                                  9,998  
                                                 
Balance at March 31, 2007 (160,130 preferred shares and 9,056,864 common shares outstanding) (As Restated, note 2)
  $ 160     $ 22,642     $ 80,153     $ (137,130 )   $ (140,746     $ (174,921 )
                                                 
 
See accompanying Notes to Consolidated Financial Statements.


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Westmoreland Coal Company and Subsidiaries
 
Consolidated Statements of Cash Flows
 
                 
    Three Months Ended
 
    March 31,  
    2007     2006  
    (As Restated, note 2)  
    (In thousands)  
    (Unaudited)  
 
Cash flows from operating activities:
               
Net income
  $ 7,704     $ 4,487  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Deferred power sales revenue
    7,312        
Cash distributions from independent power projects
    135       1,085  
Equity in earnings of independent power projects
    (135 )     (4,458 )
Depreciation, depletion and amortization
    8,885       5,920  
Amortization of intangible assets and liabilities
    246        
Stock compensation expense
    862       859  
Gain on sales of assets
    (5,866 )     (5,016 )
Minority interest
    588       483  
Amortization of deferred financing costs
    617       235  
Amortization of actuarial loss and transition obligations
    2,294        
Changes in operating assets and liabilities:
               
Receivables, net
    (23 )     1,744  
Inventories
    449       (1,639 )
Excess of trust assets over pneumoconiosis benefit obligation
    1,836       (216 )
Accounts payable and accrued expenses
    (5,064 )     (2,049 )
Income taxes payable
    182       264  
Accrual for workers’ compensation
    (139 )     (10 )
Accrual for postretirement medical costs
    941       2,491  
Pension and SERP obligations
    207       1,100  
Other assets and liabilities
    (1,528 )     (2,444 )
                 
Net cash provided by operating activities
    19,503       2,836  
                 
Cash flows from investing activities:
               
Additions to property, plant and equipment
    (3,678 )     (1,935 )
Change in restricted cash and bond collateral and reclamation deposits
    329       (2,744 )
Net proceeds from sales of assets
    13,178       5,060  
Acquisition of Absaloka mining operations, net
    (3,405 )      
                 
Net cash provided by investing activities
    6,424       381  
                 
Cash flows from financing activities:
               
Repayment of long-term debt
    (21,734 )     (3,116 )
Net borrowings (repayments) on revolving lines of credit
    (5,400 )     (1,500 )
Exercise of stock options
    218       326  
Dividends paid on preferred shares
          (205 )
                 
Net cash used in financing activities
    (26,916 )     (4,495 )
                 
Net decrease in cash and cash equivalents
    (989 )     (1,278 )
Cash and cash equivalents, beginning of year
    26,738       11,216  
                 
Cash and cash equivalents, end of period
  $ 25,749     $ 9,938  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the year for:
               
Interest
  $ 7,012     $ 2,406  
Income taxes
          12  
 
See accompanying Notes to Consolidated Financial Statements.


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
These quarterly consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Amendment No. 2 to its Annual Report on Form 10-K for the year ended December 31, 2006. The accounting principles followed by the Company are set forth in the Notes to the Company’s consolidated financial statements in that Amendment No. 2 to its 2006 Annual Report. 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 generally accepted accounting principles and require use of management’s estimates. The financial information contained in this Amendment No. 1 to 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 such interim periods are not necessarily indicative of results to be expected for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation.
 
1.   NATURE OF OPERATIONS AND LIQUIDITY
 
Westmoreland Coal Company (“the Company”) is an energy company. The Company’s current principal activities, all conducted within the United States, are the production and sale of coal from Montana, North Dakota and Texas; and the development, ownership and management of interests in cogeneration and other non-regulated independent power plants. The Company’s activities are primarily conducted through wholly-owned or majority owned subsidiaries which generally have obtained separate financing.
 
The major factors impacting the Company’s liquidity are: payments due on the term loan it entered into to acquire various operations and assets from Montana Power and Knife River in May 2001 (see note 8); payments due on the acquisition debt associated with its purchase of the 50% interest in a partnership which owns the 230 MW Roanoke Valley power plant (“ROVA”) (see note 8); payments made for the buyout of the Washington Group International mining contract at WRI (see note 3), and additional capital expenditures the Company plans to make since it has taken over responsibility to operate the mine; cash collateral requirements for additional reclamation bonds in new mining areas; and payments for its heritage health benefit costs. Unforeseen changes in the Company’s ongoing business requirements could also impact its liquidity. The principal sources of cash flow to Westmoreland Coal Company are dividends from WRI, distributions from ROVA and from Westmoreland Mining subject to the provisions in their respective debt agreements and dividends from the subsidiaries that operate power plants.
 
On May 2, 2007, the Company entered into a Standby Purchase Agreement with an investor that would backstop a rights offering of common stock by the Company to its shareholders and purchase additional shares of common stock. The Company expects to seek gross proceeds of at least $85 million before expenses. The closing of such transactions is subject to several conditions including shareholder approval (which the Company plans to seek at a meeting of stockholders later in 2007), there being no material adverse effect on the Company’s financial condition and there not being trading suspensions in its common stock or other adverse developments in the financial markets.
 
Proceeds from the rights offering will be used to fund capital expenditures that are expected to improve the Company’s coal sales margins, fund future growth initiatives and provide working capital, as well as for general corporate purposes. As part of the transaction, the Company intends to use a portion of the proceeds from the rights offering to retire its outstanding Series A Convertible Exchangeable Preferred Stock, each share of which is represented by four depositary shares. The Company is evaluating options to achieve this objective.


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   RESTATEMENT
 
Westmoreland Coal Company is filing this amendment to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007. The consolidated balance sheets and statements of operations have been restated to correct errors in the amounts recorded for the Company’s postretirement medical benefit obligations and related expenses, and its stock based compensation expense. The restatement adjustments had no effect on the cash flows of the Company for any of the periods presented.
 
For the three months ended March 31, 2007 and 2006, the restatement had the following effects on the Company’s statements of operations:
 
                 
    Three Months Ended
 
    March 31,  
Effects of Correction
  2007     2006  
    (In thousands)  
 
Net income applicable to common shareholders,
as previously reported
  $ 8,874     $ 5,353  
Increase in heritage health benefit expenses related
to the 2001 court decision
    (1,414 )     (928 )
Increase in heritage health benefit expenses related
to an error in 2006 census data
          (302 )
Increase in selling and administrative expenses related
to other census data errors
    (30 )     (30 )
Increase in stock compensation expense related
to stock based incentive plan
    (66 )     (42 )
                 
Total adjustments
    (1,510 )     (1,302 )
                 
Net income applicable to common shareholders,
as restated
  $ 7,364     $ 4,051  
                 
 
Postretirement Medical Benefit Obligations
 
The Company identified two groups of individuals that were omitted from the census data used by its actuaries to calculate the Company’s liability for one of its postretirement medical benefit plans. These omissions principally resulted from two errors:
 
1) The Company was signatory to the 1993 Wage Agreement with the United Mine Workers of America (UMWA), which covered employees who worked for the Company in the period 1993 through 1998. During this period, the Company sold or discontinued all of its mining operations covered by the 1993 Wage Agreement. The Company believed at the time that it was only responsible to provide life-time medical benefits to employees who met all retirement eligibility criteria during the term of the 1993 Wage Agreement, including attaining retirement age while working for the Company. In 1997, the Company removed from the census information used by its actuaries to calculate the Company’s postretirement medical benefits obligations those former employees who would not meet all eligibility criteria prior to the expiration of the 1993 Wage Agreement in 1998 and recorded a curtailment gain.
 
In 1998, during negotiations with the UMWA related to the dismissal of the Company’s bankruptcy case, the Company agreed to continue providing benefits to former employees who were covered by the individual employer plan established under the 1993 Wage Agreement. The Company agreed to provide benefits to these employees for a five year period and thereafter until a court of competent jurisdiction ruled that the Company could terminate these benefits. The Company therefore included in its 1998


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
financial statements the estimated cost of providing benefits to these former employees for a period of five years ending in 2003.
 
However, in 2001, in a United States District Court case involving an employer other than Westmoreland, the court ruled that the employer was obligated to provide lifetime health benefits to employees who had not reached age 55 but were otherwise entitled to lifetime health benefits under the 1993 Wage Agreement. The court decision obligated the employer in that case to provide lifetime health benefits to the individuals who worked under the 1993 Wage Agreement when those individuals met all eligibility criteria to receive benefits (including attaining age 55). While the Company was not party to that case, the court in that case was interpreting the same contract to which the Company was party. The Company failed to take into account the possible precedential effect of this 2001 decision, or the possibility that a court considering a claim by the Company would be persuaded by the reasoning of this 2001 decision, and failed to adjust the postretirement actuarial calculations of its medical benefit obligations accordingly. The Company also failed to take into account the effect of this court decision on another plan that the Company had assumed in connection with an acquisition. The Company had previously been contesting the eligibility of certain former employees covered by a similar plan.
 
As a result of this error, 172 former employees were omitted from the census data used by the actuaries to calculate the Company’s liability for postretirement medical benefit costs at December 31, 2006.
 
2) In 2006, the census data used in the actuarial calculations for the Company’s postretirement medical benefit liability also failed to include 26 individuals who are eligible for lifetime medical benefits under the Company’s 1993 Plan. The census information for these individuals was inadvertently omitted from the actuarial calculations of the accumulated benefit obligation and related postretirement benefit obligation recorded at December 31, 2006 and the amount of expense recorded for the year ended December 31, 2006. These 26 individuals have met all retirement eligibility criteria and have qualified for postretirement medical benefits. These beneficiaries were previously included in the census data used to make the actuarial calculations for the Company’s postretirement medical benefit obligations at December 31, 2005, and in prior years.
 
3) In connection with the Company’s review of the census data for all of its postretirement benefit plans, the Company determined that it had omitted 33 additional participants in its post retirement medical benefit plans.
 
With this restatement, the Company has now included in its postretirement medical benefit liability at December 31, 2006 an actuarially determined obligation for these 231 current or former employees.
 
The first error was discovered by the Company’s actuaries and management during a review of one of the Company’s postretirement plans. The remaining errors were discovered after the Company undertook a comprehensive review of the census data for all of its plans. The errors resulted in an understatement of heritage health benefit expenses and an overstatement of net income of $1.4 million and $1.3 million for the three months ended March 31, 2007 and 2006, respectively.
 
Stock based Compensation Expense
 
The Company also identified an error in the calculation of its stock based compensation expense. The Company failed to account for an incentive plan based in part on the price of the Company’s shares under SFAS 123R (“Share-Based Payment”). The errors resulted in an understatement of the Company’s stock compensation expense and an overstatement of net income of $0.1 million for each of the three months ended March 31, 2007 and 2006.


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table shows the impact of the restatement adjustments on the previously reported consolidated statements of operations for the three months ended March 31, 2007 and 2006:
 
                                 
    Three Months Ended March 31,  
    2007     2006  
    As
          As
       
    Previously
    As
    Previously
    As
 
    Reported     Restated     Reported     Restated  
    (In thousands; except per share data)  
 
Consolidated Statement of Operations
                               
Selling and administrative expenses
  $ 12,980     $ 13,076     $ 9,426     $ 9,498  
Heritage health benefit expenses
    465       1,879       7,024       8,254  
Operating income
    14,002       12,924       7,873       6,571  
Net income before income tax
    9,396       7,886       6,066       4,764  
Net income
    9,214       7,704       5,789       4,487  
Net income applicable to common shareholders
    8,874       7,364       5,353       4,051  
Net income per share applicable to common shareholders:
                               
Basic earnings per share
  $ 0.98     $ 0.81     $ 0.63     $ 0.48  
Diluted earnings per share
    0.96       0.79       0.60       0.45  
 
The following table shows the impact of the restatement adjustments on the previously reported consolidated balance sheet as of March 31, 2007:
 
                 
    March 31, 2007  
    As
       
    Previously
    As
 
    Reported     Restated  
    (In thousands)  
 
Consolidated Balance Sheet
               
Income taxes payable
  $ 4,951     $ 4,362  
Postretirement medical benefits, current portion
    17,175       17,175  
Total current liabilities
    190,641       190,052  
Postretirement medical costs, less current portion
    223,016       283,832  
Other liabilities
    16,350       17,069  
Total liabilities
    873,312       934,258  
Accumulated other comprehensive loss
    (102,815 )     (137,130 )
Accumulated deficit
    (114,115 )     (140,746 )
Total shareholders’ deficit
    (113,975 )     (174,921 )
 
3.   ABSALOKA MINING CONTRACT
 
On March 6, 2007, the Company’s 80% owned subsidiary Westmoreland Resources, Inc. (“WRI”) reached an agreement to settle all contract disputes with Washington Group International, Inc. (“WGI”), including the lawsuit WRI had filed seeking termination of the Absaloka mining contract. As a result, WRI assumed operation of the Absaloka Mine on March 30, 2007. The agreement also includes settlement of other on-going demands by WRI and disputes between its affiliate Westmoreland Coal Sales Company and WGI.
 
WRI purchased from WGI mining and office equipment for $7.9 million and tools, spare parts and supplies, and coal inventory for $2.3 million. As part of the transaction, WRI released any claim WRI had in


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the $7.0 million reclamation escrow account held by WGI, and released WGI from its financial obligation to complete final reclamation of the mine.
 
WRI also hired 131 employees previously employed by WGI and assumed their accrued benefits.
 
