Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements." Forward-looking statements can be identified by words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects" and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about our expectation that our cash from operations, cash on hand and available borrowing capacity will be sufficient to meet our investing, financing, and working capital requirements for the foreseeable future, our anticipated cash spend on heritage health and pension obligations, the timing of when our customer's plant will be back online, the likelihood we will have Excess Cash Flow, and the possibility we may from time to time use available cash to repurchase our 10.75% Senior Notes on the open market.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include political, economic, business, competitive, market, weather and regulatory conditions and the following:

• unforeseen liabilities associated with the Kemmerer acquisition or the risk that liabilities assumed in the Kemmerer acquisition will exceed our current estimates;

• effective management of the Company's expanded operations following the Kemmerer acquisition;

• risks associated with our estimated postretirement medical benefit and pension obligations, including those we are assuming in the Kemmerer acquisition, and the impact of regulatory changes on those obligations;

• changes in our black lung obligations, including those we are assuming in the Kemmerer acquisition, changes in our experience related to black lung claims, and the impact of the Patient Protection and Affordable Care Act;

• our potential inability to maintain compliance with debt covenant requirements;

• competition with natural gas and other non-coal energy resources, which may be increased as a result of energy policies, regulations and subsidies or other government incentives that encourage or mandate use of alternative energy sources;

• coal-fired power plant capacity, including the impact of environmental regulations, energy policies and other factors that may cause utilities to phase out or close existing coal-fired power plants or reduce construction of any new coal-fired power plants;

• railroad and other transportation performance, costs and availability;

• the potential inability of our subsidiaries to pay dividends to us due to restrictions in our debt arrangements, reductions in planned coal deliveries or other business factors;

• our potential inability to enter into new coal supply agreements with existing customers due to the unfavorable result of competitive bid processes or the shutdown of a power facility due to new environmental legislation or regulations;

• risks associated with the structure of contracts with our coal suppliers and power purchaser at our North Carolina power facility, which could dramatically affect the overall profitability of the generating units;

• the effect of Environmental Protection Agency inquiries and regulations on the operations of our North Carolina power facility;

• the effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers, including unplanned outages at our customers due to the impact of weather-related variances or catastrophic events;

• the potential that insurance proceeds from our business interruption claim relating to the unexpected shutdown of one of the Absaloka mine customers will not be sufficient to cover our losses associated with the business interruption;

• future legislation and changes in regulations, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases; and

• the other factors that are described in "Risk Factors" under Part I, Item 1A of the 2011 Form 10-K and in subsequent Quarterly Reports on Form 10-Q.

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it was made. Factors or events that could cause our actual results to differ may emerge from time-to-time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

Overview

Westmoreland Coal Company is an energy company whose operations include six surface coal mines in Montana, Wyoming, North Dakota and Texas, and two coal-fired power-generating units in North Carolina. We sold 21.8 million tons of coal in 2011. Our two principal operating segments are our coal and power segments. Our two non-operating segments are our heritage and corporate segments. Our heritage segment primarily includes the costs of benefits we provide to former mining operation employees and our corporate segment consists primarily of corporate administrative expenses.

We are a holding company and conduct our operations through subsidiaries. We have significant cash requirements to fund our ongoing heritage health benefit costs and corporate overhead expenses. The principal sources of cash flow to us are distributions from our principal operating subsidiaries.

Beulah Mine Coal Supply Contract

Our coal supply contract with Coyote Station, located adjacent to our Beulah Mine, expires in May 2016.

On May 3, 2012, Coyote Station informed us they are entering into a mine development agreement with another provider and on October 15, 2012, Coyote Station entered into a coal supply agreement with that provider. As a result, Coyote Station will likely not purchase coal from our Beulah Mine after the expiration of our current contract. Based on the uncertainty of securing a new contract, we revised various accounting estimates beginning in the fourth quarter of 2011 to reflect the impact on mining operations of the current contract's expiration in 2016. These changes resulted in revised depreciable asset and coal reserve lives and asset retirement obligations.

For the past several years, the Beulah Mine has averaged 2.4 million tons of coal sold per year to Coyote Station. We are currently considering strategic alternatives for our Beulah Mine, which also provides approximately 0.5 million tons of coal to the Heskett Station power plant on an annual basis.

