Summary of WESTMORELAND COAL CO

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, or industry results, 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, 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 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 receipt of a favorable private letter ruling from the IRS related to the Indian Coal Production Tax Credits; the ability to reinvest cash, including cash that has been deposited in reclamation accounts, at an acceptable rate of return; the cost of meeting future bonding requirements for our new mining areas; 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; 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 compared to competitors who sell more of their production on the spot market and under short-term contracts. We also sell under short-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:
• renewing the Company's WRI revolving line of credit and obtaining additional sources of financing;

• 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 the notes to the financial statements included in this Form 10-Q, in this Management's Discussion and Analysis of Financial Condition and Results of Operations, and under "Risk Factors" included herein and in our Annual Report on Form 10-K for the year ended December 31, 2007, or 2007 10-K.

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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 accompanying consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from the outcome of uncertainty regarding the Company's ability to extend the line of credit at Westmoreland Resources, Inc., or WRI, 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 major factors impacting the Company's liquidity are:
• Renewal of the WRI revolving credit facility at its original $20 million level.

• Generation of sufficient dividends by the Company's operations to cover the parent company's heritage health benefit, pension, and general corporate obligations.

• Limitations under our current debt agreements on the ability of WML and ROVA to pay dividends to the parent company. WML is required to maintain reserve accounts at specified levels, and the amount of dividends paid by WML to the parent company is subject to restrictions based on changes in reserve account balances or results of operations. No dividends may be paid by ROVA until its floating rate debt is repaid, which we expect should occur during the first half of 2009. The distribution of excess cash from WRI and WRM is subject to fewer restrictions and can generally be advanced to the parent company at any time.

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

• Capital expenditures required for possible expansion of the WRI mine.

The principal sources of cash flow to WCC are distributions from WRI, ROVA, and WML, all of which are subject to restrictions contained in their respective debt agreements. Distributions from ROVA and WML are made quarterly or semiannually and are subject to compliance with certain funding conditions, whereas distributions from WRI may be made when available. Accordingly, WCC has relied significantly on distributions from WRI to meet its financial obligations, principally heritage health benefit and pension costs, and corporate costs.
On October 28, 2008, WRI's $20.0 million revolving credit facility matured and the facility was extended on an interim basis at a maximum borrowing level of $10.0 million through November 28, 2008. WRI has reached an understanding with its lenders regarding the renewal of the line of credit for $20.0 million, pending final bank approval later in November, 2008. There can be no assurances that WRI will be able to obtain the financing on terms acceptable to it, or at all.
Even with a renewal of WRI's line of credit at the $20 million level, the Company will continue to seek additional sources of liquidity. The Company projects that, if it receives a favorable private letter ruling from the IRS on its Indian Coal Tax Production Credit transactions, even in the absence of obtaining additional liquidity, it would be able to meet its cash flow needs for the next twelve months through the deferral of certain capital investments and bonding deposits associated with new mine development. If the Company does not receive a favorable private letter ruling or is unable to postpone certain investments, and is unable to obtain additional financing or sell some of its assets, the Company could be unable to pay its heritage health benefit, pension, and corporate obligations as they come due.
In 2008, the Company has taken four significant steps to improve its liquidity.

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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 $73.9 million from December 31, 2007 to September 30, 2008.
Fourth, on October 16, 2008, WRI entered into a series of transactions in order to monetize the Indian Coal Production Tax Credits available to it. If a favorable private letter ruling is received on the transactions from the Internal Revenue Service prior to April 1, 2009, the Company could realize net cash flows of up to $37.1 million before taxes through 2012. See Note 19 "Subsequent Event - Indian Coal Tax Credit." In addition to its efforts to renew the WRI revolving credit facility, the Company is pursuing additional alternatives in its efforts to continue to improve its liquidity during the remainder of 2008 and 2009.
The Company is in active discussions with potential buyers regarding the sale of certain assets, but it is not certain such sale could be completed in the time required to meet the Company's cash needs. 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 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 by improving the operating performance of its mines. The Company believes that increases in tons produced and sold, improvements in productivity and its continued focus on cost control at WCC's mining operations during the remainder of 2008 and in 2009 should improve the Company's liquidity.
WRI is evaluating potential sale-leaseback transactions for some of the equipment used at the Absaloka Mine.
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, Combined Benefit Fund, or 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

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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 the loan covenants to make additional pension contributions in 2008 to achieve a 90% funding status. We made payments of $3.2 million to our pension plans in the third quarter of 2008 and estimate that we will be required to make payments of approximately $0.4 million in the fourth quarter of 2008. Under the provisions of the agreement, the funding status of the plans is determined on January 1 of each year. We are required to make payments to the pension plans to fund any shortfall under these provisions by September 15 of each year. Based on the significant decline in the value of pension assets since the beginning the year, we may be required to make additional future contributions under these provisions to the plans, if the value of the pension assets does not increase by the January 1, 2009, determination date. The amount of such required contributions could be significant. At September 30, 2008, the total value of the pension assets was $47.3 million as compared to $51.0 million at December 31, 2007.
The following table shows the actual payments we made and the Medicare Part D subsidies we received in the first nine months of 2008, and the expected payments and subsidies for the entire 2008 year:

                                           First Nine Months         Entire
                                                of 2008             2008 Year
                                                 Actual             Expected
                                              Payments and        Payments and
                                               (Receipts)          (Receipts)
                                                      (In millions)
        Postretirement medical benefits      $        13.9         $      20.7
        Pension contributions                          4.5                 4.9
        CBF premiums                                   2.6                 3.5
        Workers' compensation benefits                 0.8                 1.0
        Medicare D subsidies received                 (1.0 )              (1.7 )

Absaloka Mine Acquisition and WRI Debt On March 30, 2007, we assumed operations of our Absaloka Mine from Washington Group Incorporated, or 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 29, 2007, WRI executed a Business Loan Agreement, or Agreement, with First Interstate Bank, Billings, Montana. The Agreement provided WRI with term debt of $8.5 million and an initial 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 matured October 28, 2008 and on that date, First Interstate Bank extended the facility at a maximum borrowing level of $10.0 million with a maturity date of November 28, 2008. Interest on both the term debt and the revolving credit facility is payable at the prime rate (5.0% per annum at September 30, 2008). The two debt instruments are collateralized by WRI's inventory, chattel paper, accounts and notes receivable, and equipment.

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WCC is the guarantor of the debt under the Agreement and its guaranty is secured by a pledge of WCC's interest in WRI. The Agreement requires WRI to comply with certain covenants and minimum financial ratio requirements related to debt coverage, tangible net worth and capital expenditures. As of September 30, 2008, WRI was in compliance with such covenants.
The Company is in discussions with First Interstate Bank and other financing sources regarding renewal of the revolving credit agreement. If WRI is unsuccessful in renewing the facility, it will be required to repay outstanding borrowings. If WRI is unable to renew the facility, lenders will be entitled to foreclose on the collateral. See Note 1 "Nature of Operations and Liquidity" to our Consolidated Financial Statements.
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 September 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 (8.0% per annum at September 30, 2008). The London Interbank Offering Rate, or LIBOR, option bears interest at LIBOR plus 3.0%. In addition, a commitment fee of 0.50% of the average unused portion of the available Revolver is payable quarterly (6.7% per annum at September 30, 2008). As of September 30, 2008, a letter of credit for $1.9 million was supported by WML's Revolver.
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 September 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,

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$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 term debt is payable quarterly at the three-month LIBOR rate plus 4.50% (8.55% per annum at September 30, 2008). 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 balance of the floating rate debt at September 30, 2008, was $5.8 million.
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 plus 1.375% (5.43% per annum at September 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 September 30, 2008, ROVA was in compliance with such covenants.
Economic Trends Affecting the Coal Industry and the Company Our ongoing and future business needs may also affect liquidity. We do not anticipate that our revenues will diminish materially as a result of most of our coal and power 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 September 30, 2008, totaled (in thousands):

             WML                                            $ 43,320
             ROVA                                              6,357
             Westmoreland Risk Management                      3,127
             Other                                               265

             Total consolidated cash and cash equivalents   $ 53,069

Lines of Credit
   Amounts outstanding and available to borrow under the revolving lines of
credit of the Company's subsidiaries at September 30, 2008 (in millions):

                 Total Line of         Amounts         Letters of       Available to
                    Credit           Outstanding         Credit            Borrow

         WML    $          25.0     $           -     $        1.9     $         23.1
         WRI               20.0              11.9                -                8.1
         ROVA               6.0                 -                -                6.0

                $          51.0     $        11.9     $        1.9     $         37.2

The cash and available credit at WML and ROVA are available to the Company through quarterly distributions. However, the loan agreements of WML and ROVA require debt service accounts and impose timing and other restrictions on the ability of ROVA and WML to distribute funds to WCC. WRI can distribute cash available from its revolving line of credit to the Company through dividends. Because the WRI loan agreement imposes fewer restrictions on the ability of

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WRI to make distributions to WCC, WRI has been a significant source of liquidity for WCC. The cash at Westmoreland Risk Management, our captive insurance subsidiary, is available to the Company through dividends, subject to maintaining a statutory minimum level of capital.
On October 28, 2008, WRI's revolving credit facility matured and was extended on an interim basis at a maximum borrowing level of $10.0 million through November 28, 2008. See Note 1 "Nature of Operations and Liquidity" to our Consolidated Financial Statements.
Restricted Investments and Bond Collateral Restricted investments and bond collateral as of September 30, 2008 and December 31, 2007, are shown in the table below:

                                                                   September 30,          December 31,
                                                                       2008                   2007
                                                                             (In thousands)
ROVA debt service and prepayment accounts                         $        16,490        $       30,840

WML debt service, long-term prepayment and reclamation
escrow                                                                      9,982                33,271

WRI reclamation                                                             5,630                 5,469

Cash deposits for interest-bearing worker's compensation and
postretirement medical benefit cost obligation bonds                        7,420                 6,924


Restricted investments and bond collateral                        $        39,522        $       76,504

In addition, we had accumulated deposits of $68.6 million at September 30, 2008, representing cash received from customers of the Rosebud Mine plus interest earned on the deposits, to pay for reclamation. Off-Balance Sheet Arrangements
At September 30, 2008, we had no existing off-balance sheet arrangements, as defined under SEC rules, that have or are reasonably likely to have a material current or future effect on our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources. 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:

. . .