The assets purchased, liabilities assumed, termination fee paid to WGI, as well as the adjustments for the release of WGI from its reclamation obligation were as follows (in thousands):
 
         
Assets:
       
Inventory
  $ 2,301  
Property, plant, and equipment
    7,924  
Asset retirement cost
    4,473  
Third party reclamation receivable
    (11,107 )
         
Total assets
    3,591  
         
Liabilities:
       
Accounts payable and accrued expenses
    186  
Income Statement:
       
Termination fee included in cost of sales — coal
    813  
         
Total cash payment
  $ 4,218  
         
 
4.   CHANGES IN ACCOUNTING PRINCIPLES
 
Recognition of Revenue Under Power Sales Agreements
 
In connection with the acquisition of the remaining 50% interest in ROVA, the Company has applied the provisions of EITF 01-08, “Determining Whether an Arrangement Contains a Lease” to two power sales agreements. A portion of the capacity payments under ROVA’s two power sales agreements are considered to be operating leases under EITF 01-08. Under both agreements, ROVA invoices and collects the 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. Under the power sales agreement for ROVA II, ROVA also collects capacity payments during periods of scheduled outages based on the kilowatt hours of dependable capacity of the unit. The capacity payments that ROVA invoices and collects are higher in the first 15 years of the power sales agreements (through 2009 for ROVA I and 2010 for ROVA II), but decrease for the remaining 10 years of the agreements due to a reduction in the rate paid per MW hour of capacity. Since the power sales agreements were entered into prior to the effective date of EITF 01-08, the Company had been grandfathered relative to the accounting method it had been utilizing. As a result of the acquisition, the Company was required to apply the accounting proscribed under EITF 01-08. Effective July 1, 2006, the Company began 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, $7.3 million of amounts invoiced during the first quarter of 2007 have been deferred from recognition until 2010 and beyond.
 
Adoption of SFAS No. 158
 
In September 2006, the FASB issued SFAS No. 158, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
under previous accounting standards must be recognized as assets or liabilities with a corresponding adjustment to accumulated other comprehensive loss, net of tax effects, until they are amortized as a component of net periodic benefit cost. SFAS 158 was effective for publicly-held companies for fiscal years ending after December 15, 2006. Based on the Company’s unfunded obligations at December 31, 2006, the Company’s assets decreased by approximately $4.5 million, and liabilities for pension and other postretirement medical benefit plans increased by approximately $125.3 million, resulting in an increase in shareholders’ deficit of approximately $129.8 million. The adoption of SFAS 158 will not affect the Company’s future pension and postretirement medical benefit expenses, as determined under the provisions of SFAS 106 and SFAS 87.
 
Share-Based Payments
 
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees and directors, including grants of stock options, be recognized in the financial statements based on their fair values.
 
The Company adopted SFAS No. 123(R) on January 1, 2006, as prescribed, using the modified prospective method. Accordingly, compensation expense for all newly granted awards and awards modified, repurchased, or cancelled after January 1, 2006 is being recognized ratably over the vesting period based on the fair value of the awards at the date of grant.
 
Compensation expense for the unvested portion of stock option awards that were outstanding as of January 1, 2006 is being recognized ratably over the remaining vesting period, based on the fair value of the awards at date of grant as calculated for the pro forma disclosure under SFAS No. 123. See Note 13 “Incentive Stock Options and Stock Appreciation Rights”.
 
There was no cumulative effect adjustment recorded in the Company’s Statement of Operations for the change in accounting related to the adoption of SFAS 123(R). The adoption of SFAS 123(R) had the effect of decreasing the net income for the three months ended March 31, 2007 and 2006 by approximately $0.9 million and $0.4 million, respectively.
 
Accounting For Uncertainty in Income Taxes
 
On July 13, 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies what criteria must be met prior to recognition of the financial statement benefit of a position taken in a tax return. FIN No. 48 requires companies to include additional qualitative and quantitative disclosures within their financial statements. The disclosures include potential tax benefits from positions taken for tax return purposes that have not been recognized for financial reporting purposes and a tabular presentation of significant changes during each annual period. The disclosures also include a discussion of the nature of uncertainties, factors which could cause a change, and an estimated range of reasonably possible changes in tax uncertainties. FIN No. 48 requires a company to recognize a financial statement benefit for a position taken for tax return purposes when it is more likely than not that the position will be sustained. We adopted FIN No. 48 on January 1, 2007 and the adoption did not have an impact on our Consolidated Financial Statements.
 
5.   RECENT ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. We are currently evaluating the impact of adopting SFAS 157 but do not believe the adoption of SFAS 157 will have a material impact on our Consolidated Financial Statements.
 
6.   SIGNIFICANT EVENTS
 
Sale of Coal Royalty Interest
 
On February 27, 2007, the Company sold its royalty interest in a property at Peabody Energy Corporation’s Caballo Mine in Wyoming to Natural Resource Partners L.P. for $12.7 million. The sale of the royalty interest resulted in a gain of approximately $5.6 million during the first quarter of 2007.
 
Reserve Dedication Fee
 
The Company recorded a $10.0 million receivable and deferred revenue for a reserve dedication payment from a customer in the first quarter of 2007. This payment was received in the second quarter of 2007.
 
7.   RESTRICTED CASH AND BOND COLLATERAL
 
The Company’s restricted cash and bond collateral consist of the following:
 
                 
    Restricted Cash and Bond Collateral  
    March 31,
    December 31,
 
   
2007
    2006  
    (In thousands)  
 
Corporate:
               
Worker’s compensation bonds
  $ 5,578     $ 5,512  
Postretirement health benefit bonds
    1,172       4,436  
Coal Segment:
               
Westmoreland Mining — debt reserve account
    10,445       10,312  
Westmoreland Mining — prepayment account
    15,169       15,123  
Reclamation bond collateral:
               
Absaloka Mine
    4,745       3,702  
Jewett Mine
    1,072       1,057  
Rosebud Mine
    89       89  
Beulah Mine
    71       71  
ROVA:
               
Debt protection account
    28,253       28,141  
Ash reserve account
    605       627  
Repairs and maintenance account
    899       583  
                 
Total restricted cash and bond collateral
    68,098       69,653  
Less current portion
          (3,300 )
                 
Total restricted cash and bond collateral, less current portion
  $ 68,098     $ 66,353  
                 
 
For all of its restricted cash and bond collateral accounts, the Company can select from several investment options for the funds and receives the investment returns on these investments.


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Corporate
 
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. As of March 31, 2007 and December 31, 2006, the amount held in collateral accounts was $5.6 million and $5.5 million respectively, for the workers’ compensation plan and $1.2 million and $4.4 million respectively, for health care plans. During the three months ended March 31, 2007, approximately $3.3 million was released from the health care bond collateral accounts as a result of reduced bonding requirements under an amendment to the Coal Act.
 
Coal Segment
 
Pursuant to the WML term loan agreement, WML is required to maintain a debt service reserve account and a long-term prepayment account. As of March 31, 2007 and December 31, 2006, there was a total of $10.4 million and $10.3 million, respectively in the debt service reserve account. There was $15.2 million and $15.1 million in the prepayment account at March 31, 2007 and December 31, 2006, respectively. The prepayment account is to be used to fund a $30.0 million payment due December 31, 2008 for the Series B notes.
 
As of March 31, 2007, the Company had reclamation bond collateral in place for its Absaloka, Rosebud, Jewett and Beulah Mines. 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.
 
ROVA
 
Pursuant to the terms of its Credit Agreement, ROVA must maintain a debt protection account (“DPA”). At March 31, 2007 the DPA was funded with $28.3 million. Additional funding of the DPA of $1.1 million per year is required through 2008. The required funding level is reduced by $6.7 million in 2009 and by $3.0 million in 2010.
 
The Credit Agreement also requires ROVA to fund a repairs and maintenance account and an ash reserve account totaling $3.2 million from January 31, 2004 through January 31, 2010, after which date the funding requirement reduces to $2.8 million. The funds for the repairs and maintenance account are required to be deposited every six months based on a formula contained in the agreement. The ash reserve account was fully funded at March 31, 2007. As of March 31, 2007, these accounts had a combined balance of $1.5 million.


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
8.   LINES OF CREDIT AND LONG-TERM DEBT
 
The amounts outstanding at March 31, 2007 and December 31, 2006 under the Company’s lines of credit and long-term debt consist of the following:
 
                                 
    Current Portion of Debt     Total Debt Outstanding  
    March 31,
    December 31,
    March 31,
    December 31,
 
    2007     2006     2007     2006  
    (In thousands)  
 
Corporate debt:
                               
Revolving line of credit
  $     $     $ 7,600     $ 8,500  
Westmoreland Mining debt:
                               
Revolving line of credit
                      4,500  
Westmoreland Mining term debt:
                               
Series B Notes
    12,650       12,000       53,600       56,600  
Series C Notes
                20,375       20,375  
Series D Notes
                14,625       14,625  
Other term debt
    1,801       1,311       5,695       3,474  
ROVA debt:
                               
ROVA acquisition bridge loan
    25,700       30,000       25,700       30,000  
ROVA acquisition term loan
    5,000       5,000       5,000       5,000  
ROVA term debt
    30,181       28,492       148,885       162,933  
                                 
Total debt outstanding
  $ 75,332     $ 76,803     $ 281,480     $ 306,007  
                                 
 
The ROVA current and total term debt includes debt premiums of $0.6 million and $4.7 million, respectively.
 
The maturities of all long-term debt and the revolving credit facilities outstanding at March 31, 2007 are (in thousands):
 
         
2007
  $ 54,849  
2008
    85,953  
2009
    43,999  
2010
    27,751  
2011
    21,039  
Thereafter
    43,159  
         
    $ 276,750  
         
 
Corporate Revolving Line of Credit
 
The Company has a $14.0 million revolving credit facility with First Interstate Bank. Interest is payable monthly at the bank’s prime rate (8.25% per annum at March 31, 2007). The Company is required to maintain financial ratios relating to its liquidity, indebtedness, and net worth. As of March 31, 2007, the Company was in compliance with such covenants. The revolving credit facility is collateralized by the Company’s stock in Westmoreland Resources Inc. (“WRI”), which owns the Absaloka Mine in and the dragline located at WRI’s Absaloka Mine. In June 2006, the term of this facility was extended to June 30, 2008.


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Westmoreland Mining LLC
 
Westmoreland Mining LLC (“WML”) has a $20.0 million revolving credit facility (the “Facility”) with PNC Bank, National Association (“PNC”) which expires on April 27, 2008. The interest rate is either PNC’s Base Rate plus 1%, or a Euro-Rate plus 3%, at WML’s option. As of March 31, 2007, the interest rate under the Facility is 9.25% per year. In addition, a commitment fee of 1/2 of 1% of the average unused portion of the available credit is payable quarterly. The amount available under the Facility is based upon, and any outstanding amounts are secured by, eligible accounts receivable.
 
WML has a term loan agreement under which $53.6 million in Series B Notes, $20.4 million in Series C Notes and $14.6 million in Series D Notes are outstanding as of March 31, 2007. The Series B Notes require quarterly principal and interest payments to December 2008. The Series C and D Notes require quarterly interest payments with principal payments beginning March 31, 2009 and final payment on December 31, 2011. The Series B Notes bear interest at a fixed interest rate of 9.39% per annum; the Series C Notes bear interest at a fixed rate of 6.85% per annum; and the Series D Notes bear interest at a variable rate based upon LIBOR plus 2.90% (8.26% per annum at March 31, 2007). All of the notes are secured by the assets of WML and the term loan agreement requires the Company to comply with certain covenants and minimum financial ratio requirements related to liquidity, indebtedness, and capital investments. As of March 31, 2007, WML was in compliance with such covenants.
 
The Company engages in leasing transactions for equipment utilized in operations. Certain leases at the Rosebud and Beulah Mines qualify as capital leases and were recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the leases. The present value of these lease payments at March 31, 2007 and December 31, 2006 was $5.4 million and $3.2 million, respectively, at a weighted average interest rate of 6.44% and 6.12%, respectively. The Jewett Mine also has a note payable outstanding from the purchase of a parcel of land at March 31, 2007 in the amount of $0.3 million with interest payable at 6.0% annually.
 
ROVA
 
The Company funded the ROVA acquisition and debt protection account deposit in part with a $30.0 million bridge loan facility from SOF Investments, L.P. (“SOF”) and a $5.0 million term loan with First Interstate Bank. At March 31, 2007, the SOF bridge loan had an outstanding balance of $25.7 million and the term loan had an outstanding balance of $5.0 million. The SOF bridge loan has a one-year term extendable to four years at the option of the Company. The loan bears interest at the London Interbank Offering Rate (“LIBOR”) plus 4% (9.40% per annum at March 31, 2007). The Company also paid SOF a 1% closing fee. If the Company elects to extend the loan beyond its initial one-year term, it will be required to issue warrants to purchase 150,000 shares of the Company’s common stock to SOF at a premium of 15% to the then current stock price. These warrants would be exercisable for a three-year period from the date of issuance. The loan is secured by a pledge of the semi-annual cash distributions from ROVA commencing in January 2007 as well as pledges from the Company’s subsidiaries that directly or indirectly acquired the operating agreements.
 
The $5.0 million term loan with First Interstate Bank has a one-year term maturing June 29, 2007, which was paid-off on May 7, 2007 prior to maturity. Interest is payable at the bank’s prime rate (8.25% per annum at March 31, 2007).
 
