Summary of WESTMORELAND COAL CO

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material Changes in Financial Condition from December 31, 2007, to March 31, 2008
Forward-Looking Disclaimer
Throughout this 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 the Annual Report on Form 10-K for the year ended December 31, 2007, or our 2007 Form 10-K, and 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 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; 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 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 in our 2007 Form 10-K and below; the Company's ability to raise additional capital, as discussed under Liquidity and Capital Resources; and the other factors discussed in Note 18 of this 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 a part of this document.

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Overview
Competitive, Economic and Industry Factors We are an energy company. We mine coal, which is used to produce electric power, and we own power-generating plants. We own five mines, which supply power plants. Several of these power plants are located adjacent to our mines, and we sell virtually all our coal under multi-year contracts. Due to the generally longer duration and terms of our contracts, we enjoy relatively stable demand and margins compared to competitors who sell more of their production on the spot market and under shorter-term contracts. We also sell under shorter-term contracts a small amount of coal produced by others.
We own the ROVA power project. ROVA consists of two coal-fired units with a total generating capacity of 230 megawatts, or MW. ROVA supplies power pursuant to long-term contracts.
According to the 2008 Annual Energy Outlook prepared by the EIA, approximately 49% of all electricity generated in the United States in 2006 was produced by coal-fired units. The EIA projects that the demand for coal used to generate electricity will increase approximately 1.4% per year from 2006 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 electric power. Challenges
We believe that our principal challenges today include the following:
• obtaining adequate capital for our on-going operations and refinancing debt due later in 2008;

• renegotiating sales prices to reflect higher market prices and fully recover increased 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

• defending against claims for potential taxes and royalties assessed by various governmental entities, most 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
Westmoreland Coal 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 its mines in Montana, North Dakota and Texas; and the ownership of power plants. The Company's

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activities are primarily conducted through wholly 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 7) and subsequent borrowings at WML, which owns four of our mines; payments due on the project debt payable by our 230 MW ROVA power plant (see Note 7); payments due on the term loan and revolving credit facility used to acquire the minority interest in WRI and to repay certain then-existing debt of WCC; payments on the Company's convertible debt; cash collateral requirements for additional reclamation bonds in new mining areas; payments for the Company's heritage health benefit costs; and ongoing reclamation costs.
At March 31, 2008, the current maturities of the Company's long-term debt were approximately $103.2 million.
Unforeseen changes in the Company's ongoing business requirements could also impact its liquidity. The principal sources of cash flow to WCC are distributions from WRI, ROVA, and WML, all of which are subject to the restrictions contained in their respective debt agreements.
On March 4, 2008, the Company completed the sale of $15.0 million in senior secured convertible notes to an existing shareholder. The notes mature five years from date of issuance, carry a 9.0% fixed annual interest rate (with interest payable in cash or in kind at the Company's option) and are convertible into the Company's common stock at the noteholders' option at an initial conversion price of $10.00 per share.
On March 17, 2008, Westmoreland Partners, a wholly owned subsidiary of the Company, completed a refinancing of ROVA's debt with The Prudential Insurance Company of America and Prudential Investment Management, Inc., or Prudential. The refinancing paid off all outstanding bank borrowings, bond borrowings, and the ROVA acquisition loan - all of which are described in the 2007 Form 10-K - and eliminated the need for the irrevocable letters of credit, which supported the Bond Borrowings. The Company received a $5.0 million net cash distribution from ROVA as part of the refinancing
As of May 9, 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 alternatives for providing additional liquidity during 2008.
The Company has engaged a large bank to assist the Company in refinancing its existing debt at WML, 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 WCC. While the Company has had 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.
The Company has also engaged a commercial insurance provider to assist the Company in meeting future bonding requirements. The new bonding agreement would be designed to provide the additional reclamation bonds required for new mining areas, and will initially require the Company to provide 100% cash collateral for new bonds. While the Company has had discussions with the insurance provider, there can be no assurance the Company will obtain additional bonding capacity on terms acceptable to it, or at all.