We will continue to evaluate the effect of this development and potential strategic alternatives on various employment-related liabilities, which could result in revised accounting estimates related to those liabilities in future periods.

Kemmerer Mine Acquisition and Add-On Notes

On December 23, 2011, we entered into an agreement with Chevron Mining Inc. to acquire the Kemmerer surface coal mine located in Kemmerer, Wyoming. We closed this acquisition on January 31, 2012. This transaction included approximately 107 million tons of total proven or probable coal reserves as of December 31, 2011. The Kemmerer Mine has an estimated life at current production levels of approximately 22 years. The total consideration paid by us to acquire the Kemmerer Mine included $76.5 million in cash and our assumption of approximately $88.0 million in liabilities, including retiree medical benefits for current union employees, the underfunded portion of the pension and reclamation obligations.

In January 2012, we completed the private placement of $125.0 million of senior secured notes due in 2018 ("Add-On Notes"), which notes were additional notes issued pursuant to the existing Parent Notes indenture (the "Parent Notes"), collectively referred to as the "10.75% Senior Notes". The net proceeds from the Add-On Notes financed the $76.5 million cash portion of the purchase price for the acquisition of the Kemmerer Mine and $24.7 million to satisfy the cash bonding obligations for the Kemmerer Mine. The net proceeds also covered the cash transaction costs associated with the Kemmerer acquisition and the Add-On Notes offering of approximately $6.7 million. The remaining net proceeds were partially used to fund the initial operating expenses associated with the Kemmerer Mine. The use of proceeds from the offering of Add-On Notes to finance the acquisition of the Kemmerer Mine is shown in the table below (in millions):

            Proceeds received from the Add-On Notes           $ 125.0
            Cash consideration for the Kemmerer acquisition     (76.5 )
            Reclamation bonding collateral                      (24.7 )
            Transaction fees and expenses                        (6.7 )
            Initial Purchaser's discount                         (5.6 )

            Remaining proceeds                                $  11.5

Xcel Fire

In November 2011, an explosion and subsequent fire occurred at Unit 3 of Xcel Energy's Sherburne County Generating Station, or Unit 3, which is the largest customer of our Absaloka Mine. Xcel indicated that Unit 3 will be offline for an extended period while Xcel investigates the source of the explosion and the extent of the damage. The current estimate is that Unit 3 will be back online by the end of the first quarter of 2013. Westmoreland Resources, Inc., or WRI, our wholly owned subsidiary that operates the Absaloka Mine, maintains business interruption insurance coverage and submitted a notice of loss to its insurance carriers. Our insurance carriers have accepted liability under the policy for the business interruption claim and we have started to receive cash proceeds. We recognize income as business interruption losses are incurred and reimbursement is virtually assured and have recognized $3.3 million and $11.9 million of income for the three and nine months ended September 30, 2012, respectively.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011

Summary

The following table shows the comparative consolidated results and changes
between periods:



                                                            Three Months Ended September 30,
                                                                                  Increase (Decrease)
                                                   2012           2011              $               %
                                                                     (In thousands)
Revenues                                         $ 161,332      $ 132,449      $    28,883          21.8 %
Net income applicable to common shareholders         7,282          2,389            4,893         204.8 %
Adjusted EBITDA(1)                                  35,520         24,157           11,363          47.0 %

(1) Adjusted EBITDA, a non-GAAP financial measure, is defined and reconciled to net income (loss) at the end of this "Results of Operations" section.

Our third quarter 2012 revenues increased primarily due to a $30.0 million increase in our coal segment revenues mostly due to the Kemmerer acquisition, which was partially offset by a customer shutdown at our Absaloka Mine as a result of an accident at the customer's facility as explained above as well as reduced tonnage demand due to reduced demand for power and increased wind generation. The increase in our coal segment revenues was offset by a $1.1 million decrease in our power segment revenues due to unplanned outages.

