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 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:
• 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, or the Company, or Westmoreland, or WCC, 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 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 mining debt at Westmoreland Mining LLC, or WML, which owns the Rosebud, Jewett, Beulah and Savage Mines (see Note 7); payments due on the project debt payable by our 230 MW Roanoke Valley power plant, or ROVA (see Note 7); payments due on the term loan and revolving credit facility used to acquire the minority interest in Westmoreland Resources, Inc., or WRI, which owns the Absaloka Mine; 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. 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.
In the first six months of 2008, the Company took three significant steps to improve its liquidity.
First, 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.
Second, 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, and eliminated the need for the irrevocable letters of credit, which supported the bond borrowings.
Third, on June 26, 2008, WML completed a refinancing of its term debt. On that date, WML entered into a note purchase agreement with institutional investors under which it sold $125.0 million of secured notes. These notes bear interest at a rate of 8.02% per annum. Also on June 26, 2008, WML amended its Revolving Credit Agreement with its lenders, which increased the facility to an amount not to exceed $25.0 million and extended its term through 2013.
These three steps increased consolidated working capital by $85.9 million from December 31, 2007 to June 30, 2008.
The Company is pursuing additional alternatives in its efforts to continue to improve its liquidity during the remainder of 2008.
WRI's revolving credit facility matures October 28, 2008. The Company is currently working to renew that facility, and may pursue a larger overall credit facility at WRI. The Company is also evaluating potential sale-leaseback transactions for some of its equipment used at the mine.
The Company is also pursuing alternatives to meet future reclamation bond requirements with reduced amounts of cash collateral as it enters new mining areas.
WCC is also attempting to improve its liquidity through the operating performance of its mines. The Company believes that increases in tons produced and sold and productivity, and its continued focus on cost control at WCC's mining operations during the second half of 2008 should also improve the Company's liquidity.
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 Company is also evaluating its overall mining investment opportunities and may consider other alternatives to raise additional capital and improve its liquidity during 2008 or 2009.
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 extend its line of credit, improve the operating performance of its mines, finance the bonding requirements for its new mining areas, or sell some of its assets to meet its obligations. The Company's Form 10-K for the period ended December 31, 2007 contains a going concern opinion in our independent registered public accounting firm's report.

Factors Affecting our Liquidity
Pension and Heritage Health Benefit Costs 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 to former employees who worked in our 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.
As part of the WML refinancing, we are required by loan covenants to make additional pension contributions in 2008 to achieve a 90% funding status. We estimate that we will be required to make payments of approximately $3.2 million in the third quarter of 2008.
The following table shows the actual payments we made and the Medicare Part D subsidies we received in the first six months of 2008, and the expected payments and subsidies for the entire 2008 year:

                                            First Six Months         Entire
                                                 of 2008           2008 Year
                                                 Actual             Expected
                                              Payments and        Payments and
                                               (Receipts)          (Receipts)
                                                      (In millions)
         Postretirement medical benefits     $         7.9         $     19.8
         Pension contributions                         1.3                5.2
         CBF premiums                                  1.8                3.5
         Workers' compensation benefits                0.5                1.0
         Medicare D subsidies received                (0.8 )             (1.7 )

WML Debt
On June 26, 2008, WML completed a refinancing of its debt. The refinancing increased WML's outstanding debt from $89.0 million to $125.0 million, reduced WML's restricted cash from $31.5 million to $5.0 million, and modified maturity dates and interest rates. The Company received an $8.5 million cash distribution from WML as part of the refinancing.
The refinancing permits WML to make quarterly distributions to WCC. WML may distribute up to 100% of its excess cash flow, as that term is defined in the note purchase agreement, after fully funding the debt service reserve account and reserving $1.0 million per quarter for working capital purposes. As of June 30, 2008, the debt service reserve account was fully funded at $5.0 million.
The WML refinancing provides for $125.0 million of fixed rate term debt. The term debt bears interest at 8.02% per annum, payable quarterly. The principal payments required for the term debt are $7.5 million in 2011, $14.0 million in 2012, $18.0 million in 2013, $18.0 million in 2014, $20.0 million in 2015, and $47.5 million thereafter. The term debt is payable in full on March 31, 2018.