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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.
Factors Affecting our Liquidity
Our health benefit costs consist primarily of payments for postretirement medical and workers' compensation benefits. We are also obligated for employee pension, CBF, 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 postretirement medical benefit 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 postretirement medical benefit payments would increase annually through 2016 and then decline to zero over the next approximately sixty years as the number of eligible beneficiaries declines.
The following table shows the payments we made and the Medicare Part D subsidies we received in the first three months of 2008, and the expected payments and subsidies for 2008:

                                                   2008
                                                  First
                                                 Quarter          2008
                                                  Actual        Expected
                                                 Payments       Payments
                                                (Receipts)     (Receipts)
                                                      (In millions)
             Postretirement medical benefits      $   3.4       $   19.6
             Pension contributions                    0.6            3.2
             CBF premiums                             0.9            3.5
             Workers' compensation benefits           0.3            1.0
             Medicare D subsidies received           (0.1 )         (1.7 )

The WML term loan agreement requires quarterly interest and principal payments of approximately $5.2 million during the second and third quarters of 2008, and a $34.4 million final principal and interest payment in December 2008. This debt financing also requires that 25% of the excess cash flow, as defined, be set aside to fund the debt payment due in December 2008. Therefore, only 75% of WML's excess cash flow is available to the Company until this debt is paid off in 2008.
In 2004, WML also extended its revolving credit facility to 2007 and reduced the amount of the facility to $12.0 million. In December 2005, WML amended the revolving facility to increase the borrowing base to $20.0 million. The increase includes the ability to issue letters of credit up to $10.0 million, which WML expects to use for reclamation bond collateral requirements. In April 2008, the facility was amended again to extend its maturity to May 31, 2008. As of March 31, 2008, a letter of credit for $1.9 million was supported by WML's revolving credit facility, WML had borrowed $7.5 million against the facility and $10.6 million was available as of that date.

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The ROVA debt refinancing provided $107.0 million of fixed rate term debt with interest rates varying from 6.0% to 11.42%. The weighted average interest rate on the fixed rate term debt is 8.30% per annum. The payments required for the fixed rate term debt are $29.1 million in 2008, $22.3 million in 2009, $9.4 million in 2010, $8.0 million in 2011, $8.8 million in 2012, and $29.4 million thereafter. The term debt is to be fully repaid before the end of 2015.
The refinancing also provided $11.5 million in floating rate debt with a final maturity no later than January 31, 2011. Interest on the floating rate debt is payable quarterly at the three-month London Interbank Offering Rate (LIBOR) in effect for the quarter plus 4.50%. The payments required for the floating rate debt include excess quarterly distributions from ROVA and will vary each quarter. The company will not receive a distribution from ROVA until the principal balance of the floating rate debt is paid.
The refinancing provides for a $6.0 million revolving loan with a maturity of April 30, 2015. Interest on the revolving loan is payable quarterly at the three-month LIBOR rate in effect for the quarter plus 1.375%. No balance was outstanding on the revolving loan at March 31, 2008.
The fixed and the floating rate debt as well as the revolving loan are secured by a pledge of the quarterly cash distributions from ROVA.
On March 30, 2007, we assumed operations of our Absaloka Mine from WGI, and additionally 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, WGI released the $7.0 million reclamation escrow account to WRI, and WRI released WGI from its financial obligation to complete final reclamation of the mine. On October 1, 2007, WRI redeemed WGI's 20% ownership interest in WRI, leaving the Company as the sole shareholder in WRI. WRI made significant additional capital expenditures during 2007 and we expect we will need to make further investments in mine development projects, mining equipment and to support bonding requirements in the future.
On October 29, 2007, WRI executed a Business Loan Agreement, or Agreement, with First Interstate Bank. The Agreement provides WRI with term debt of $8.5 million and a revolving credit facility of $20.0 million. The term debt requires sixteen quarterly payments of principal and interest with the final payment due September 20, 2011. The revolving credit facilities mature October 28, 2008. Interest on both notes is payable at the prime rate (5.25% per annum at March 31, 2008). The two notes are collaterized by WRI's inventory, chattel paper, accounts receivable and equipment. The Agreement requires WRI to comply with certain covenants and minimum financial ratio requirements related to debt service coverage, tangible net worth and capital expenditures. WCC is guarantor of the notes. The Agreement replaces the revolving lines of credit of $14.0 million to WCC. The outstanding balance of $11.2 million on the WCC line of credit facility was fully repaid to First Interstate Bank on October 29, 2007. The outstanding balance on the revolver and term loan as of March 31, 2008, was $9.1 million and $8.0 million, respectively.
Our ongoing and future business needs may also affect liquidity. We do not anticipate that our revenues will diminish materially as a result of any future downturn in economic conditions because ROVA produces relatively low-cost power and most of our coal production is sold under long-term contracts, which help insulate us from unfavorable market developments. However, contract price reopeners, contract renegotiations, contract expirations or terminations and market competition could affect future coal revenues and our liquidity.