On December 18, 1991, ROVA entered into a Credit Agreement (“Tranche A”) with a consortium of banks (the “Banks”) and an institutional lender for the financing and construction of the first ROVA facility. On December 1, 1993, the Credit Agreement was amended and restated (“Tranche B”) to allow for the financing and construction of the second ROVA facility. Under the terms of the Credit Agreement, ROVA was permitted to borrow up to $229.9 million from the banks (“Bank Borrowings”), $120.0 million from an


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
institutional lender, and $36.8 million in tax-exempt facility revenue bonds (“Bond Borrowings”) under two indenture agreements with the Halifax County, North Carolina, Industrial Facilities and Pollution Control Financing Authority (“Financing Authority”). The borrowings are evidenced by promissory notes and are secured by substantially all of the book value of ROVA’s assets including land, the facilities, ROVA’s equipment, inventory, accounts receivable, certain other assets and assignment of all material contracts. Bank Borrowings amounted to $39.0 million at March 31, 2007, and mature from July 2007 to July 2008. The Credit Agreement provides for interest to be paid on the Bank Borrowings at rates set at varying margins in excess of the Banks’ base rate, LIBOR or certificate of deposit rate, for various terms from one day to one year in length, each selected by ROVA when amounts are borrowed. The weighted average interest rate on the Bank Borrowings at March 31, 2007, was 6.85% per annum.
 
Under the terms of the Credit Agreement, interest on the Tranche A institutional borrowings is fixed at 10.42% per annum and interest on the Tranche B institutional borrowings is fixed at 8.33% per annum. The Credit Agreement requires repayment of the Tranche A institutional borrowings in 38 semiannual installments ranging from $0.9 million to $4.3 million. Payment of the Tranche A institutional borrowings commenced in 1996 and is currently scheduled to be completed in 2014.
 
The Credit Agreement requires repayment of the Tranche B institutional borrowings in 40 semiannual installments ranging from $0.3 million to $6.5 million. Payment of the Tranche B institutional borrowings commenced in 1996 and is currently scheduled to be completed in 2015.
 
In accordance with the indenture agreements, the Financing Authority issued $29.5 million of 1991 Variable Rate Demand Exempt Facility Revenue Bonds (“1991 Bond Borrowings”) and $7.2 million of 1993 Variable Rate Demand Exempt Facility Revenue Bonds (“1993 Bond Borrowings”). The 1991 Bond Borrowings and the 1993 Bond Borrowings are secured by irrevocable letters of credit in the amounts of $30.1 million and $7.4 million, respectively, which were issued by the banks. The weighted average interest rate on the bonds at March 31, 2007 was 3.84% per annum. The 1991 Bond Indenture Agreement requires repayment of the 1991 Bond Borrowings in four semi-annual installments of $1.2 million, $1.2 million, $14.8 million, and $12.4 million. The first installment of the 1991 Bond Borrowings is due in January 2008. The 1993 Indenture Agreement requires repayment of the 1993 Bond Borrowings in three semi-annual installments of $1.6 million, $1.8 million and $3.8 million. The first installment is due in July 2009.
 
Irrevocable letters of credit in the amounts of $4.5 million and $1.5 million were issued to ROVA’s customer by the banks on behalf of ROVA for ROVA I and ROVA II, respectively, to ensure performance under their respective power sales agreements.
 
The debt agreements contain various restrictive covenants primarily related to construction of the facilities, maintenance of the property, and required insurance. Additionally, financial covenants include restrictions on incurring additional indebtedness and property liens, paying cash distributions to the partners, and incurring various commitments without lender approval. At March 31, 2007, ROVA was in compliance with the various covenants.
 
9.   DERIVATIVE INSTRUMENTS
 
As of March 31, 2007, the Company was party to two derivative contracts to manage a portion of its exposure to the price volatility of diesel fuel used in its operations. In a typical commodity swap agreement, the Company receives the difference between a fixed price per gallon of diesel fuel and a price based on an agreed upon published, third-party index if the index price is greater than the fixed price. If the index price is lower, the Company pays the difference. By entering into swap agreements, the Company effectively fixes the price it will pay in the future for the quantity of diesel fuel subject to the swap agreement.


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Table of Contents

 
ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In October 2006, the Company entered into a derivative contract to manage a portion of its exposure to the price volatility of diesel fuel to be used in its operations in 2007. The contract covers 2.4 million gallons of diesel fuel at a weighted average fixed price of $2.02 per gallon. This contract settles monthly from January to December, 2007.
 
In January 2007, the Company entered into an additional derivative contract related to diesel fuel to be used in its operations in 2007. The contract covers 1.1 million gallons of diesel fuel at a weighted average fixed price of $1.75 per gallon. This contract settles monthly from February to December, 2007.
 
The Company accounts for these derivative instruments on a mark-to-market basis through earnings. The Consolidated Financial Statements as of March 31, 2007 reflect unrealized gains on these contracts of $0.3 million, which is recorded in accounts receivable. Unrealized gains during the three months ended March 31, 2007 were $0.7 million, which is recorded as a reduction to Costs of sales — coal. During the three months ended March 31, 2007, the Company settled a portion of these contracts covering approximately 0.8 million gallons of fuel, which resulted in a loss of less than $0.1 million.
 
Information regarding derivative instruments for the three months ended March 31, 2007 is as follows (in thousands):
 
         
Unrealized derivative loss beginning of the year
  $ (336 )
Change in fair value
    656  
Realized loss on settlements
    (64 )
         
Unrealized gain on derivatives at March 31, 2007
  $ 256  
         
 
10.   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 our former Eastern mining operation employees as well as other administrative costs associated with providing those benefits.
 
The components of these expenses are (in thousands):
 
                 
    Three Months Ended,
 
    March 31,  
    2007     2006  
    (As Restated, note 2)  
 
Health care benefits
  $ 6,728     $ 7,178  
Combined benefit fund payments (credit)
    (4,873 )     995  
Workers’ compensation benefits
    187       297  
Black lung benefits (credit)
    (163 )     (216 )
                 
Total
  $ 1,879     $ 8,254  
                 
 
During the first quarter of 2007, the Company reached a settlement with the UMWA Combined Benefit Fund (“CBF”) for the reimbursement of $5.8 million, plus interest, in past overpayments to the CBF for retiree medical benefits. The Company received $2.9 million of the reimbursement and $0.6 million in interest during the first quarter, and received the remaining $2.9 million reimbursement plus interest of approximately $0.1 million during the second quarter of 2007. The Company recorded the settlement as a $5.8 million reduction in heritage health benefit expenses and $0.6 million in interest income, and recorded a receivable for the $2.9 million plus related accrued interest through March 31, 2007.


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Table of Contents

 
ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
11.   PENSION AND POSTRETIREMENT MEDICAL BENEFITS
 
The Company provides pension and postretirement medical benefits to qualified full-time employees and retired employees and their dependents, the majority of which benefits are mandated by the Coal Act. The Company incurred costs of providing these benefits during the three months ended March 31, 2007 and 2006 as follows (in thousands):
 
                                 
    Three Months Ended March 31,  
          Postretirement
 
    Pension Benefits     Medical Benefits  
    2007     2006     2007     2006  
    (As Restated, note 2)  
 
Components of net periodic benefit cost:
                               
Service cost
  $ 744     $ 800     $ 231     $ 188  
Interest cost
    1,073       1,053       4,479       4,536  
Expected return on plan assets
    (1,027 )     (931 )            
Amortization of deferred items
    189       354       2,104       2,867  
                                 
Total net periodic benefit cost
  $ 979     $ 1,276     $ 6,814     $ 7,591  
                                 
 
The Company expects to pay approximately $17.0 million for postretirement medical benefits during 2007, net of Medicare Part D reimbursements. A total of $4.0 million was paid in the first quarter of 2007.
 
The Company expects to contribute approximately $4.2 million to its pension plans during 2007. A total of $0.6 million was paid in the first quarter of 2007.
 
12.   ASSET RETIREMENT OBLIGATIONS, RECLAMATION DEPOSITS AND CONTRACTUAL
THIRD PARTY RECLAMATION RECEIVABLES
 
Asset Retirement Obligations
 
Changes in the Company’s asset retirement obligations for the three months ended March 31, 2007 and 2006 are summarized below (in thousands):
 
                 
    Three Months Ended March 31,  
    2007     2006  
 
Asset retirement obligations — beginning of year
  $ 184,062     $ 158,407  
Accretion
    3,261       2,532  
Settlements (final reclamation performed)
    (1,403 )     (3,243 )
Changes due to amount and timing of reclamation
    (2,901 )      
                 
Asset retirement obligations — end of period
  $ 183,019     $ 157,696  
                 


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The asset retirement obligation, contractual third party reclamation receivable, and reclamation deposits for each of the Company’s mines and ROVA are summarized below (in thousands):
 
                         
          Contractual Third
       
    Asset Retirement
    Party Reclamation
    Reclamation
 
    Obligation     Receivable     Deposits  
 
Rosebud
  $ 98,858     $ 3,679     $ 63,712  
Jewett
    63,671       27,037        
Beulah
    5,985              
Savage
    1,719              
Absaloka
    12,350              
ROVA
    436              
                         
Total
  $ 183,019     $ 30,716     $ 63,712  
                         
 
As of March 31, 2007 the Company or its subsidiaries have reclamation bonds in place for its active mines in Montana, North Dakota and Texas and for inactive mining sites in Virginia and Colorado which are now awaiting final bond release. 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 Company estimates that the cost of final reclamation for its mines when they are closed in the future will total approximately $484.9 million, with a present value of $183.0 million. As permittee, the Company or its subsidiaries are responsible for the total amount. 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.
 
On March 6, 2007, the Company, WRI and WGI signed a comprehensive settlement agreement pursuant to which the mining contract between WRI and WGI for the Absaloka Mine was terminated on March 30, 2007 and all claims among the parties were settled, including the dispute relating to the coal sales agency agreement and the litigation relating to WGI’s performance under the mining contract. As part of this settlement, WRI released any claim WRI had in the $7.0 million reclamation escrow account held by WGI and released WGI from its financial obligations to complete final reclamation of the Absaloka Mine.
 
13.   STOCKHOLDERS’ EQUITY
 
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, par value $1.00 per share (“Series A Preferred Stock”). Each share of Series A Preferred Stock is represented by four Depositary Shares. The full amount of the quarterly dividend on the Series A Preferred Stock is $2.125 per preferred share or $0.53 per Depositary Share. The Company paid quarterly dividends of $0.25 per Depositary Share from October 1, 2004 through July 1, 2006. The Company suspended the payment of preferred stock dividends following the recognition of the deficit in shareholders’ equity described below. The quarterly dividends which are accumulated through and including April 1, 2007 amount to $14.8 million in the aggregate ($92.65 per preferred share or $23.16 per Depositary Share).
 
The Company is currently reporting a deficit in shareholders’ equity. As a result, the Company is prohibited from paying preferred stock dividends because of the statutory restrictions limiting the payment of preferred stock dividends under Delaware law, the state in which the Company is incorporated. Under


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Table of Contents

 
ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Delaware law, the Company is permitted to pay preferred stock dividends only to the extent that shareholders’ equity exceeds the par value of the preferred stock ($160,000 at March 31, 2007).
 
Restricted Net Assets
 
At March 31, 2007, Westmoreland Coal Company had approximately $127.6 million of net assets at its subsidiaries that were not available to be transferred to it in the form of dividends, loans, or advances due to restrictions contained in the credit facilities of these subsidiaries. Approximately $20.3 million of net assets of the subsidiaries are unrestricted.
 
14.   INCENTIVE STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND PERFORMANCE UNITS
 
As of March 31, 2007, the Company had stock options and SARs outstanding from three stock incentive plans for employees and three stock incentive plans for directors.
 
The employee plans provide for the grant of incentive stock options (“ISOs”), non-qualified options under certain circumstances, SARs and restricted stock. ISOs and SARs generally vest over three years, expire ten years from the date of grant, and may not have an option or base price that is less than the market value of the stock on the date of grant. The maximum number of shares that could be issued or granted under the employee plans is 1,150,000, and as of March 31, 2007, a total of 210,472 shares are available for future grants.
 
The non-employee director plans generally provide for the grant of stock options or SARs with a value of $60,000 when elected or appointed, and stock options or SARs with a value of $30,000 after each annual meeting. In 2006, directors were granted SARs as a form of award. The maximum number of shares that could be issued or granted under the director plans is 900,000, and as of March 31, 2007, 19,176 shares were available for future grants.
 
No SARs, options or shares of restricted stock were granted during the first quarter of 2007 or 2006.
 
As of March 31, 2007, there was approximately $0.3 million of intrinsic value for vested SARs and for all SARs outstanding. Upon vesting, the holders may exercise the SARs and receive an amount equal to the increase in the value of the common stock between the grant date and the exercise date in shares of common stock. The intrinsic value of options and SARs exercised during the first three months of 2007 and 2006 was $0.1 million and $0.8 million, respectively.
 