Our third quarter 2012 net income applicable to common shareholders increased by $4.9 million. The primary factors, in aggregate, driving this increase in net income were:

                                                                     Three Months
                                                                        Ended
                                                                  September 30, 2012
                                                                    (In millions)
Increase in our coal segment operating income
primarily due to the Kemmerer acquisition                        $                8.3
Increased losses attributable to noncontrolling
interest related to increased losses from a partially
owned consolidated coal segment subsidiary                                        1.1
Increase due to other factors                                                     0.3
Increase in interest expense primarily due to the
offering of the Add-On Notes                                                     (3.4 )
Decrease in our power segment operating income
primarily due to unplanned outages                                               (0.7 )
Decrease in our corporate segment operating income
primarily due to higher long-term compensation
expenses                                                                         (0.7 )

                                                                 $                4.9

Coal Segment Operating Results

The following table shows comparative coal revenues, operating income, Adjusted
EBITDA and sales volume and percentage changes between periods:



                                                  Three Months Ended September 30,
                                                                      Increase (Decrease)
                                          2012          2011             $              %
Revenues (in thousands)                 $ 138,798     $ 108,823     $     29,975        27.5 %
Operating income (in thousands)            18,025         9,679            8,346        86.2 %
Adjusted EBITDA (in thousands)(1)          34,584        22,070           12,514        56.7 %
Tons sold-millions of equivalent tons         6.0           6.0               -           -  %

(1) Adjusted EBITDA, a non-GAAP financial measure, is defined and reconciled to net income (loss) at the end of this "Results of Operations" section.

Our third quarter 2012 coal segment revenues and operating income increased primarily due to the Kemmerer acquisition, which was partially offset by a customer shutdown at our Absaloka Mine as a result of an accident at the customer's facility as explained above as well as reduced tonnage demand due to reduced demand for power and increased wind generation. Business interruption insurance proceeds have partially offset the decrease in operating income that was due to the accident and have been reported in Other operating income. Overall tons sold remained comparable to the prior year's quarter; however tons sold decreased at our Absaloka Mine which was offset with tons sold at our Kemmerer Mine.

Power Segment Operating Results

The following table shows comparative power revenues, operating income, Adjusted
EBITDA, production and percentage changes between periods:



                                        Three Months Ended September 30,
                                                           Increase (Decrease)
                                 2012         2011            $              %
                                                 (In thousands)
          Revenues             $ 22,534     $ 23,626     $    (1,092 )       (4.6 )%
          Operating income        4,023        4,694            (671 )      (14.3 )%
          Adjusted EBITDA(1)      6,742        7,441            (699 )       (9.4 )%
          Megawatts hours           417          445             (28 )       (6.3 )%

(1) Adjusted EBITDA, a non-GAAP financial measure, is defined and reconciled to net income (loss) at the end of this "Results of Operations" section.

Our third quarter 2012 power segment revenues, operating income and megawatt hours decreased due to unplanned outages.

Heritage Segment Operating Results

The following table shows comparative detail of the heritage segment's operating
expenses and percentage changes between periods:



                                                  Three Months Ended September 30,
                                                                     Increase (Decrease)
                                           2012         2011           $               %
                                                           (In thousands)
Health care benefits                     $   2,850     $ 2,445     $     405           16.6 %
Combined benefit fund payments                 561         686          (125 )        (18.2 )%
Workers' compensation benefits                 121         162           (41 )        (25.3 )%
Black lung benefits                            349         603          (254 )        (42.1 )%

Total heritage health benefit expenses       3,881       3,896           (15 )         (0.4 )%
Selling and administrative costs               268         180            88           48.9 %

Heritage segment operating loss          $   4,149     $ 4,076     $      73            1.8 %

Our third quarter 2012 heritage operating expenses were comparable to the third quarter of 2011.

Corporate Segment Operating Results

Our corporate segment operating expenses for the third quarter of 2012 increased $0.7 million primarily due to higher long-term compensation expenses.

Nonoperating Results (including interest expense, interest income, other income
(loss), income tax benefit, and net loss attributable to noncontrolling interest)

Our interest expense for the third quarter of 2012 increased to $11.1 million compared with $7.7 million for the third quarter of 2011 primarily due to the higher overall debt levels resulting from the offering of the Add-On Notes.

Our interest income, other income (loss), and income tax benefit for the third quarter of 2012 were comparable to the third quarter of 2011.