The refinancing also amended the 2001 Revolving Credit Agreement, or the Revolver, by increasing the borrowing limit from $20.0 million to $25.0 million and extending the maturity date to June 26, 2013. WML has two interest rate options to choose from on the Revolver. The Base Rate option bears interest at a base rate plus 0.50% and is payable quarterly. The Libor Rate option bears interest at the Libor rate plus 3.0%. In addition, a commitment fee of 0.50% of the average unused portion of the available Revolver is payable quarterly. As of June 30, 2008, a letter of credit for $1.9 million was supported by WML's Revolver. No balance was outstanding on the Revolver at June 30, 2008.
The term debt and Revolver are secured by substantially all assets of WML, Westmoreland Savage Corporation, or WSC, Western Energy Company, or WECO, and Dakota Westmoreland Corporation, or DWC; the Company's membership interest in WML; and the stock of WSC, WECO and DWC. WECO, DWC, and WSC have guaranteed WML's obligations with respect to the term debt and under the Revolver. WML is required to comply with certain loan covenants related to liquidity, indebtedness, and capital investments. As of June 30, 2008, WML was in compliance with such covenants.
ROVA Debt
The March 17, 2008, ROVA debt refinancing provided for approximately $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 principal 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 and $8.8 million in 2012. The term debt is to be fully repaid before the end of 2015.
The refinancing also provided for approximately $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%. Payments required on the floating rate debt are to be made from quarterly distributions from ROVA, if any, 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 provided 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 June 30, 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. ROVA is required to comply with certain loan covenants related to interest and fixed charge coverage. As of June 30, 2008, ROVA was in compliance with such covenants.
Absaloka Mine Contract Acquisition and WRI Debt 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. 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

facility matures October 28, 2008, and the Company is currently working to renew the facility. Interest on both the term debt and the revolving credit facility is payable at the prime rate (5.0% per annum at June 30, 2008). The two debt instruments 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 debt under the Agreement. The outstanding balance on the revolver and term loan as of June 30, 2008, was $8.3 million and $7.4 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. Cash Balances and Available Credit
Consolidated cash and cash equivalents at June 30, 2008, totaled (in thousands):

             WML                                            $ 53,711
             ROVA                                             11,625
             Westmoreland Risk Management                      2,614
             Westmoreland Coal Company                         1,059
             Other                                                22

             Total consolidated cash and cash equivalents   $ 69,031

The cash at WML is available to the Company through quarterly distributions, subject to the restrictions described above. The cash at ROVA 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.
As of June 30, 2008, WML had $23.1 million of its $25.0 million revolving line of credit available to borrow. As of June 30, 2008, WRI had $5.7 million of its $14.0 million revolving line of credit available to borrow. As of June 30, 2008, ROVA had all of its $6.0 million revolving line of credit available to borrow.
Restricted Investments and Bond Collateral Restricted investments and bond collateral, which were not classified as cash or cash equivalents, as of June 30, 2008 and December 31, 2007, are shown in the table below:

                                                                 June 30,          December 31,
                                                                   2008                2007
                                                                         (In thousands)
ROVA debt service and prepayment accounts                        $  13,544        $       30,840

WML debt service, long-term prepayment and reclamation
escrow                                                              10,108                33,271

WRI reclamation                                                      5,584                 5,469

Cash deposits for interest-bearing worker's compensation
and postretirement medical benefit cost obligation bonds             7,162                 6,924


Restricted investments and bond collateral                       $  36,398        $       76,504

In addition, we had accumulated deposits of $67.7 million at June 30, 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
The following is a summary of cash provided by or used in each of the indicated types of activities:

                                               Six Months Ended June 30
                                                 2008             2007
                                                    (In thousands)
              Cash provided by (used in):
              Operating activities           $   21,210        $  44,540
              Investing activities               25,856           (3,606 )
              Financing activities                2,229          (27,832 )

Cash provided by operating activities decreased $23.3 million in the six months ended June 30, 2008 compared to the six months ended June 30, 2007 primarily as a result of a $25.8 million increase in our net loss. In 2008, the Company's operating cash flows were also negatively impacted by $2.6 million in severance payments associated with our restructuring plan. Our 2007 operating cash flows benefitted from $5.6 million of cash received from the black lung trust fund.
Cash provided by investing activities increased $29.5 million in the six months ended June 30, 2008 compared to the six months ended June 30, 2007. This increase was primarily the result of the reduction in restricted investments and bond collateral from the ROVA and WML debt refinancings.
Cash used in financing activities decreased by $30.1 million in the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The decrease is a result of the ROVA and WML debt refinancings, which provided the long-term borrowings in 2008, which offset previous debt repayments. In 2007, $30.5 million of long-term debt payments were made during the first six months with no corresponding borrowings during the period.
The Company's working capital at June 30, 2008, increased by $85.9 million to approximately $2.9 million compared to an $83.0 million deficit at December 31, 2007. The increase in working capital was primarily a result of the ROVA and WML debt refinancing which increased cash and cash equivalents by $49.3 million and reduced current installments of long-term debt by $46.1 million and amounts outstanding under the Company's revolving lines of credit by $5.9 million.

RESULTS OF OPERATIONS
Quarter Ended June 30, 2008, Compared to Quarter Ended June 30, 2007.
   Coal Operations
   The following table shows comparative coal revenues, sales volumes, cost of
sales and percentage changes between the periods:

                                                                 Quarter Ended June 30,
                                                               2008                   2007              Change

Revenues - thousands                                      $     92,471          $      101,758             -9 %
Volumes - millions of equivalent coal tons                         6.3                     7.0            -10 %
Cost of sales - thousands                                 $     79,598          $       84,389             -6 %

Tons of coal sold decreased by approximately 0.7 million tons in the second quarter of 2008 from the second quarter of 2007. The decrease was the result of reduced tons sold at our Absaloka Mine, due to the mine's work stoppage and unscheduled customer outages.
In June 2008, during negotiation over a collective bargaining agreement to replace the previous agreement that expired in March 2008, represented employees at the Absaloka Mine imposed a ten-day work stoppage. On June 17, 2008, the Absaloka Mine resumed full operation, after the Company and the Union entered into a new three-year agreement.
Our coal revenues decreased by approximately $9.3 million from the second quarter of 2007 to the second quarter of 2008. The decrease was the result of reduced tons described above and the impact of the terms of the new cost-plus contract at our Jewett Mine.
Our coal segment's cost of sales in the second quarter of 2008 decreased by approximately $4.8 million from the second quarter of 2007. This decrease was also driven primarily by reduced tons sold at our Absaloka Mine, again due to the mine's work stoppage and unscheduled customer outages. The new contract at our Jewett Mine also reduced our cost of sales as our customer accepted responsibility for capital equipment, inventory, and reclamation costs. These cost decreases were partially offset by increases in fuel and other variable costs at our Rosebud and Beulah Mines.
Our coal segment's depreciation, depletion, and amortization expense in the second quarter of 2008 increased by less than $0.1 million from the second quarter of 2007. This small increase resulted from an increase in our depreciation at our Rosebud Mine from new capital investments and was partially offset by a decrease in our depreciation at our Jewett Mine as our customer accepted responsibility for capital purchases under the new cost-plus contract.
Our coal segment's selling and administrative expenses in the second quarter of 2008 decreased by $2.0 million from the second quarter of 2007. This decrease was primarily the result of reduced labor, professional fees, and information . . .