Information with respect to both the employee and director SARs is as follows:
 
                         
          Stock
       
          Appreciation
    Weighted Average
 
    Base Price Range     Rights     Base Price  
 
Outstanding at December 31, 2006
  $ 18.04 - 29.48       560,747     $ 21.66  
Exercised
    19.37 - 20.98       (9,960 )     20.21  
Outstanding at March 31, 2007
  $ 18.04 - 29.48       550,787     $ 21.68  
                         
 
Information about SARs outstanding as of March 31, 2007 is as follows:
 
                                         
        Weighted Average
           
        Remaining
  Weighted Average
      Weighted Average
        Contractual Life
  Base Price
      Base Price (Vested
Range of Base Price
  Number Outstanding   (Years)   (All SARs)   SARs Vested   SARs)
 
$18.04 - 29.48
    550,787       8.3     $ 21.68       378,253     $ 20.38  
 
The amount of unamortized compensation expense for SARs outstanding at March 31, 2007 was $1.9 million which is expected to be recognized over approximately three years.


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Information with respect to employee and director stock options is as follows:
 
                                 
                Weighted Average
       
    Issue Price
    Stock Option
    Exercise
       
    Range     Shares     Price        
 
Outstanding at December 31, 2006
  $ 2.81 - 22.86       541,616     $ 11.62          
Exercised
    12.86 - 18.08       (13,966 )     15.63          
                                 
Outstanding at March 31, 2007
  $ 2.81 - 22.86       527,650     $ 11.52          
                                 
 
Information about stock options outstanding as of March 31, 2007 is as follows:
 
                                         
          Weighted Average
                   
          Remaining
    Weighted Average
          Weighted Average
 
Range of Exercise
  Number
    Contractual Life
    Exercise Price (All
    Number
    Exercise Price
 
Price
  Outstanding     (Years)     Options)     Exercisable     (Vested Options)  
 
$ 2.81 -  5.00
    188,150       2.7     $ 2.92       188,150     $ 2.92  
  5.01 - 10.00
                             
 10.01 - 15.00
    92,035       5.0       12.36       92,035       12.36  
 15.01 - 22.86
    247,465       5.7       17.74       244,131       17.67  
                                         
$ 2.81 - 22.86
    527,650       4.5     $ 11.52       524,316     $ 11.45  
                                         
 
The amount of unamortized compensation expense for options outstanding at March 31, 2007 was less than $0.1 million.
 
As of March 31, 2007, the Company had performance units outstanding under its Performance Unit Plan. The value of the performance units is payable to the participants upon vesting in cash, or at the option of the Company, in shares of common stock. The value is based in part on the appreciation of the Company’s common stock and its performance relative to the average of two stock market indices. The performance units vest over a three year period. The units granted are accounted for a liability based award, since the Company has historically settled the awards in cash and intends to settle the outstanding awards in cash. During the first three months of both 2007 and 2006, the Company recognized $0.1 million of stock compensation expense for this plan under SFAS 123(R). The amount of unamortized compensation expense for this plan was $0.4 million at March 31, 2007.
 
Compensation cost arising from share-based payment arrangements was $0.9 million and $0.4 million, during the first three months of 2007 and 2006, respectively, including $0.6 million and $0.4 million, respectively, for stock issued as matching contributions to the Company’s 401(k) Savings Plan.
 
15.   EARNINGS PER SHARE
 
Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined on the same basis except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of stock options and stock appreciation rights (SARs), if dilutive, and the impact of restricted stock outstanding. The number of additional shares from options and SARs is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. The number of additional shares from restricted stock is calculated by assuming that an amount equal to the unamortized compensation costs attributable to the restricted shares outstanding is used to acquire shares of common stock at the average market price during the reporting period.


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table provides a reconciliation of the number of shares used to calculate basic and diluted earnings per share (EPS):
 
                 
    Three Months Ended March 31,  
    2007     2006  
    (As Restated, note 2)
 
    (In thousands, except per share data)  
 
Net income applicable to common shareholders:
  $ 7,364     $ 4,051  
Number of shares of common stock outstanding:
               
Basic
    9,039       8,430  
Effect of dilutive stock options
    247       414  
Effect of dilutive SARs
          71  
Effect of dilutive restricted stock
          13  
                 
Diluted
    9,286       8,928  
                 
Net income per share applicable to common shares outstanding:
               
Basic
  $ 0.81     $ 0.48  
Diluted
  $ 0.79     $ 0.45  
Number of shares excluded from calculation of diluted EPS because the exercise price of the options and SARs were greater than the average market price of the common shares
    197        
                 
 
16.   INCOME TAXES
 
Income tax expense attributable to income before income taxes consists of:
 
                 
    Three Months Ended March 31,  
    2007     2006  
    (In thousands)  
 
Current:
               
Federal
  $     $ 25  
State
    182       252  
                 
      182       277  
                 
Deferred:
               
Federal
           
State
           
                 
Income tax expense
  $ 182     $ 277  
                 
 
17.   BUSINESS SEGMENT INFORMATION
 
Segment information is presented in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”. This standard is based on a management approach, which requires segmentation based upon our internal organization and reporting of revenue and operating income based upon internal accounting methods.
 
The Company’s operations are classified into four segments: coal, independent power, heritage and corporate. The coal segment includes the production and sale of coal from Montana, North Dakota and Texas.


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Table of Contents

 
ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The independent power operations include the ownership of interests in cogeneration and other non-regulated independent power plants and related business development expenses. The heritage segment includes costs of benefits the Company provides to former employees of its previously owned Eastern U.S. coal mining operations which have been disposed of. The corporate segment represents all costs not otherwise classified, including corporate office expenses. Assets attributed to the heritage segment consist primarily of cash, bonds and deposits restricted to pay heritage health benefits. Prior year segment information has been reclassified to conform to the new segment presentation.
 
Summarized financial information by segment for the first three months of 2007 and 2006 is as follows:
 
                                         
    Three Months Ended March 31, 2007  
          Independent
                   
    Coal     Power     Heritage     Corporate     Total  
    (As Restated, note 2)  
    (In thousands)  
    (Unaudited)  
 
Revenues:
                                       
Coal
  $ 103,080     $     $     $     $ 103,080  
Energy
          24,608                   24,608  
Equity in earnings
          136                   136  
                                         
      103,080       24,744                   127,824  
                                         
Costs and expenses:
                                       
Cost of sales — coal
    83,050                         83,050  
Cost of sales — energy
          14,308                   14,308  
Depreciation, depletion and amortization
    6,377       2,423             85       8,885  
Selling and administrative
    5,456       3,219       470       3,931       13,076  
Heritage health benefit expenses
                1,879             1,879  
Gain on sales of assets
    (221 )     (4 )           (5,641 )     (5,866 )
                                         
Operating income (loss)
    8,418       4,798       (2,349 )     1,625       12,492  
                                         
Other income (expense):
                                       
Interest expense
    (2,470 )     (3,748 )           (327 )     (6,545 )
Interest income
    1,166       517       647       73       2,403  
Minority interest
    (588 )                       (588 )
Other income (loss)
    108       (3 )           19       124  
                                         
Income (loss) before income taxes
  $ 6,634     $ 1,564     $ (1,702 )   $ 1,390     $ 7,886  
                                         
Capital expenditures
  $ 3,598     $ 72     $     $ 8     $ 3,678  
                                         
Total assets
  $ 450,096     $ 281,898     $ 11,589     $ 15,754     $ 759,337  
                                         
 


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Three Months Ended March 31, 2006  
          Independent
                   
    Coal     Power     Heritage     Corporate     Total  
    (As Restated, No. 2)  
    (In thousands)  
    (Unaudited)  
 
Revenues:
                                       
Coal
  $ 94,634     $     $     $     $ 94,634  
Equity in earnings
          4,458                   4,458  
                                         
      94,634       4,458                   99,092  
                                         
Costs and expenses:
                                       
Cost of sales — coal
    73,865                         73,865  
Depreciation, depletion and amortization
    5,831       8             81       5,920  
Selling and administrative
    5,468       854       189       2,987       9,498  
Heritage health benefit expenses
                8,254             8,254  
(Gain) loss on sales of assets
    44                   (5,060 )     (5,016 )
                                         
Operating income (loss)
    9,426       3,596       (8,443 )     1,992       6,571  
                                         
Other income (expense):
                                       
Interest expense
    (2,522 )                 (132 )     (2,654 )
Interest income
    964             24       145       1,133  
Minority interest
    (483 )                       (483 )
Other income
    71       126                   197  
                                         
Income (loss) before income taxes
  $ 7,456     $ 3,722     $ (8,419 )   $ 2,005     $ 4,764  
                                         
Capital expenditures
  $ 1,553     $     $     $ 382     $ 1,935  
                                         
Total assets
  $ 406,433     $ 54,897     $ 10,256     $ 10,973     $ 482,559  
                                         
 
18.   COMMITMENTS
 
Lease Obligations
 
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 $10.1 million and $8.7 million in the first three months of 2007 and 2006, respectively.
 
The Company has operating lease commitments expiring at various dates, primarily for real property and equipment. Rental expense under operating leases during the first three months of 2007 and 2006 totaled $1.7 million and $1.5 million, respectively.

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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Minimum future rental obligations existing under leases with remaining terms of one year or more at March 31, 2007 are as follows (in thousands):
 
         
    Lease
 
    Obligations  
 
2007
  $ 4,574  
2008
    3,814  
2009
    1,653  
2010
    748  
2011 and thereafter
    459  
 
Coal Supply Agreements
 
Westmoreland Partners, which owns ROVA, has two coal supply agreements with TECO Coal Corporation (“TECO”). If Westmoreland Partners continues to purchase coal under these contracts at the current volume and pricing and does not extend these coal supply agreements, then Westmoreland Partners would be obligated to pay TECO $19.9 million for the remainder of 2007 and $26.5 million in each of the years of 2008, 2009, 2010, 2011, 2012 and an aggregate of $58.2 million after 2012.
 
Long-Term Sales Commitments
 
The following table presents estimated total sales tonnage under existing long-term contracts for the next five years from the Company’s existing mining operations. The prices for all future tonnage are subject to revision and adjustments based upon market prices, certain indices and/or cost recovery.
 
         
    Projected Sales
 
    Tonnage
 
    Under Existing
 
    Long-Term
 
    Contracts  
    (In millions
 
    of tons)  
 
2007
    30.0  
2008
    27.3  
2009
    26.6  
2010
    24.9  
2011
    20.6  
 
The tonnages in the table above represent estimated sales tonnage under existing, executed contracts and generally exclude pending or anticipated contract renewals or new contracts. These projections reflect customers’ scheduled major plant outages, if known. These projections include projected tonnages under the Jewett Mine’s contract with NRG.
 
19.   CONTINGENCIES
 
Royalty Claims
 
The Company acquired Western Energy Company (“WECO”) from Montana Power Company in 2001. WECO produces coal from the Rosebud Mine, which includes federal leases, a state lease and some privately owned leases near Colstrip, Montana. The Rosebud Mine supplies coal to the four units of the adjacent Colstrip Power Plant. In the late 1970’s, a consortium of six utilities, including Montana Power, entered into negotiations with WECO for the long-term supply of coal to Units 3&4 of the Colstrip Power Plant, which would not be operational until 1984 and 1985, respectively. The parties could not reach agreement on all the


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
relevant terms of the coal price and arbitration was commenced. The arbitration panel issued its opinion in 1980. As a result of the arbitration order, WECO and the Colstrip owners entered into a Coal Supply Agreement and a separate Coal Transportation Agreement. Under the Coal Supply Agreement, the Colstrip Units 3&4 owners pay a price for the coal F.O.B. mine. Under the Coal Transportation Agreement, the Colstrip Units 3&4 owners pay a separate fee for the transportation of the coal from the mine to Colstrip Units 3&4 on a conveyor belt that was designed and constructed by WECO and has been continuously operated and maintained by WECO.
 
In 2002 and 2006, the State of Montana, as agent for the Minerals Management Service (“MMS”) of the U.S. Department of the Interior, conducted audits of the royalty payments made by WECO on the production of coal from the federal leases. The audits covered three periods: October 1991 through December 1995, January 1996 through December 2001, and January 2002 through December 2004. Based on these audits, the Office of Minerals Revenue Management (“MRM”) of the Department of the Interior issued orders directing WECO to pay royalties in the amount of $8.6 million on the proceeds received from the Colstrip owners under the Coal Transportation Agreement during the three audit periods. The orders held that the payments for transportation were payments for the production of coal. The Company believes that only the costs paid for coal production are subject to the federal royalty, not payments for transportation.
 
WECO appealed the orders of the MRM to the Director of the MMS. On March 28, 2005, the MMS issued a decision stating that payments to WECO for transportation across the conveyor belt were part of the purchase price of the coal and therefore subject to the royalty charged by the federal government under the federal leases. However, the MMS dismissed the royalty claims for periods more than seven years before the date of the order on the basis that the statute of limitations had expired, which reduced the total demand from $8.6 million to $5.0 million.
 
On June 17, 2005, WECO appealed the decision of the MMS on the transportation charges to the United States Department of the Interior, Office of Hearings and Appeals, Interior Board of Land Appeals (“IBLA”). On September 6, 2005, the MMS filed its answer to WECO’s appeal. This matter is still pending before the IBLA.
 
The total amount of the MMS royalty claims including interest through the end of 2003 was approximately $5.0 million. This amount, if payable, is subject to interest through the date of payment, and as discussed above, the audit covered the periods through 2004.
 
By decision dated September 26, 2006, the MMS issued a demand to WECO assessing a royalty underpayment charge of $1.6 million, which the MMS asserts is attributable to coal production from Federal Coal Lease No. M18-080697-0. This assessment is based on the same MMS analysis as the assessments previously asserted by the MMS pursuant to its decisions dated September 23, 2002 but applies to a later period. The amount of the potential liability is $1.6 million, plus interest.
 