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Cash Balances and Available Credit
Consolidated cash and cash equivalents at March 31, 2008, totaled (in thousands):

             ROVA                                           $ 12,137
             Westmoreland Coal Company                         7,755
             Westmoreland Mining LLC                           2,650
             Westmoreland Risk Management                      2,316
             Other                                                55

             Total consolidated cash and cash equivalents   $ 24,913

The cash at Westmoreland Mining LLC is available to the Company through quarterly distributions, subject to the restrictions described above. The cash at Westmoreland Risk Management, our captive insurance subsidiary, is available to the Company through dividends. The Company will not receive a distribution from ROVA until the principal balance of the floating rate debt is repaid.
As of March 31, 2008, WML had $10.6 million of its $20.0 million revolving line of credit available to borrow. As of March 31, 2008, WRI had $4.9 million of its $14.0 million revolving line of credit available to borrow.
Restricted Investments
We had restricted cash and bond collateral, which were not classified as cash or cash equivalents, of $59.9 million at March 31, 2008. The restricted investments at March 31, 2008, included $12.8 million in ROVA's debt service accounts and prepayment accounts and $34.6 million in Westmoreland Mining's debt service reserve, long-term prepayment and reclamation escrow accounts, $14.3 million of which we have classified as non-current assets and $20.3 million of which we have classified as current assets. At March 31, 2008, our WRI reclamation, workers' compensation and postretirement medical benefit cost obligation bonds were collateralized by interest-bearing cash deposits of $12.5 million. In addition, we had accumulated reclamation deposits of $66.8 million at March 31, 2008, representing cash received from customers of the Rosebud Mine to pay for reclamation, plus interest earned on the investments.
Historical Sources and Uses of Cash
Cash provided by operating activities was $14.4 million for the first three months of 2008 compared to $19.3 million for the first three months of 2007. The increase in net loss of $18.8 million significantly contributed to the decrease in operating cash flows for the first three months of 2008. The increase in noncash charges, which includes depreciation, amortization, stock compensation, gain on sale of assets, non-cash interest expense (reflecting a conversion price lower than the fair market value of the common stock at issuance) recorded upon the issuance of the convertible debt with a beneficial conversion feature, and minority interest, to $21.0 million in 2008 from $5.2 million in 2007 partially offset the increase in the net loss. The majority of the increase in non-cash charges related to the $7.7 million of non-cash interest expense recorded in first quarter 2008 for the convertible debt's beneficial conversion feature. Also contributing to the increase in net non-cash charges was the gain we recognized from the sale of our royalty interest at the Caballo Mine which occurred in the first quarter of 2007. We had no comparable gains or losses on the sale of assets during the first quarter 2008. Cash provided by operating activities for the first three months of 2008 reflects $7.5 million of revenue deferred under ROVA's long-term sales agreements compared to $7.3 million for the first three months of 2007. Changes in working capital decreased cash provided by operating activities in the first three months of 2008 by $3.0 million compared to a decrease in cash from changes in working capital of $1.7 million in the first three months of 2007.
Our working capital deficit was $84.7 million at March 31, 2008, compared to $94.7 million at December 31, 2007. The decrease in our working capital deficit resulted from an