Our net loss attributable to noncontrolling interest for the third quarter of 2012 increased to $2.3 million compared with $1.2 million for the third quarter of 2011 related to increased losses from a partially owned consolidated coal segment subsidiary.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Items that Affect Comparability of Our Results

For the nine months ended September 30, 2011, our results included items that
did not relate directly to ongoing operations, affecting the comparability of
our results. The expense components of these items were as follows:



                                                                    Nine Months Ended
                                                                      September 30,
                                                                  2012            2011
                                                                      (In thousands)
Loss on extinguishment of debt                                   $   -          $ (17,030 )
Fair value adjustment on derivatives and related
amortization of debt discount                                        -             (3,215 )

Impact (pre-tax)                                                 $   -          $ (20,245 )

Items recorded in the nine months ended September 30, 2011

• As a result of the Parent Notes offering in February 2011, we recorded $17.0 million of loss on extinguishment of debt. The loss included a $9.1 million make-whole payment and $7.9 million of non-cash write-offs of unamortized discount on debt and related capitalized debt costs and convertible debt conversion expense.

• Upon the Parent Notes offering and subsequent retirement of our convertible debt, we recorded an expense of $3.1 million resulting from the mark-to-market accounting for the conversion feature in the notes with $0.1 million of interest expense of a related debt discount.

Summary

The following table shows the comparative consolidated results and changes
between periods:



                                                             Nine Months Ended September 30,
                                                                                   Increase (Decrease)
                                                  2012            2011               $               %
                                                                     (In thousands)
Revenues                                        $ 441,410       $ 372,353       $    69,057          18.5 %
Net loss applicable to common shareholders         (4,622 )       (23,309 )          18,687         (80.2 )%
Adjusted EBITDA(1)                                 77,412          61,689            15,723          25.5 %

(1) Adjusted EBITDA, a non-GAAP financial measure, is defined and reconciled to net income (loss) at the end of this "Results of Operations" section.

Our revenues for the first nine months of 2012 increased primarily due to a $78.5 million increase in our coal segment revenues mostly due to the Kemmerer acquisition, which was partially offset by a customer shutdown at our Absaloka Mine as a result of an accident at the customer's facility as explained above as well as reduced tonnage demand due to natural gas, hydro and wind generation. The increase in our coal segment revenues was offset by a $9.5 million decrease in our power segment revenues due to a large planned maintenance outage during the second quarter and unplanned outages.

Our net loss applicable to common shareholders for the first nine months of 2012 increased by $1.6 million, excluding $20.2 million of expense during the first nine months of 2011 discussed in Items that Affect Comparability of Our Results. The primary factors, in aggregate, driving this increase in net loss were:

                                                                     Nine Months
                                                                        Ended
                                                                  September 30, 2012
                                                                    (In millions)
Increase in interest expense primarily due to the
offering of the Add-On Notes                                     $               (9.9 )
Decrease in our power segment operating income
primarily due to a large planned maintenance outage and
unplanned outages                                                                (6.7 )
Decrease in our corporate segment operating income
primarily due to one-time recruiting and compensation
expenses related to a new executive position and higher
long-term compensation expenses                                                  (2.8 )
Increase in our coal segment operating income primarily
due to the Kemmerer acquisition                                                  15.4
Increased losses attributable to noncontrolling
interest related to increased losses from a partially
owned consolidated coal segment subsidiary                                        2.1
Increase due to other factors                                                     0.3

                                                                 $               (1.6 )

Coal Segment Operating Results

The following table shows comparative coal revenues, operating income and
production, and percentage changes between periods:



                                                           Nine Months Ended September 30,
                                                                                Increase (Decrease)
                                                 2012           2011              $               %
Revenues (in thousands)                        $ 382,272      $ 303,734      $    78,538          25.9 %
Operating income (in thousands)                   37,478         20,576           16,902          82.1 %
Adjusted EBITDA (in thousands)1                   84,080         57,262           26,818          46.8 %
Tons sold-millions of equivalent tons               15.5           16.0             (0.5 )        (3.1 )%

(1) Adjusted EBITDA, a non-GAAP financial measure, is defined and reconciled to net income (loss) at the end of this "Results of Operations" section.

Our coal segment revenues and operating income for the first nine months of 2012 increased primarily due to the Kemmerer acquisition, which was partially offset by a customer shutdown at our Absaloka Mine as a result of an accident at the customer's facility as explained above as well as reduced tonnage demand due to natural gas, hydro and wind generation. Business interruption insurance proceeds have partially offset the decrease in operating income that was due to the . . .