In 2003, the State of Montana Department of Revenue (“DOR”) assessed state taxes for years 1997 and 1998 on the transportation charges collected by WECO from the Colstrip Units 3&4 owners. The taxes are payable only if the transportation charges are considered payments for the production of coal. The DOR is relying upon the same arguments used by the MMS in its royalty claims. WECO has disputed the state tax claims.
 
In 2006, DOR issued additional assessments for certain of these taxes for years 1998-2001. WECO appealed and DOR elected to proceed to hearing on these objections using its internal administrative hearing process. This is the first stage of the eventual adjudication which could ultimately conclude with the Montana Supreme Court. It is likely that the IBLA will rule on the MMS issue before this DOR process reaches the Montana state court system, and it is likely that the federal court will have ruled on any appeal from the IBLA before the DOR issue reaches the Montana Supreme Court. The total of the state tax claims through the end


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
of 2001, including interest through the end of 2006, was approximately $20.4 million. If this amount is payable it is subject to interest from the time the tax payment was due until it is paid.
 
The MMS has asserted two other royalty claims against WECO. In 2002, the MMS held that “take or pay” payments received by WECO during the period from October 1, 1991 to December 31, 1995 from two Colstrip Units 3&4 owners were subject to the federal royalty. The MMS is claiming that these “take or pay” payments are payments for the production of coal, notwithstanding that no coal was produced. WECO filed a notice of appeal with MMS on October 22, 2002, disputing this royalty demand. No ruling has yet been issued by MMS. The total amount of the royalty demand, including interest through August 2003, is approximately $2.7 million.
 
In 2004, the MMS issued a demand for a royalty payment in connection with a settlement agreement dated February 21, 1997 between WECO and one of the Colstrip owners, Puget Sound Energy. This settlement agreement reduced the coal price payable by Puget Sound as a result of certain “inequities” caused by the fact that the mine owner at the time, Montana Power, was also one of the Colstrip customers. The MMS has claimed that the coal price reduction is subject to the federal royalty. WECO has appealed this demand to the MMS, which has not yet ruled on the appeal. The amount of the royalty demand, with interest through mid-2003, is approximately $1.3 million.
 
Finally, in May 2005 the State of Montana asserted a demand for unpaid royalties on the state lease for the period from January 1, 1996 through December 31, 2001. This demand, which was for $0.8 million, is based on the same arguments as those used by the MMS in its claim for payment of royalties on transportation charges and the 1997 retroactive “inequities” adjustment of the coal price payable by Puget Sound.
 
Neither the MMS nor the DOR has made royalty or tax demands for all periods during which WECO has received payments for transportation of coal. Presumably, the royalty and tax demands for periods after the years in dispute, generally, 1997 to 2004, and future years will be determined by the outcome of the pending proceedings. However, if the MMS and DOR were to make demands for all periods through the present, including interest, the total amount claimed against WECO, including the pending claims and interest thereon through December 31, 2006, could exceed $33.0 million.
 
The Company believes that WECO has meritorious defenses against the royalty and tax demands made by the MMS and the DOR. The Company expects a favorable ruling from the IBLA, although it could be a year or more before the IBLA issues its decision. If the outcome is not favorable to WECO, the Company plans to seek relief in Federal district court.
 
Moreover, in the event of a final adverse outcome with DOR and MMS, the Company believes that certain of the Company’s customers are contractually obligated to reimburse the Company for any royalties and taxes imposed on the Company for the production of coal sold to the Colstrip owners, plus the Company’s legal expenses. Consequently, the Company has not recorded any provisions for these matters. It is possible that the customers may dispute the Company’s interpretation of the contracts. Legal expenses associated with these matters are expensed as incurred.
 
Rensselaer Tax Assessment
 
Niagara Mohawk Power Corporation (“NIMO”) was party to power purchase agreements with independent power producers, including the Rensselaer project, in which the Company owned an interest. In 1997, the New York Public Service Commission approved NIMO’s plan to terminate or restructure 29 power purchase contracts. The Rensselaer project agreed to terminate its Power Purchase and Supply Agreement after NIMO threatened to seize the project under its power of eminent domain. NIMO and the Rensselaer project executed a settlement agreement in 1998 with a payment to the project. On February 11, 2003, the North Carolina Department of Revenue notified the Company that it had disallowed the exclusion of gain as non-business income from the settlement agreement between NIMO and the Rensselaer project. The State of North Carolina


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
assessed a current tax of $3.5 million, interest of $1.3 million (through 2004), and a penalty of $0.9 million. The Company consequently filed a protest. The North Carolina Department of Revenue held a hearing on May 28, 2003. In November 2003, the Company submitted further documentation to the State to support its position. On January 14, 2005, the North Carolina Department of Revenue concluded that the additional assessment is statutorily correct. On July 27, 2005, the Company responded to the North Carolina Department of Revenue providing additional information.
 
In March, 2007, the Department of Revenue revised its assessment to $4.2 million, which included interest but no penalty. The Company has an accrued reserve of $4.2 million at March 31, 2007, which is the amount the Company believes it will be required to pay.
 
Combined Benefit Fund
 
Under the Coal Act, the Company is required to provide postretirement medical benefits for certain UMWA miners and their dependents by making payments into certain benefit plans, one of which is the Combined Benefit Fund (“CBF”).
 
The Coal Act merged the UMWA 1950 and 1974 Benefit Plans into the CBF, and beneficiaries of the CBF were assigned to coal companies across the country. Congress authorized the Department of Health & Human Services (“HHS”) to calculate the amount of the premium to be paid by each coal company to whom beneficiaries were assigned. Under the statute, the premium was to be based on the aggregate amount of health care payments made by the 1950 and 1974 Plans in the plan year beginning July 1, 1991, less reimbursements from the Federal Government, divided by the number of individuals covered. That amount is increased each year by a cost of living factor.
 
Prior to the creation of the CBF, the UMWA 1950 and 1974 Plans had an arrangement with HHS pursuant to which they would pay the health care costs of retirees entitled to Medicare, and would then seek reimbursement for the Medicare-covered portion of the costs from HHS. The parties had lengthy disputes over the years concerning the amount to be reimbursed, which led them to enter into a capitation agreement in which they agreed that HHS would pay the Plans a specified per-capita reimbursement amount for each beneficiary each year, rather than trying to ascertain each year the actual amount to be reimbursed. The capitation agreement was in effect for the plan year beginning July 1, 1991, the year specified by the Coal Act as the baseline for the calculation of Coal Act premiums.
 
In assessing the annual premium of the coal operators under the CBF, the Trustees of the CBF used an interpretation by HHS that “reimbursements” in the base-line year were the amounts that would have been payable by the government if the actual Medicare regulations were applied, not the amounts actually received by the CBF under the capitation agreement. This method of calculating the CBF premium resulted in a higher amount than would have been the case if the government payments under the capitation agreement had been applied. The coal operators disagreed with the HHS interpretation and initiated litigation in the mid — 1990’s.
 
In 1995, the Court of Appeals for the Eleventh Circuit ruled, in a victory for the coal companies, that the meaning of the statute was clear, i.e., that “reimbursements” meant the actual amount by which the CBF was reimbursed, regardless of the amount of the Medicare-covered expenditures under government regulations. In 2002, the Court of Appeals for the District of Columbia Circuit ruled that the statute was ambiguous, and remanded the case to the Commissioner of Social Security, as successor to HHS, for an explanation of its interpretation so that the court could evaluate whether the interpretation was reasonable. The Commissioner of Social Security affirmed the previous interpretation and the coal companies then brought another legal challenge. On August 12, 2005, the United States District Court for the District of Maryland agreed with the Eleventh Circuit that the term “reimbursements” unambiguously means the actual amount by which the CBF was reimbursed, and the Court granted summary judgment to the coal operators. However, the judge ruled that


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
until all appeals have been exhausted and the case is final, the CBF can retain the premium overpayments, although the judge applied the new premium calculation prospectively.
 
On December 21, 2006, the United States Court of Appeals for the Fourth Circuit ruled in favor of the coal operators and affirmed the decision of the Maryland District Court that “reimbursements” in the Coal Act premium calculation refers to actual reimbursements received by the CBF.
 
The difference in premium payments for Westmoreland is substantial. Pursuant to the holdings of the Eleventh Circuit and the Federal District Court of Maryland, Westmoreland has overpaid and expensed premiums for the period from 1993 through 2006.
 
During the first quarter of 2007, the Company reached a settlement with the UMWA Combined Benefit Fund (“CBF”) for the reimbursement of $5.8 million, plus interest, in past overpayments to the CBF for retiree medical benefits. The Company received $2.9 million of the reimbursement and $0.6 million in interest during the first quarter, and received the remaining $2.9 million reimbursement plus interest of approximately $0.1 million during the second quarter of 2007. The Company recorded the settlement as a $5.8 million reduction in heritage health benefit expenses and $0.6 million in interest income, and recorded a receivable for the $2.9 million plus related accrued interest through March 31, 2007.
 
McGreevey Litigation
 
In late 2002, the Company was served with a complaint in a case styled McGreevey et al. v. Montana Power Company et al. in a Montana State court. The plaintiffs are former stockholders of Montana Power who filed their first complaint on August 16, 2001. This was the Plaintiffs’ Fourth Amended Complaint; it added Westmoreland as a defendant to a suit against Montana Power Company, various officers of Montana Power Company, the Board of Directors of Montana Power Company, financial advisors and lawyers representing Montana Power Company and the purchasers of some of the businesses formerly owned by Montana Power Company and Entech, Inc., a subsidiary of Montana Power Company. The plaintiffs seek to rescind the sale by Montana Power of its generating, oil and gas, and transmission businesses, and the sale by Entech of its coal business, or to compel the purchasers to hold these businesses in trust for the shareholders. The Plaintiffs contend that they were entitled to vote to approve the sale by Entech to the Company even though they were not shareholders of Entech. Westmoreland has filed an answer, various affirmative defenses and a counterclaim against the plaintiffs. Shortly after the Company was named as a defendant, the litigation was transferred from Montana State Court to the U.S. District Court in Billings, Montana.
 
There has been no significant activity in the case involving Westmoreland for the past four years. Settlement discussions between the plaintiffs and other defendants appear to have been unsuccessful. We have never participated in settlement discussions with the plaintiffs because we believe that the case against the Company is totally without merit. Even if the plaintiffs could establish that shareholder consent was required for the sale of Montana Power’s coal business in 2001, there is virtually no legal support for the argument that such a sale to a buyer acting in good faith, purchasing from a wholly owned subsidiary, and relying on the seller’s representations can be rescinded. Indeed, the practical issues relating to such rescission would present a significant obstacle to such a result, particularly when the business has been operated by the buyer for six years, significant amounts of capital have been invested, reserves have been depleted, and the original seller is in bankruptcy and has no means to complete a repurchase or operate the business following a repurchase.
 
The Company has considered seeking a dismissal of the claims against it but is waiting for the outcome of a matter under review in the bankruptcy proceedings in Delaware involving Touch America (formerly Montana Power Company). In those proceedings, the unsecured creditors have asserted that the claims originally filed by McGreevey in Montana — the claims against the officers and directors which, if successful, would likely result in a payment by the insurance carrier that provided D&O insurance to Montana Power Company — belong to


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ITEM 1
WESTMORELAND COAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the creditors, not the shareholders who are the plaintiffs in the McGreevey action. If the Delaware Bankruptcy Court holds that those claims are “derivative” and thus belong to the corporation, then the unsecured creditors may have a right to those claims. Although the Delaware Bankruptcy Court will not directly decide that issue with respect to the claims against the various asset purchasers, including the Company, such a decision would likely affect the analysis of the Montana District Court where our case is pending.
 
No reserve has been accrued by the Company for this matter.
 
20.   SUBSEQUENT EVENTS
 
On May 2, 2007, the Company entered into a Standby Purchase Agreement with an investor that would backstop a rights offering of common stock by the Company to its shareholders and purchase additional shares of common stock. Effective as of July 3, 2007, the Standby Purchase Agreement was amended to add an additional standby purchaser. The Standby Purchase Agreement contemplated a transaction closing by November 2007.
 
On March 4, 2008, the Company completed the sale of $15.0 million in senior secured convertible notes to that investor. The notes mature 5 years from date of issuance, carry a 9.0% interest rate and are convertible into the Company’s common stock at the investor’s option at an initial conversion price of $10 per share. As part of that transaction the Standby Purchase Agreement was terminated.
 
In June 2007, the Company extended the bridge loan used to acquire ROVA, and issued the lender a warrant to purchase 150,000 shares of common stock. Under the terms of the loan agreement, all cash distributions from ROVA are required to be applied to the principal and interest payments on the loan through its remaining four-year term.
 
In February 2008, the Company completed negotiations to refinance the ROVA project with an institutional lender. The refinancing will include the bridge loan used to acquire the additional interest in the ROVA project in 2006 and all of the term loans outstanding at ROVA. The refinancing will allow ROVA to make a distribution to the Company of $5.0 million when the refinancing closes in mid-March 2008.
 
As of March 17, 2008, the Company believes that it has capital resources or committed financing arrangements in place to provide adequate liquidity to meet all of its currently projected cash requirements through August, 2008 based on its most recent forecast. The Company is considering several alternatives for raising additional capital during 2008.
 