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increase in cash and cash equivalents, accounts receivable and other current assets in the amount of $5.2 million, $7.7 million and $2.0 million, respectively. The decrease was partially offset by decreases in inventories and increases in production taxes in the amount of $2.9 million and $3.7 million, respectively during the first quarter.
Cash provided from investing activities during the first three months ended March 31, 2008, was $10.8 million compared to $6.4 million for the first three months ended March 31, 2007. The increase in cash from investing activities was driven by the $15.4 million reduction in our restricted cash due to the ROVA debt refinancing completed during the first quarter of 2008. Cash provided by investing activities in the first three months of 2007 included $12.7 million of proceeds from the sale of our royalty interest in the Caballo Mine in Wyoming which was offset by the $3.4 million paid in connection with the assumption of the Absaloka mining operations from WGI. Additions to property, plant and equipment increased in the first three months of 2008 to $4.8 million compared to $3.7 million in the first three months of 2007.
We used $20.0 million of cash for our financing activities in the first three months of 2008 compared to $26.7 million in the first three months of 2007. This decrease was the result of net borrowings of $2.4 million on our revolving lines of credit for the first quarter of 2008 compared to net repayments of $5.4 million on the revolving lines of credit for the first quarter of 2007.
Severance Benefits Payable to Former CEO In May 2007, Christopher K. Seglem was terminated as Chairman, CEO and President of the Company. Mr. Seglem asserts that he 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 differences in interpretation in the Executive Severance Policy through discussions but no assurances can be given that the differences 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 severance policy were to be upheld by a court, he would be entitled to severance payments of approximately $3.8 million plus reimbursement of his attorney's fees. The Company has recorded a reserve of $1.8 million for this matter.

RESULTS OF OPERATIONS
Quarter Ended March 31, 2008, Compared to Quarter Ended March 31, 2007.
   Coal Operations
   The following table shows comparative coal revenues, sales volumes, cost of
sales and percentage changes between the periods:

                                                   Quarter ended March 31,
                                                     2008            2007        Change

   Revenues - thousands                          $   108,342      $ 103,080         5 %
   Volumes - millions of equivalent coal tons            7.7            7.5         3 %
   Cost of sales - thousands                     $    87,402      $  83,050         5 %

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Tons of coal sold increased by approximately 0.2 million tons in the first quarter of 2008 from the first quarter of 2007.
Our coal revenues increased by approximately $5.3 million from the first quarter of 2007 to the first quarter of 2008. This overall increase was due to an overall 3.0% increase in pricing as a result of contract renewals.
Our coal segment's cost of sales in the first quarter of 2008 increased by approximately $4.4 million from the first quarter of 2007. This increase was driven by increases in production costs due to the increase in tons sold, fuel costs, and accretion costs due to increases in our asset retirement liabilities, which increased at the end of 2007 as a result of updated engineering studies.
Our coal segment's depreciation, depletion, and amortization expense in the first quarter of 2008 increased by approximately $1.4 million from the first quarter of 2007. This increase resulted primarily from increases in capital expenditures and capital leases for equipment at the mines, as well as from increased depletion expenses from asset retirement cost assets, which increased at the end of 2007 as a result of updated engineering studies.
Our coal segment's selling and administrative expenses in the first quarter of 2008 decreased by $0.4 million from the first quarter of 2007. This decrease was primarily the result of reduced labor costs as a result of the implementation of our restructuring plan.
Independent Power
For the first quarter of 2008 and 2007, ROVA produced 436,000 and 427,000 MW hours, respectively, and achieved average capacity factors of 95.0% and 94.0%, respectively.
Our independent power revenues in the first quarter of 2008 increased by approximately $1.3 million from the first quarter of 2007. This revenue increase was the result of an increase in MW hours sold during the quarter as well as a . . .