The Company has also engaged a large bank to assist the Company in refinancing its existing debt at Westmoreland Mining, with the goal of better matching debt amortization with cash flow from the mining operations. The refinancing would be designed to provide for additional availability to finance future capital requirements of the mines, and provide for an increase in the amounts allowed to be distributed to Westmoreland Coal Company. While the Company has had initial discussions with the bank and potential lenders about the refinancing, there can be no assurance that the Company will obtain the refinancing on terms acceptable to it, or at all.
 
Depending upon the size and terms of that potential refinancing, the Company will evaluate the need to raise additional capital.
 
The Company continues to believe that one of the other alternatives available to it is the sale of one or more of the Company’s assets. There can be no assurance that any sale could be completed on a timely basis or on terms acceptable to the Company.
 
The accompanying consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from the outcome of the uncertainty regarding the Company’s ability to raise additional capital, refinance its debt obligations or sell some of its assets to meet its obligations.


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ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Material Changes in Financial Condition from December 31, 2006 to March 31, 2007
 
2007 Restatement
 
We are filing this amendment to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007. The consolidated balance sheets and statements of operations have been restated to correct errors in the amounts recorded for our postretirement medical benefit obligations and related expenses, and our stock based compensation expense. The restatement adjustments had no effect on our cash flows for any of the periods presented.
 
For the three months ended March 31, 2007 and 2006, the restatement had the following effects on our consolidated statements of operations:
 
                 
    Three Months Ended March 31,  
    2007     2006  
    (In thousands)  
 
Net income applicable to common shareholders,
as previously reported
  $ 8,874     $ 5,353  
Increase in heritage health benefit expenses related
to the 2001 court decision
    (1,414 )     (928 )
Increase in heritage health benefit expenses related
to an error in 2006 census data
          (302 )
Increase in selling and administrative expenses
related to other census data errors
    (30 )     (30 )
Increase in stock compensation expense
related to stock based incentive plan
    (66 )     (42 )
                 
Total adjustments
    (1,510 )     (1,302 )
                 
Net income applicable to common shareholders,
as restated
  $ 7,364     $ 4,051  
                 
 
Forward-Looking Disclaimer
 
Throughout this Amendment No. 1 to Form 10-Q, the Company makes statements which are not historical facts or information and that may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, the information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For example, words such as “may,” “will,” “should,” “estimates,” “predicts,” “potential,” “continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, levels of activity, performance or achievements, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the material weaknesses in the Company’s internal controls over financial reporting identified in Amendment No. 2 to our 2006 Form 10-K, the associated ineffectiveness of the Company’s disclosure controls; health care cost trends; the cost and capacity of the surety bond market; the Company’s ability to manage growth and significantly expanded operations; the ability of the Company to implement its growth and development strategy; the Company’s ability to pay the preferred stock dividends that are accumulated but unpaid; the Company’s ability to retain key senior management; the Company’s access to financing or ability to refinance its bridge loan; the Company’s ability to maintain compliance with debt covenant requirements or obtain waivers from its lenders in cases of non-compliance; the Company’s ability to achieve anticipated cost savings and profitability targets; the Company’s


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ability to successfully identify new business opportunities; the Company’s ability to negotiate profitable coal contracts, price reopeners and extensions; the Company’s ability to predict or anticipate commodity price changes; the Company’s ability to maintain satisfactory labor relations; changes in the industry; competition; the Company’s ability to utilize its deferred income tax assets; the ability to reinvest cash, including cash that has been deposited in reclamation accounts, at an acceptable rate of return; weather conditions; the availability of transportation; price of alternative fuels; costs of coal produced by other countries; the demand for electricity; the performance of ROVA and the structure of ROVA’s contracts with its lenders and Dominion Virginia Power; the effect of regulatory and legal proceedings; environmental issues, including the cost of compliance with existing and future environmental requirements; the risk factors set forth below; the Company’s ability to raise additional capital, as discussed under Liquidity and Capital Resources; and the other factors discussed in Note 19 of this Amendment No. 1 to Form 10-Q. As a result of the foregoing and other factors, no assurance can be given as to the future results and achievement of the Company’s goals. The Company disclaims any duty to update these statements, even if subsequent events cause its views to change.
 
References in this document to www.westmoreland.com, any variations of the foregoing, or any other uniform resource locator, or URL, are inactive textual references only. The information on our Web site or any other Web site is not incorporated by reference into this document and should not be considered to be a part of this document.
 
Overview
 
We are an energy company. We mine coal, which is used to produce electric power, and we own power generating plants. All of our five mines supply baseloaded power plants. Several of these power plants are located adjacent to our mines, and we sell virtually all our coal under long-term contracts. Consequently, our mines enjoy relatively stable demand and pricing compared to competitors who sell more of their production on the spot market.
 
We now own 100% of ROVA, which supplies baseload power pursuant to long-term contracts. We operate and maintain ROVA and four power projects owned by others. We have a 4.49% interest in the gas-fired Ft. Lupton Project, which has a generating capacity of 290 MW and provides peaking power to the local utility.
 
According to the 2006 Annual Energy Outlook prepared by the EIA, approximately 50% of all electricity generated in the United States in 2005 was produced by coal-fired units. The EIA projects that the demand for coal used to generate electricity will increase approximately 2.6% per year from 2005 through 2030. Consequently, we believe that the demand for coal will grow, in part because coal is the lowest cost fossil-fuel used for generating baseload electric power.
 
Challenges
 
We believe that our principal challenges today include the following:
 
  •  obtaining adequate capital for our on-going operations and our growth initiatives;
 
  •  negotiating a long-term contract between the Jewett Mine and its customer;
 
  •  renegotiating sales prices to reflect higher market prices and fully recover commodity and production costs;
 
  •  continuing to fund high heritage health benefit expenses which continue to be adversely affected by inflation in medical costs, longer life expectancies for retirees and the failure of the UMWA retirement fund trustees to manage medical costs;
 
  •  maintaining and collateralizing, where necessary, our Coal Act and reclamation bonds;
 
  •  funding required contributions to pension plans that are underfunded;
 
  •  complying with new environmental regulations, which have the potential to significantly reduce sales from our mines; and


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  •  defending against claims for potential taxes and royalties assessed by various governmental entities, some of which we believe are subject to reimbursement by our customers.
 
We discuss these issues, as well as the other challenges we face, elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and under “Risk Factors.”
 
Liquidity and Capital Resources
 
The major factors impacting our liquidity are: payments due on the term loan we entered into to acquire various operations and assets from Montana Power and Knife River in May, 2001; payments due on the acquisition debt associated with our purchase of the ROVA interest; additional capital expenditures we plan to make after taking over operations at our Absaloka Mine in March 2007; cash collateral requirements for additional reclamation bonds in new mining areas; and payments for our heritage health benefit costs. See “Factors Affecting our Liquidity”. Unforeseen changes in our ongoing business requirements could also impact our liquidity. Our principal sources of cash flow at Westmoreland Coal Company are dividends from WRI, distributions from ROVA and from Westmoreland Mining subject to the provisions in their respective debt agreements and dividends from the subsidiaries that operate power plants.
 
On May 1, 2007, the Company entered into a Standby Purchase Agreement with an investor that would backstop a rights offering of common stock by the Company to its shareholders and purchase additional shares of common stock. The Company expects to seek gross proceeds of at least $85 million before expenses. The closing of such transactions is subject to several conditions, including shareholder approval (which the Company plans to seek at a meeting of stockholders later in 2007), there being no material adverse effect on the Company’s financial condition and there not being trading suspensions in its common stock or other adverse developments in the financial markets.
 
Proceeds from the rights offering will be used to fund capital expenditures that are expected to lower the Company’s coal mining production costs, fund future growth initiatives and provide working capital, as well as for general corporate purposes. As part of the transaction, the Company intends to retire its outstanding Series A Convertible Exchangeable Preferred Stock, each share of which is represented by four depositary shares, and the Company is evaluating options to achieve this objective. The Company intends to use a portion of the proceeds from the rights offering to redeem the depositary shares that are outstanding at the conclusion of the rights offering.
 
Factors Affecting our Liquidity
 
Our heritage health benefit costs consist primarily of payments for post retirement medical and workers’ compensation benefits. We are also obligated for employee pension and pneumoconiosis benefits. It is important to note that retiree health benefit costs are directly affected by increases in medical service costs, prescription drug costs and mortality rates. The most recent actuarial valuations of our heritage health benefits obligations, which pertain primarily to former employees who worked in our Eastern mines and are guaranteed life-time benefits under the federal Coal Act, indicated that our heritage health benefit payments would increase annually through 2011 and then decline to zero over the next approximately sixty years as the number of eligible beneficiaries declines. In the first three months of 2007, we paid $4.0 million for postretirement benefit expenses, $0.9 million for CBF premiums and $0.3 million for workers’ compensation benefits and received $0.3 million in offsetting Medicare D subsidies. During 2007, we expect to pay $18.8 million in cash costs for postretirement medical benefits and receive $1.8 million of offsetting federal subsidies. In 2007, we expect to make payments for Combined Benefit Fund premiums in the amount of $3.7 million and $1.0 million of payments for workers’ compensation benefits.
 
The Westmoreland Mining acquisitions in 2001 greatly increased revenues and operating cash flow. The financing obtained to make those acquisitions requires quarterly interest and principal payments of approximately $4.2 million. This debt financing also requires that 25% of excess cash flow, as defined, be set aside to fund the $30.0 million debt payment due in December 2008. Therefore, only 75% of Westmoreland Mining’s excess cash flow is available to the Company until this debt is paid off in 2008. Westmoreland Mining also entered into the add-on debt facility in 2004 which requires the use of approximately $0.5 million of cash


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each quarter for debt service. The add-on facility permitted Westmoreland Mining to undertake significant capital projects, principally at the Rosebud and Jewett Mines, without adversely affecting cash available to Westmoreland Coal Company. The terms of the add-on facility permitted Westmoreland Mining to distribute this $35.0 million to Westmoreland Coal Company. Westmoreland Mining’s distributions of $3.5 million in 2006 represented the remainder available from the $35.0 million add-on facility.
 
In June 2006, we acquired the 50% interest in ROVA that we did not previously own, which increased revenues and operating cash flow. This acquisition was funded with $35.0 million in acquisition debt as described in Note 8 to our consolidated financial statements. ROVA also has project-level debt which funded the original development of the power plants. The project-level debt requires semi-annual principal payments as also described in Note 8 to the financial statements as well as ongoing interest payments. The acquisition debt requires approximately $0.7 million of interest payments each quarter. Should we elect to extend the term of $25.7 million of the acquisition debt to four years, we will make semi-annual principal payments of approximately $4.3 million, which would amount to substantially all of the cash distributions generated by ROVA over that term.
 
On March 6, 2007, we entered into an agreement to acquire WGI’s contract to be the exclusive miner at our Absaloka Mine and completed this transaction on March 30, 2007. WRI purchased from WGI mining and office equipment for $7.9 million and tools, spare parts and supplies, and coal inventory for $2.3 million. As part of the transaction, WRI released any claim WRI had in the $7.0 million reclamation escrow account held by WGI, and released WGI from its financial obligation to complete final reclamation of the mine. While certain equipment was included in our purchase, we expect we will need additional capital for investment in mine development projects, mining equipment and to support bonding requirements.
 
Our ongoing and future business needs may also affect liquidity. We do not anticipate that either our coal or our power production revenues will diminish materially as a result of any future downturn in economic conditions because ROVA and the power plants that purchase our coal produce relatively low-cost, baseload power. In addition, most of our coal and power production are sold under long-term contracts, which help insulate us from unfavorable market developments. However, contract price reopeners, contract expirations or terminations, a failure to negotiate a long-term agreement between the Jewett Mine and its customer and market competition could affect future coal revenues. We may also need additional capital to support our ongoing efforts to develop new projects such as the Gascoyne Mine and power facility.
 
Cash Balances and Available Credit
 
Consolidated cash and cash equivalents at March 31, 2007 totaled $25.7 million including $11.2 million at ROVA, $1.2 million at Westmoreland Power Inc., $2.2 million at Westmoreland Mining, $2.5 million at WRI and $1.3 million at our captive insurance subsidiary. The cash at Westmoreland Mining is available to the Company through quarterly distributions, as described below. The cash at our captive insurance subsidiary and WRI is available to the Company through dividends. The cash at ROVA is available to the Company through distributions after debt service and debt reserve account requirements are met. Under the provisions of the ROVA acquisition bridge loan, all cash distributions from ROVA subsequent to December 31, 2006, are to be applied to the principal balance of the loan and related interest.
 
As of March 31, 2007, Westmoreland Coal Company had $6.4 million of its $14.0 million revolving line of credit available to borrow.
 
Restricted Cash
 
We had restricted cash and bond collateral, which were not classified as cash or cash equivalents, of $68.1 million at March 31, 2007 compared to $69.7 million at December 31, 2006. The restricted cash at March 31, 2007 included $29.8 million in ROVA’s debt service accounts and prepayment accounts and $25.6 million in Westmoreland Mining’s debt service reserve, long-term prepayment, and reclamation escrow accounts. At March 31, 2007 our reclamation, workers’ compensation and postretirement medical cost obligation bonds were collateralized by interest-bearing cash deposits of $12.7 million, which we have classified as non-current assets in the consolidated balance sheet. In addition, we had accumulated reclamation


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deposits of $63.7 million at March 31, 2007, representing cash received from customers of the Rosebud Mine to pay for reclamation, plus interest earned on the investments.
 
Westmoreland Mining Debt Facilities
 
The original term loan agreement, which financed our acquisition of the Rosebud, Jewett, Beulah, and Savage Mines, continues to restrict Westmoreland Mining’s ability to make distributions to Westmoreland Coal Company. Until Westmoreland Mining has fully paid the original acquisition debt, which is scheduled for December 31, 2008, Westmoreland Mining may only pay Westmoreland Coal Company a management fee and distribute to Westmoreland Coal Company 75% of Westmoreland Mining’s surplus cash flow. Westmoreland Mining is depositing the remaining 25% into an account that will be applied to the $30.0 million balloon payment due December 31, 2008. In 2004 when Westmoreland Mining entered into the add-on facility, it also extended its revolving credit facility to 2007 and reduced the amount of the facility to $12.0 million. In December 2005, Westmoreland Mining amended the revolving facility to increase the borrowing base to $20.0 million and to extend its maturity to April 2008 to better align with its operating needs. The increase includes the ability to issue letters of credit up to $10.0 million which Westmoreland Mining expects to use for reclamation bond collateral requirements. As of March 31, 2007, a letter of credit for $1.9 million was supported by Westmoreland Mining’s revolving credit facility and Westmoreland Mining has the remaining $18.1 million credit facility’s borrowing base available.
 
Historical Sources and Uses of Cash
 
Cash provided by operating activities was $19.5 million for the first three months of 2007 compared with $2.8 million for the first three months of 2006. The increase in net income and non-cash charges to income, which includes depreciation, amortization, stock compensation, gain on sale of assets and minority interest, in the first three months of 2007 increased cash provided by operating activities by $3.2 million and $5.1 million, respectively. There was only $0.1 million of cash distributions from independent power projects for the first three months of 2007 because ROVA distributions received were consolidated after the acquisition of June 2006. Cash provided by operating activities reflects $7.3 million of revenue deferred under ROVA’s long-term sales agreements. Cash distributions from ROVA of $1.1 million were recorded for the first three months of 2006. Changes in working capital decreased cash provided by operating activities in the first three months of 2007 by $3.1 million compared to a decrease in cash from changes in working capital of $0.8 million in the first three months of 2006.
 
Our working capital deficit was $54.4 million at March 31, 2007 compared to $66.8 million at December 31, 2006. The decrease in our working capital deficit resulted primarily from a $10.0 million increase in accounts receivable. The increase in accounts receivable resulted from a $10.0 million reserve dedication receivable recorded during the first quarter.
 
Cash provided from investing activities during the first three months ended March 31, 2007 was $6.4 million compared to $0.4 million in the first three months ended March 31, 2006. The increase in investing cash activities was driven by the $12.7 million of proceeds from sale of our royalty interest at the Caballo Mine in Wyoming. This increase was offset by the $3.4 million paid in connection with the assumption of the Absaloka mining operations from WGI. Cash provided by investing activities in the first three months of 2006 included $5.1 million received from the sale of mineral interests in Colorado. Cash provided from investing activities included a decrease in our restricted cash accounts of $0.3 million for the first three months of 2007. In the first three months of 2006, cash of $2.7 million was deposited into our restricted cash accounts. This decrease was due to a refund of the collateral as a result of a reduction in our postretirement health benefit bonds in the first quarter of 2007. Additions to property, plant and equipment increased in the first three months of 2007 to $3.7 million compared to $1.9 million in the first three months of 2006.
 
We used $26.9 million of cash for our financing activities in the first three months of March 31, 2007 compared to $4.5 million in the first three months of March 31, 2006. This increase was the result of a $21.7 million repayment of long-term debt and a $5.4 repayment on revolving lines of credit in the first three


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months of 2007. The repayment of long-term debt and revolving lines of credit in the first three months of 2006 were $4.6 million.
 
RESULTS OF OPERATIONS
 
Quarter Ended March 31, 2007 Compared to Quarter Ended March 31, 2006.
 
Coal Operations
 
The following table shows comparative coal revenues, sales volumes, cost of sales and percentage changes between the periods:
 
                         
    Three Months Ended March 31,  
    2007     2006     Change  
 
Revenues — thousands
  $ 103,080     $ 94,634       9 %
Volumes — millions of equivalent coal tons
    7.5       7.4       1 %
Cost of sales — thousands
  $ 83,050     $ 73,865       12 %
 
Tons of coal sold increased by approximately 0.1 million tons in the first three months of 2007 from the first three months of 2006. Our tons sold increased primarily as a result of improved performance at our Jewett and Absaloka Mines during the first quarter of 2007. These increases were offset by decreases at our Rosebud, Beulah, and Savage Mines, primarily caused by unscheduled customer plant outages.
 
Our coal revenues increased by approximately $8.4 million from the first quarter of 2006 to the first quarter of 2007. This was due in part to the increase in tonnage, but was primarily driven by increased pricing. At the Rosebud and Beulah Mines, we achieved approximately 13% and 10% revenue per ton increases, respectively, as our coal sales contracts provided for pass-through adjustments for higher costs and we renewed an expiring contract in January 2006 at current market prices. At the Absaloka Mine, we achieved an 8% revenue per ton increase due to market price reopeners and renewals. Lastly, at our Jewett Mine, our revenues increased slightly as the increase in tons sold was partially offset by a 5% decrease in price resulting from our current interim price agreement.
 
Our coal segment’s cost of sales in the first three months of 2007 also increased by approximately $9.2 million from the first three months of 2006. This increase was primarily driven by $4.3 million increase in base reclamation, stripping, and other operating costs at our Rosebud Mine. Our Absaloka Mine’s cost of sales also increased by $3.0 million due to the increase in tons sold driving increases in royalties, production taxes, and contract mining costs. The remainder of our costs of sales increase was driven by increases in hauling costs, accretion of our reclamation obligations, and increases in commodity costs at our Jewett and Beulah Mines.
 
Our coal segment’s depreciation, depletion, and amortization expense in the first three months of 2007 increased by approximately $0.5 million from the first three months of 2006. This increase resulted from increased depletion expenses from asset retirement cost assets, which increased at the end of 2006 as a result of updated engineering studies.
 
Our coal segment’s selling and administrative expenses in the first three months of 2007 remained essentially unchanged from the first three months of 2006.
 
Independent Power
 
The power segment includes the ownership of interests in cogeneration and other non-regulated independent power plants, our power operations and maintenance business and business development expenses. Power segment operating income was $4.8 million in the first quarter 2007 compared to $3.6 million in the first quarter 2006. Our energy revenues and costs of sales were $24.7 million and $14.3 million, respectively, during the first quarter 2007.
 
In connection with the ROVA acquisition, we changed our method of recognizing revenue under ROVA’s long-term power sales agreements effective July 1, 2006. For the first quarter 2007, revenue billed under these


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agreements totaling $7.3 million was deferred to future periods. We also began consolidation of ROVA’s results of operations effective July 1, 2006. Previously the ROVA results were reported using the equity method. The equity method reported only earnings (calculated net of interest expense, interest income, depreciation, depletion and amortization).
 
The power segment’s financial performance is presented in the following table:
 
                 
    Three Months Ended
 
    March 31,  
    2007     2006  
 
50% share of ROVA earnings shown as equity in earnings
  $     $ 4,341  
Ft. Lupton equity earnings
    136       117  
                 
Total equity earnings
    136       4,458  
                 
Energy revenue(1)
    24,608        
Costs and expenses:
               
Cost of sales — energy
    (14,308 )      
Depreciation, depletion, and amortization
    (2,423 )     (8 )
Selling and administrative
    (3,219 )     (854 )
Gain on sales of assets
    4        
                 
Power segment revenue less costs and expenses
    4,662       (862 )
                 
Independent power segment operating income
    4,798       3,596  
Other income (expense):
               
Interest expense
    (3,748 )      
Interest income
    517        
Minority interest
           
Other income
    (3 )     126  
                 
Income before income taxes
  $ 1,564     $ 3,722  
                 
 
 
(1) The Company recorded $7.3 million in deferred revenue in 2007 related to capacity payments billed at ROVA.
 
For the first three months of 2007 and 2006, ROVA produced 427,000 and 426,000 MW hours, respectively, and achieved average capacity factors of 94% and 93%, respectively.
 
We also recognized $136,000 in equity earnings in the first three months of 2007, compared to $117,000 in the first three months of 2006, from our 4.49% interest in the Ft. Lupton project.
 
During the first three months of 2007, our Westmoreland Utilities subsidiary, which operates and provides maintenance services to four power plants in Virginia owned by Dominion Virginia Power, contributed $2.7 million of revenue which is shown as energy revenue and had $2.1 million of costs and expenses which are shown as Cost of sales-energy.
 
Heritage
 
During the first three months of 2007 heritage costs decreased by $6.1 million from the first three months of 2006. This decrease resulted primarily from a $5.8 million settlement reached with the Combined Benefit Fund which was recorded in the first three months of 2007.
 
Our heritage costs also decreased during the first quarter of 2007 as a result of decreases in retiree health and workers’ compensation costs. These costs decreased as a result of an increase in the discount rate used in our postretirement medical benefit projections and favorable trends in our first quarter workers’ compensation costs. These cost decreases were partially offset by a small decrease in the benefit we received from our Black Lung trust in the first quarter of 2007, as compared to the first quarter of 2006.


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Corporate
 
Our corporate segment selling and administrative expenses increased by $0.9 million from the first three months of 2007 compared to 2006 and were offset by gains from the sales of assets which were $0.6 million higher in 2007 compared to 2006. This increase resulted primarily from an increase in professional fees, labor, and information technology consulting fees for our systems implementation. The first quarter of 2007 includes a gain of $5.6 million on the sale of our royalty interest at the Caballo Mine in Wyoming, while the first quarter of 2006 includes a gain of $5.1 million from the sale of mineral interests in Colorado.
 
Selling and Administrative
 
Our selling and administrative costs increased from $9.5 million in first quarter 2006 to $13.1 million in first quarter 2007. $2.4 million of this increase is the result of consolidating ROVA.
 
Interest
 
Interest expense was $6.5 million and $2.7 million for the first three months of 2007 and 2006, respectively. The increase resulted from the $2.9 million in interest expense from ROVA’s project debt following its acquisition and approximately $0.9 million in increased interest expense primarily driven by our ROVA acquisition debt. Interest income increased by $1.3 million in the first three months of 2007 as a result of $0.6 million in interest income received from our settlement with the Combined Benefit Fund, $0.5 million in ROVA interest income, and increased interest income from our restricted cash and bond collateral accounts due to increases in those balances and interest rates.
 
Income Tax
 
Current income tax expense for the first three months of 2007 decreased by $0.1 million from the first three months of 2006. Income tax expense in both periods relates to obligations for state income taxes in North Carolina, Texas and Minnesota.


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ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company is exposed to market risk, including the effects of changes in commodity prices and interest rates as discussed below.
 
Commodity Price Risk
 
The Company produces and sells commodities — principally coal and electric power — and also purchases commodities — principally diesel fuel, steel and electricity.
 
The Company produces and sells coal through its subsidiaries, WRI, Westmoreland Mining LLC, and Westmoreland Coal Sales Co., and the Company produces and sells electricity and steam through its subsidiary Westmoreland Energy LLC. Nearly all of the Company’s coal production and all of its electricity and steam production are sold through long-term contracts with customers. These long-term contracts reduce the Company’s exposure to changes in commodity prices. These 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. Contracts may also contain periodic price reopeners or renewal provisions, which give us the opportunity to adjust the price of our coal to reflect developments in the marketplace.
 
In October 2006, the Company entered into a derivative contract to manage a portion of its exposure to the price volatility of diesel fuel to be used in its operations in 2007. The contract covers 2.4 million gallons of diesel fuel at a weighted average fixed price of $2.02 per gallon. This contract settles monthly from January to December, 2007.
 
In January 2007, the Company entered into an additional derivative contract to be used in its operations in 2007. The contract covers 1.1 million gallons of diesel fuel at a weighted average fixed price of $1.75 per gallon. This contract settles monthly from February to December, 2007.
 
The Company accounts for these derivative instruments on a mark-to-market basis through earnings. The Consolidated Financial Statements as of March 31, 2007 reflect unrealized gains on these contracts of $0.3 million, which is recorded in accounts receivable. Unrealized gains during the three months ended March 31, 2007 were $0.7 million, which is recorded as Costs of sales — coal. During the three months ended March 31, 2007, the Company settled a portion of these contracts covering approximately 0.8 million gallons of fuel, which resulted in a loss of less than $0.1 million.
 
Interest Rate Risk
 
The Company and its subsidiaries are subject to interest rate risk on its debt obligations. The Company’s revolving lines of credit have a variable rate of interest indexed to either the prime rate or LIBOR. Based on balances outstanding on the lines of credit as of March 31, 2007, a one percent change in the prime interest rate or LIBOR would increase or decrease interest expense by $76,000 on an annual basis. Westmoreland Mining’s Series D Notes under its term loan agreement have a variable interest rate based on LIBOR. A one percent change in LIBOR would increase or decrease interest expense on the Series D Notes by $146,000 on an annual basis. A portion of ROVA’s project debt under its Credit Agreement also has a variable interest rate based on LIBOR. A one percent change in LIBOR would increase or decrease interest expense on ROVA’s debt by $0.8 million on an annual basis. The Company’s ROVA acquisition debt also has variable interest rates based on LIBOR. A one percent change in LIBOR would increase or decrease interest expense on the acquisition term loan by approximately $0.3 million on an annual basis. The Rosebud Mine has capital leases with variable interest rates. A one percent change in the interest rates for these leases would increase or decrease interest expenses by less than $0.1 million on an annual basis.
 
The carrying value and estimated fair value of the Company’s long-term debt with fixed interest rates at March 31, 2007 were $152.1 million and $160.8 million, respectively.
 
The Company’s heritage health benefit expenses are also impacted by interest rate changes because its workers compensation, pension, pneumoconiosis, and postretirement medical benefit obligations are recorded on a discounted basis.


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ITEM 4   CONTROLS AND PROCEDURES
 
As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
 
As part of our Amendment No. 2 to our 2006 Annual Report on Form 10-K and the Amendment No. 1 to our Form 10-Q, we determined that the description of the previously disclosed material weakness existing as of December 31, 2006 should be modified and we identified additional material weaknesses in our internal controls over financial reporting. The material weaknesses relate to the lack of adequate controls over the testing, verification and review of electronic spreadsheets that impact the Company’s financial reporting, the lack of controls to ensure the completeness and accuracy of the census data used to calculate the Company’s postretirement medical benefit liabilities, and the lack of controls over the accounting for the Company’s Performance Unit Plan under generally accepted accounting principles.
 
Our chief executive officer and chief financial officer have concluded, based on this evaluation, that as of March 31, 2007, the end of the period covered by this report, our disclosure controls and procedures were not effective at a reasonable assurance level.
 
No change in the Company’s internal control over financial reporting (as defined in Rules as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, except for the changes that were designed to remediate the material weaknesses regarding the Company’s controls identified in the Company’s Amendment No. 2 to its Annual Report on Form 10-K for the year ended December 31, 2006.
 
To remediate the material weaknesses described above and enhance our internal control over financial reporting, the following improvements to our internal controls have been or will be implemented during 2007 and 2008:
 
  •  The calculations for asset retirement obligations have been standardized at all of our mines and have been simplified.
 
  •  An additional layer of financial supervision and review has been added at each of our mines.
 
  •  Personnel in our Corporate office perform a detailed review of all asset retirement obligation calculations.
 
  •  Additional training will be provided to those responsible for performing and reviewing asset retirement obligation calculations.
 
  •  An additional level of review will be added over the calculation of our postretirement medical benefit liability and expense.
 
  •  An additional level of review will be added over our census data used to calculate our postretirement medical benefits.
 
  •  An additional level of review will be added over the preparation of our income tax accrual.


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PART II — OTHER INFORMATION
 
ITEM 1   LEGAL PROCEEDINGS
 
Litigation
 
The Company is party to litigation described in this Amendment No. 1 to Form 10-Q in Note 19 to our consolidated financial statements.
 
Combined Benefit Fund Litigation
 
See Note 19 in the consolidated financial statements.
 
1992 UMWA Benefit Plan Surety Bond
 
On May 11, 2005, XL Specialty Insurance Company and XL Reinsurance America, Inc. (together, “XL”), filed in the U.S. District Court, Southern District of New York, a Complaint for Declaratory Judgment against Westmoreland Coal Company and named Westmoreland Mining LLC as a co-defendant. The Complaint asked the court to confirm XL’s right to cancel a $21.3 million bond that secures Westmoreland’s obligation to pay premiums to the UMWA 1992 Plan, and also asked the court to direct Westmoreland to pay $21.3 million to XL to reimburse XL for the $21.3 million that would be drawn under the bond by the 1992 Plan Trustees upon cancellation of the bond.
 
At a hearing held on January 31, 2006, the judge advised the parties that the United States District Court for New Jersey would be a more appropriate venue. On March 1, 2006, the plaintiffs filed their complaint in the New Jersey District Court. On April 12, 2006, the defendants filed a motion to dismiss for lack of jurisdiction because there is no diversity of citizenship. The motion was granted on March 21, 2007 and the case was dismissed from Federal court. The plaintiffs refiled their complaint in New Jersey State Court, Somerset County, on March 23, 2007.
 
On February 7, 2007, Westmoreland Coal Company voluntarily reduced the amount of the XL bond, with the consent of XL, from approximately $21.3 million to $9.0 million. This reduction was permitted by amendments to the Coal Act that were signed into law on December 20, 2006.
 
The Company believes that it has no obligation to reimburse XL for draws under the bond unless the draw is the result of a default by the Company under its obligations to the UMWA 1992 Plan. No default has occurred. If XL prevails on its claim, the Company will be required to provide cash collateral of $9.0 million for its obligations to the 1992 Plan or, alternatively, provide a letter of credit.
 
Litigation with Washington Group International, Inc.
 
See Note 3 in the consolidated financial statements.
 
McGreevey Litigation
 
See Note 19 in the consolidated financial statements.
 
Texas Westmoreland Price Arbitration
 
Under the lignite supply agreement between Texas Westmoreland Coal Company and NRGT, the customer of the Texas Westmoreland’s Jewett Mine, the price for lignite delivered to NRGT in 2008 will be determined by negotiation or, failing agreement, by arbitration. While the parties are still in negotiations to restructure the lignite supply agreement, they agreed to seek a price determination through arbitration under the auspices of the International Institute for Conflict Resolution and Prevention. This arbitration process commenced on February 2, 2007 and a hearing was held on March 23, 2007. On March 26, 2007, the 2008 price was determined through arbitration. Based on the price determined by the arbitration, Texas Westmoreland notified NRGT that it was electing, as permitted by the lignite supply agreement, to deliver no lignite to NRGT in 2008. The price determined by arbitration resulted from a calculation based on proxy variables and certain assumptions that do


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not necessarily reflect actual conditions at NRGT’s Limestone Plant. TWCC now has the option to deliver lignite under a right of first refusal price basis, which we believe dispenses with proxy variables and non actual plant conditions. On April 30, 2007, NRGT advised Texas Westmoreland of the price at which it could purchase coal from the Powder River Basin and this price was below the price determined by the arbitration. TWCC is calculating its own position on right of first refusal pricing that is likely to be higher than that calculated by NRGT. If the parties cannot agree on the right of first refusal price, the matter will be resolved through arbitration. Once the right of first refusal price is determined, TWCC must nominate the volume of lignite that it will deliver at that price in 2008. If TWCC nominates zero tons, its rights under the lignite supply agreement to sell lignite to NRGT through the stated contract expiration date of August 2015 will terminate. We anticipate that negotiations between the parties will continue regardless of these developments because there are advantages to both parties to have a multi-year agreement regarding lignite supply. If TWCC nominates zero tons for 2008 under the right of first refusal and restructuring of the lignite supply agreement cannot be reached, it may be necessary to close the Jewett Mine at the end of 2007.
 
SEC Investigation
 
On March 6, 2007 we were informed that the Denver office of the Securities and Exchange Commission (“SEC”) had begun an informal inquiry in connection with accounting errors requiring restatement of 2005 and prior years’ financial statements, including 2004 and 2005 quarterly financial statements. On March 20, 2007, our Chief Executive Officer, Chief Financial Officer and General Counsel met with two members of the SEC staff in Denver and explained the reasons for the restatement of prior years’ financial statements. We are not aware that any laws have been violated. On April 25, 2007, we were informed by the SEC staff in a telephone conversation that their informal inquiry would be closed.


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ITEM 1A   RISK FACTORS
 
In addition to the trends and uncertainties described in Management’s Discussion and Analysis of Financial Condition and Results of Operations, we are subject to the risks set forth below. Risk factors that are unchanged from those contained in Amendment No. 2 to our 2006 Annual Report on Form 10-K have not been repeated in this Amendment No. 1 to Form 10-Q.
 
Our revenues, profitability and cash flow could suffer if negotiations between our Jewett Mine and its customer do not produce an economic basis for the continued supply of lignite.
 
The Jewett Mine is dedicated to supplying its sole customer which is located adjacent to the mine. The owners of the Limestone Electric Generating Station accounted for 25% of our total revenues for 2006 under a long-term contract that gives us the right to supply all of the plant’s lignite requirements, but not its coal (as distinct from lignite) or other fuel requirements. The Jewett Mine would have difficulty finding an alternate purchaser for its lignite if it elects not to supply lignite at pricing determined under the existing contract or otherwise fails to obtain an acceptable economic basis for the continued supply of lignite to its customer.
 
The Jewett Mine’s customer has already built rail unloading and associated facilities that are being used to take coal from the Southern Powder River Basin as permitted under our contract with that customer. As a general matter, plants that take coal by rail can buy their coal from many different suppliers. We will face significant competition, primarily from mines in the Southern Powder River Basin of Wyoming, to renegotiate our long-term contract with the customer.
 
We are responsible under federal and state regulations for the ultimate reclamation of the mines we operate. At the Jewett Mine, our customer has assumed by contract the liability to fund reclamation after the termination of mining and has posted bonds to secure their obligations. If our customer defaults on the unfunded portion of their contractual obligations to pay for reclamation, or otherwise challenges the amount of the obligation for which they are liable, we could be required to make these expenditures ourselves and the cost of reclamation could exceed any amount we might recover in litigation, which would also increase our costs and reduce our profitability.
 
The cash flow from the Jewett Mine contributes to the debt service of Westmoreland Mining LLC’s term debt. Any reduction in the operations of the Jewett Mine could affect Westmoreland Mining LLC’s ability to repay the term debt and maintain compliance with certain covenants including minimum financial ratio requirements.
 
The certifications of our interim chief executive officer are based on nine days of employment with the Company.
 
Keith E. Alessi joined the Company effective May 2, 2007 as interim chief executive officer and interim president. In evaluating his certifications contained in Exhibit 31 and Exhibit 32 to this Quarterly Report on Form 10-Q, you should bear in mind that the knowledge on which these certifications were based derived from his work, including his discussions with other officers of the Company, in the period May 2, 2007 to May 10, 2007.
 
We may face risks related to an SEC investigation and securities litigation in connection with the restatement of our financial statements.
 
We are not aware that the Securities and Exchange Commission (“SEC”) has begun any formal or informal investigation in connection with the errors in accounting for our postretirement medical benefit plans, one of our stock based compensation plans and state income taxes, requiring restatement of 2006 and prior years’ financial statements including 2005 and 2006 quarterly financial statements, or that any laws have been violated. However, if the SEC makes a determination that the Company has violated Federal securities laws, the Company may face sanctions, including, but not limited to, monetary penalties and injunctive relief, which could adversely affect our business. In addition, the Company or its officers and directors could be named


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defendants in civil proceedings arising from the restatement. We are unable to estimate what our liability in either event might be.
 
Our ability to operate effectively and achieve our strategic goals could be impaired if we lose key personnel.
 
Our future success is substantially dependent upon the continued service of our key senior management personnel. We do not have key-person life insurance policies on any employees. The loss of the services of any of our executive officers or other key employees could make it more difficult for us to pursue our business goals.
 
Severance benefits payable to former CEO
 
As reported on Form 8-K filed on May 4, 2007, Christopher K. Seglem was terminated as Chairman, CEO and President of the Company effective May 1, 2007. Mr. Seglem is entitled to payment of severance benefits under an Executive Severance Policy dated December 8, 1993. The total amount of the severance benefits payable to Mr. Seglem has not been determined because the Executive Severance Policy is subject to different interpretations in regard to certain important terms. The Company and Mr. Seglem have been attempting to resolve the ambiguities in the Executive Severance Policy through discussions but no assurances can be given that the ambiguities will be resolved. If Mr. Seglem were to bring litigation against the Company to enforce what he believes are his rights under the Executive Severance Policy, the Company would be required to pay his attorney’s fees under the terms of the policy, unless a court were to determine that under the circumstances, recovery of all or a part of any such fees would be unjust. If Mr. Seglem’s interpretation of the policy were to be upheld by a court, he would be entitled to payment of approximately $3.8 million.


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ITEM 3   DEFAULTS UPON SENIOR SECURITIES
 
See Note 13 “Stockholders’ Equity” to our consolidated financial statements, which is incorporated by reference herein.
 
ITEM 5   OTHER INFORMATION
 
The Company has accumulated but unpaid quarterly preferred dividends through and including April 1, 2007 in the amount of $14.8 million in the aggregate ($92.65 per preferred share or $23.16 per Depositary Share). The Company is prohibited from paying preferred stock dividends because there are statutory restrictions limiting the payment of preferred stock dividends under Delaware law, the state in which the Company is incorporated. Under Delaware law, the Company is permitted to pay preferred stock dividends only to the extent that shareholders’ equity exceeds the par value of the preferred stock (which par value was $160,000 at March 31, 2007).
 
ITEM 6   EXHIBITS
 
         
  (a)     Exhibits
  (31)     Rule 13a-14(a)/15d-14(a) Certifications.
  (32)     Certifications pursuant to 18 U.S.C. Section 1350.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
WESTMORELAND COAL COMPANY
 
/s/  David J. Blair
David J. Blair
Chief Financial Officer
(A Duly Authorized Officer)
 
Date: March 17, 2008
 
/s/  Kevin A. Paprzycki
Kevin A. Paprzycki
Controller and Principal Accounting Officer
(A Duly Authorized Officer)
 
Date: March 17, 2008


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Exhibit Index
 
         
Exhibit
   
Number
 
Description
 
  (31)     Rule 13a-14(a)/15d-14(a) Certifications.
  (32)     Certifications pursuant to 18 U.S.C. Section 1350.


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